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Unit 1
Introduction

Topics to be covered
 Meaning and characteristics of a company.
 Lifting of corporate veil.
 Overview of administration of Company Law.
 Types of companies including private and public company,
government company, foreign company, one person
company, small company, associate company, dormant
company and producer company.
 Association not for profit; Illegal association.

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Meaning of a Company
A company is a legal entity formed by individuals, shareholders, or
stakeholders to conduct business activities. It operates as a separate legal
entity from its owners, meaning it can enter contracts, own assets, and be
held liable for its debts and obligations.
Companies can be created for various purposes, including profit
generation, non-profit activities, or government functions. They are usually
registered under specific laws and regulations depending on the country
they operate in.

Characteristics of a Company

1. Separate Legal Entity

A company is considered a distinct legal entity, separate from its owners

(shareholders). This means:

● It can own property, enter into contracts, and conduct business in its
own name.
● It can sue and be sued independently from its owners.
● The company continues to exist even if its owners change or pass
away.

Example: If a company takes a loan and fails to repay it, creditors can sue
the company but not the personal assets of its shareholders (unless fraud or
misconduct is involved).

2. Limited Liability

Shareholders are only liable for the company’s debts up to the amount they
have invested. This means personal assets of shareholders are protected
from business losses.

● In a private or public limited company, liability is limited to the unpaid

value of shares held.
● In an unlimited company, liability extends beyond share value, making
owners personally responsible.

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 ● Example: If a shareholder invests $10,000 in a company, and the
company incurs a $1 million loss, the shareholder will not be required
to pay beyond their initial $10,000 investment.

3. Perpetual Succession

A company’s existence does not depend on its owners or directors. It

continues to exist even if shareholders change, retire, or die.

● Ownership is transferable, ensuring business continuity.

● Dissolution happens only through legal procedures like winding up or
liquidation.

Example: If all shareholders of a company sell their shares or pass away, the
company will still exist and operate as usual.

4. Transferability of Shares

Shares of a public company are freely transferable, allowing investors to

buy or sell shares easily on stock exchanges.

● In a private company, shares are not freely transferable and may

require board approval.
● In a public company, investors can trade shares without restrictions,
providing liquidity.

Example: If an investor wants to exit a publicly traded company, they can

sell their shares on the stock market without affecting the company’s
operations.

5. Common Seal (Now Optional in Many Countries)

Traditionally, companies used a common seal as an official signature for

documents and contracts. However, modern laws often allow companies to
operate without a common seal, using director or authorized signatory
approval instead.

Example: When a company signs a property lease, the agreement may bear
the company’s common seal along with the signature of an authorized
director.

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Lifting of the Corporate Veil
The principle of separate legal entity means that a company is legally
distinct from its shareholders and directors. This was established in the
famous Salomon v. Salomon & Co Ltd (1897) case, which ruled that a
company has its own identity, separate from its owners.

However, in some cases, courts "lift" or "pierce" the corporate veil to hold
shareholders, directors, or company officials personally liable for fraudulent
or illegal actions committed under the company's name.

Lifting the corporate veil refers to a legal action where courts disregard the
company's separate legal personality and hold individuals behind the
company personally liable for corporate obligations or misconduct.

Situations Where Courts Lift the Corporate Veil

1. Statutory Grounds for Lifting the Corporate Veil
Certain laws allow for the corporate veil to be lifted in specific situations:
i) Fraud or Improper Conduct

● If a company is formed to commit fraud or evade legal obligations,

courts will look beyond its legal entity to hold the real culprits
responsible.
● Example: If a company is created only to evade taxes or to deceive
creditors, courts may lift the veil to penalize those involved.

ii) Tax Evasion and Avoidance

● Companies cannot be used as a means to avoid taxes illegally.

● Example: In Daimler Co Ltd v. Continental Tyre and Rubber Co (1916),
the court lifted the veil because the company was a front for enemy
nationals during wartime.

iii) Failure to Follow Statutory Obligations

● If a company does not comply with legal requirements (e.g., not filing
tax returns, misrepresenting accounts), authorities may lift the veil to
hold directors liable.

iv) Public Interest and National Security

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 ● If a company’s activities threaten public interest, safety, or national
security, governments may intervene.

