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Corporate Legal Framework

Notes 7.4 Types of Companies

Companies can be classified into three categories according to the mode of incorporation. If a

company is incorporated by a charter granted by the monarch, it is called a Chartered Company
and is regulated by that charter.

Example: The East India Company came into being by the grant of a Royal Charter. Such
type of companies do not exist in India.

A company which is created by a special Act of the Legislature is called a Statutory Company
and is governed by the provisions of that Act. The State Bank of India and the Industrial
Finance Corporation of India are two examples of statutory companies. A company brought
into existence by registration of certain documents under the Companies Act, 1956 is called
Registered Company.

The liability of members of a registered company may be limited or unlimited (s.12). It may be
limited by shares, or by guarantee or by both (i.e., shares and guarantee).
A company limited by shares is a registered company having the liability of its members limited
by its memorandum of association to the amount, if any, unpaid on the shares respectively held
by them. The amount remaining unpaid on the shares can be called up at any time – during the
lifetime of the company or at the time of winding up. However, a shareholder cannot be called
upon to pay more than the amount remaining unpaid on his shares. His personal assets cannot
be called upon for the payment of the liabilities of the company, if nothing remains to be paid on
the shares purchased by him. Such a company is also known as a ‘Share Company.’
A company limited by guarantee is one having the liability of its members limited by the
memorandum to such amount as the members may respectively undertake by the memorandum
to contribute to the assets of the company in the event of its being wound up. Such a company
is also known as ‘guarantee company’. The liability of the members of a guarantee company is
limited by a stipulated sum mentioned in the memorandum. The guaranteed amount can be
called up by the company from the members only at the time of winding up if the liabilities of
the company exceed its assets.
A pure ‘guarantee company’ does not have a share capital. The working funds, if required, are
raised from source like fees, donations, subsidy, endowments, grants, subscriptions and the like.
Such a company is generally formed for the purpose of promotion of art, science, culture, charity,
sport, commerce or for some similar purpose.
A company limited by shares as well as by guarantee is a hybrid form of company which combines
elements of the guarantee and the share company. Such a company raises its initial capital from
its shareholders; while the normal working funds are provided form other sources such as fees,
charges, subscription, etc. Every member of such a company is subject to a two-fold liability, i.e.,
the guarantee which may become effective in the winding up of the company and the liability to
pay up to the nominal amount of his share which may become effective during the lifetime of the
company or at the time of winding up.
An unlimited company is a company not having any limit on the liability of its members. The
members of such a company are liable, in the event of its being wound up, to the full extent of
their fortunes to meet the obligations of the company. However, the members are not liable to the
company’s creditors. The company, being a separate legal entity from the persons who constitute
it, is liable to its creditors. If the creditors cannot obtain payment from the company, they may
petition the court for the winding up of the company. The Liquidator will then call upon the
members to contribute to the assets of the company without limitation of their liability for the
payment of the debts of the company.

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