ON THE BASIS OF LIABILITY (CLASSES OF COMPANIES UNDER THE ACT)

 CLASSES OF COMPANIES UNDER THE ACT

1. On the basis of liability:
(a) Company limited by shares: Section 2(22) of the Companies Act, 2013, defines that when the liability of the members of a company is limited by its memorandum of association to the amount (if any) unpaid on the shares held by them, it is known as a company limited by shares.

It thus implies that for meeting the debts of the company, the shareholder may be called upon to contribute only to the extent of the amount, which remains unpaid on his shareholdings. His separate property cannot be encompassed to meet the company’s debt.

It may be worthwhile to know that though a shareholder is a co-owner of the company, he is not a co- owner of the company’s assets. The ownership of the assets remains with the company, because of its nature - as a legal person. The extent of the rights and duties of a shareholder as co-owner is measured by his shareholdings.

(b) Company limited by guarantee: Section 2(21) of the Companies Act, 2013 defines it as the company 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.

Thus, the liability of the member of a guarantee company is limited upto a stipulated sum mentioned in the memorandum. Members cannot be called upon to contribute beyond that stipulated sum.

The common features between a ‘guarantee company’ and ‘the company having share capital’ are legal personality and limited liability. In the latter case, the member’s liability is limited by the amount remaining unpaid on the share, which each member holds. Both of them have to state in their memorandum that the members’ liability is limited.

However, the point of distinction between these two types of companies is that in the former case the members may be called upon to discharge their liability only after commencement of the winding up and only subject to certain conditions; but in the latter case, they may be called upon to do so at any time, either during the company’s life-time or during its winding up.

It is clear from the definition of the guarantee company that it does not raise its initial working funds from its members. Therefore, such a company may be useful only where no working funds are needed or where these funds can be held from other sources like endowment, fees, charges, donations, etc.
In Narendra Kumar Agarwal vs. Saroj Maloo, the Supreme court has laid down that the right of a guarantee company to refuse to accept the transfer by a member of his interest in the company is on a diuerent footing than that of a company limited by
shares. The membership of a guarantee company may carry privileges much diuerent from those of ordinary shareholders.

(c) Unlimited company: Section 2(92) of the Companies Act, 2013 defines unlimited company as a company not having any limit on the liability of its members. In such a company, the liability of a member ceases when he ceases to be a member.

The liability of each member extends to the whole amount of the company’s debts and liabilities but he will be entitled to claim contribution from other members. In case the company has share capital, the articles of association must state the amount of share capital and the amount of each share. So long as the company is a going concern the liability on the shares is the only liability which can be enforced by the company. The creditors can institute proceedings for winding up of the company for their claims. The offcial liquidator may call the members for their contribution towards the liabilities and debts of the company, which can be unlimited.