2. Judicial Grounds for Lifting the Corporate Veil

Courts can also lift the corporate veil based on legal precedents:
i) Company as a Sham or Mere Facade

● If a company is formed just as a cover to avoid legal obligations, courts

may disregard its separate identity.
● Example: In Gilford Motor Co Ltd v. Horne (1933), the court ruled that a
company set up by an ex-employee to bypass a non-compete
agreement was a mere sham, and lifted the veil.

ii) Evasion of Legal Responsibilities

● If directors use the company structure to evade contractual or legal

obligations, the courts may hold them personally liable.
● Example: If a director dissolves a company and starts a new one just to
escape debts, courts may hold them responsible.

iii) Protection of Creditors’ Rights

● If directors or shareholders misuse company funds or assets to

defraud creditors, courts may lift the veil.
● Example: If a company transfers all assets to another entity just before
insolvency to avoid paying creditors, courts may intervene.

iv) Agency Relationship Between Company and Shareholders

● If a company is entirely controlled by one or a few individuals who treat

it as an extension of their personal affairs, courts may consider the
company an "agent" of those individuals.
● Example: If a parent company controls a subsidiary completely and
uses it for unlawful purposes, courts may hold the parent company
responsible.

Consequences of Lifting the Corporate Veil

When the corporate veil is lifted:
✅ Personal Liability – Shareholders and directors may be held personally
liable for company debts.
✅ Legal Action Against Individuals – Directors can be prosecuted for fraud,

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misconduct, or tax evasion.
✅ Asset Seizure – Personal assets of individuals behind the company may
be seized.

✅ Company Dissolution – In severe cases, the company itself may be shut

down.

Overview of Administration of Company Law

The administration of company law refers to the regulation, enforcement,
and governance of laws related to companies. It ensures that businesses
operate legally, transparently, and ethically while protecting stakeholders
like shareholders, creditors, and the public.

Key Authorities Responsible for Administering Company Law

The administration of company law is handled by government bodies,

regulatory agencies, and judicial systems. These authorities oversee
company formation, compliance, reporting, and dispute resolution.
i) Ministry or Department of Corporate Affairs
Most countries have a Ministry of Corporate Affairs (MCA) or an equivalent
authority that supervises corporate governance.
Example:

● India: Ministry of Corporate Affairs (MCA)

● UK: Department for Business and Trade
● USA: U.S. Securities and Exchange Commission (SEC) (for public
companies)

ii) Company Law Regulator or Registrar of Companies (ROC)

Every country has a regulatory body responsible for company registration
and compliance.
Example:

● India: Registrar of Companies (ROC) under MCA

● UK: Companies House
● USA: State-level Secretaries of State

iii) Securities Market Regulator

Regulates publicly traded companies to ensure fair trading, investor
protection, and financial transparency.
Example:
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 ● India: Securities and Exchange Board of India (SEBI)
● USA: U.S. Securities and Exchange Commission (SEC)
● UK: Financial Conduct Authority (FCA)

iv) Judiciary and Tribunals

Judicial bodies handle corporate disputes, fraud cases, and enforcement of
company law.
Example:

● India: National Company Law Tribunal (NCLT) & National Company

Law Appellate Tribunal (NCLAT)
● USA: Corporate courts like the Delaware Chancery Court
● UK: High Court’s Companies Court

v) Competition Commission
Ensures fair competition and prevents monopolistic or anti-competitive
practices.
Example:

● India: Competition Commission of India (CCI)

● USA: Federal Trade Commission (FTC)
● UK: Competition and Markets Authority (CMA)

Key Aspects of Company Law Administration

i) Company Formation and Registration

● Businesses must register with the Registrar of Companies (ROC) to

obtain legal status.
● Legal documents like Memorandum of Association (MOA) and Articles
of Association (AOA) must be filed.
● Unique Identification Numbers (CIN, EIN, etc.) are issued for taxation
and compliance.

ii) Corporate Governance and Compliance

● Companies must follow governance rules such as board meetings,

shareholder rights, and financial disclosures.
● Directors and auditors are required to act in the best interest of the
company and stakeholders.
● Regulatory bodies monitor corporate governance to prevent conflicts
of interest and fraud.

