Page 197 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes 7.5 Classification 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. For 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.

Notes 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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