iii) Financial Reporting and Auditing

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 ● Companies must prepare and file annual financial statements with
authorities.
● Public companies need independent auditors to ensure transparency.
● Authorities may investigate and penalize false or misleading financial
statements.

iv) Regulation of Mergers, Acquisitions, and Takeovers

● Authorities oversee corporate restructuring to prevent monopolies

and protect investors.
● Anti-competition laws prevent unfair business takeovers.

v) Prevention of Fraud and Corporate Misconduct

● Laws prevent insider trading, money laundering, and financial fraud.

● Whistleblower protection laws help expose unethical business
practices.

vi) Winding Up and Liquidation

● Companies may voluntarily or involuntarily wind up due to insolvency

or non-compliance.
● The process is overseen by insolvency boards and courts to ensure
fair creditor settlements.

Types of Companies: -
Private and Public Company

Private Company
A Private Limited Company (Pvt. Ltd.) is a business entity that does not offer
its shares to the general public and imposes restrictions on share transfers.
It is usually owned by a small group of people, such as family members or
close associates.
Example: Flipkart Pvt. Ltd. (before Walmart acquisition), Infosys Pvt. Ltd.
(before going public)
Public Company

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A Public Limited Company (Ltd.) is a company whose shares are freely
traded on the stock exchange and can be owned by anyone from the public.
It must follow strict regulations and provide financial disclosures.
Example: Reliance Industries Ltd., Tesla Inc., Amazon Ltd.

Characteristics of Private and Public Companies:

A) Private Company Characteristics
1. Restricted Shareholders – Minimum 2 and maximum 200 shareholders.
2. No Public Share Offering – Cannot invite the public to buy shares.
3. Restricted Share Transfer – Shares cannot be freely transferred
without approval.
4. Limited Liability – Shareholders are liable only for the capital they
invested.
5. Perpetual Succession – The company exists even if shareholders
change.
6. Less Regulatory Compliance – Compared to public companies, fewer
financial disclosures and legal requirements.
7. Use of "Private Limited (Pvt. Ltd.)" – The name must include “Private
Limited.”

Pros of a Private Company

✅ Limited Liability – Owners’ personal assets are protected.
✅ Control and Decision-making – Owners retain control over business
decisions.
✅ Less Regulatory Burden – Compared to public companies, fewer legal
compliances.
✅ Quick Decision-Making – Fewer shareholders mean faster decisions.

Cons of a Private Company

❌ Limited Fundraising Options – Cannot raise money from the public.
❌ Restricted Share Transfers – Shareholders cannot sell shares freely.
❌ Growth Limitations – Scaling up is harder due to funding restrictions.

B) Public Company Characteristics

1. Unlimited Shareholders – Minimum 7, but no maximum limit.
2. Public Share Trading – Can issue shares to the general public.

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 3. Free Transferability of Shares – Shares can be bought and sold without
restriction.
4. Limited Liability – Shareholders are liable only for their investment.
5. Perpetual Succession – The company continues even if shareholders
change.
6. Strict Compliance – Must comply with laws, submit financial reports,
and hold board meetings.
7. Use of "Limited (Ltd.)" – The company’s name must include “Limited.”

Pros of a Public Company

✅ Easier Access to Capital – Can raise funds through public share

issuance.
✅ Enhanced Credibility – Public companies gain more trust and brand
value.
✅ Share Liquidity – Investors can buy and sell shares easily.
✅ Business Growth Opportunities – Easier to expand due to public
investment.
Cons of a Public Company
❌ Strict Compliance Requirements – Must follow government regulations,
disclosures, and audits.
❌ Risk of Hostile Takeovers – Since shares are freely traded, outsiders can
acquire a majority.
❌ Higher Costs – IPOs (Initial Public Offerings) and legal compliances are
expensive.
❌ Loss of Control – More shareholders lead to diluted decision-making
power.

Government Company
Definition:
A Government Company is a company in which the Central Government,
State Government, or both hold at least 51% of the paid-up share capital. It
operates under the Companies Act, 2013 (India) or equivalent legislation in
other countries.

Key Features:
1. Ownership: At least 51% of shares are owned by the government
(either Central, State, or both).
2. Legal Identity: It is a separate legal entity distinct from the
government.

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 3. Management & Control: The government appoints the board of
directors, but it runs like a private business.
4. Profit-Oriented: Unlike government departments, these companies
operate for profit but may have social welfare obligations.
5. Funding: Can raise funds from the government, financial institutions,
or the public (if it is a listed company).
6. Regulation: Operates under the Companies Act, but some are also
governed by specific Acts (e.g., LIC Act, BSNL Act).
7. Examples:
o India: Bharat Heavy Electricals Ltd (BHEL), Oil and Natural Gas
Corporation (ONGC), Steel Authority of India Ltd (SAIL)
o USA: Amtrak, Tennessee Valley Authority (TVA)
o UK: BBC, Network Rail

Foreign Company
Definition:
A Foreign Company is a company incorporated outside a country but has a
place of business, operations, or branch in that country. In India, it is
defined under Section 2(42) of the Companies Act, 2013.
Key Features:
1. Incorporation: Registered in a foreign country but has business
activities in another nation.
2. Legal Entity: Recognized under the foreign country’s jurisdiction but
must comply with local laws where it operates.
3. Regulation: Subject to domestic corporate laws, foreign exchange
regulations, and taxation policies.
4. Operations in Host Country:
o May have branches, subsidiaries, joint ventures, or liaison
offices.
o Must register with regulatory bodies (e.g., RBI & MCA in India,
SEC in the US).
5. Examples:
o Amazon, Google, Microsoft (USA-based companies operating
worldwide)
o Toyota (Japan-based, has subsidiaries globally)
o Nestlé (Switzerland-based with operations in India, USA, etc.)

Types of Foreign Companies in India (or similar jurisdictions):

1. Branch Office: Engaged in export/import, consultancy, or professional
services.

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 2. Liaison Office: Acts as a communication channel, cannot engage in
commercial activities.
3. Wholly-Owned Subsidiary: A foreign company holds 100% equity in a
local company.
4. Joint Venture: Foreign company partners with a local entity for
business.

One Person Company (OPC)

Definition:
A One Person Company (OPC) is a type of private limited company that has
only one individual as its member (shareholder). It is ideal for solo
entrepreneurs who want to enjoy the benefits of a corporate entity while
maintaining complete control.

Key Features:
1. Single Owner: Only one person can be the shareholder, making it a
unique entity.
2. Limited Liability: The owner's liability is limited to the capital invested.
3. Separate Legal Entity: The company exists separately from its owner.
4. Perpetual Succession: Since it’s a separate legal entity, it continues
even after the owner’s death (a nominee must be appointed).
5. Minimum Compliance: Compared to private limited companies, OPCs
have fewer legal formalities.
6. No Need for Annual General Meeting (AGM): The single owner can
pass resolutions by entering them in the minutes book.

Eligibility Criteria for OPC:

● Only a natural Indian citizen and resident (stayed in India for at least
182 days in the previous financial year) can form an OPC.
● A person cannot incorporate more than one OPC or be a nominee in
more than one OPC.
● If an OPC crosses ₹2 crore turnover or ₹50 lakh paid-up capital, it must
convert into a private or public limited company.

Advantages of OPC:
✔ Easy to incorporate and manage
✔ Full control with the owner
✔ Limited liability protection

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✔ Perpetual succession (ownership transfer through a nominee)
✔ Suitable for small business owners, freelancers, and startups

Disadvantages of OPC:
✖ Only one shareholder is allowed
✖ Cannot issue shares to raise capital
✖ Restricted to specific business activities (e.g., cannot run a Non-Banking
Financial Company (NBFC))

Small Company
Definition:
A Small Company is a private company that meets certain financial criteria
related to paid-up capital and turnover. It enjoys simplified compliance
requirements under the Companies Act.
Criteria to Qualify as a Small Company (As per Companies Act, 2013 –
Amended in 2022):
A company is classified as small if it meets both conditions:

1. Paid-up share capital does not exceed ₹4 crore.

2. Annual turnover does not exceed ₹40 crore.

Exceptions:
● Public companies cannot be classified as small companies.
● Companies registered under Section 8 (Non-Profit Organizations) do
not qualify as small companies.

Key Features:
1. Limited Liability: Owners/shareholders are not personally liable for
company debts.
2. Fewer Compliance Requirements:
o No need for Board Meetings if there are only two directors.
o Lesser penalties for non-compliance compared to regular
companies.
3. Lower Costs: Auditing and financial reporting costs are lower than
large private limited companies.
4. Easier Compliance Filing: They need to file less paperwork (such as
fewer board resolutions).

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Advantages of a Small Company:
✔ Less compliance burden (fewer audits and filings)
✔ Lower statutory fees
✔ Tax benefits compared to larger companies
✔ More flexibility in operations

Disadvantages of a Small Company:

✖ Limited funding options (cannot issue shares to the public)
✖ If a company exceeds the financial limits, it must comply with full
regulations of a private limited company
✖ Growth potential is limited due to financial caps

Associate Company
Definition:
An Associate Company is a company in which another company (called the
parent or investor company) holds at least 20% but less than 50% of shares
(voting power). It has significant influence over the associate company but
does not control it completely.

Key Features:
1. Significant Influence: The parent company can influence management
and decisions but does not have complete control.
2. Holding of Shares: The parent company must hold at least 20% of
voting power in the associate company.
3. No Subsidiary Relationship: An associate company is not a subsidiary
of the parent company.
4. Financial Reporting: The associate company’s financials are often
included in the parent company’s consolidated financial statements
under the equity method of accounting.

Examples of Associate Companies:

● Tata Sons Ltd. holds around 30% stake in Tata Consultancy Services
(TCS). TCS is considered an Associate Company of Tata Sons.
● Maruti Suzuki India Ltd. (majority owned by Suzuki, but partly held by
other stakeholders).
● Microsoft and OpenAI (if Microsoft owns a significant but non-
controlling stake).

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Advantages of Associate Companies:
✔ Allows strategic partnerships between businesses.
✔ Helps in expansion and diversification without full ownership.
✔ Reduces risk compared to full ownership (subsidiary).
✔ Access to shared technology, knowledge, and markets.

Disadvantages of Associate Companies:

✖ The parent company has limited control over business operations.
✖ The performance of the associate company impacts the parent’s financial
reports.

Dormant Company
Definition:
A Dormant Company is a company that has been registered but is not
carrying out any significant business activities or financial transactions. It is
maintained for future projects, asset protection, or intellectual property
holding.

Key Features:
1. No Business Operations: A dormant company does not engage in
commercial activities (i.e., no business transactions, income, or
trading).
2. Registered with ROC: It must be registered under the Companies Act,
2013 and must file an application for dormant status with the Registrar
of Companies (ROC).
3. Compliance Requirements: It must file minimal annual returns and
maintain records, even if inactive.
4. Can be Revived Anytime: A dormant company can become active
again whenever needed.

Eligibility for Dormant Status (As per Section 455 of Companies

Act, 2013):
A company can apply for dormant status if:

● It has no significant financial transactions in the past two years.

● It has not filed financial statements and annual returns in the past two
years.
● It is holding an asset or intellectual property for future use.

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Examples of Dormant Companies:
● A company registered to hold a brand name or patent for future
business.
● A real estate company waiting for future projects.
● A startup registered but not yet operational.

Advantages of Dormant Companies:

✔ Keeps company name, brand, and assets secure.
✔ Avoids company deregistration or closure.
✔ Less compliance and tax burden compared to active companies.
✔ Can be reactivated when needed without fresh registration.

Disadvantages of Dormant Companies:

✖ Cannot conduct business operations.
✖ Must still file annual returns and meet compliance requirements.
✖ Reactivation requires ROC approval and compliance updates.

Producer Company
Definition:
A Producer Company is a special type of company formed by farmers,
agriculturists, or producers to improve their business activities such as
production, harvesting, procurement, marketing, and selling of agricultural
produce.
It is registered under the Companies Act, 2013 but follows the regulations of
the Producer Companies Act, 2002.
Key Features:
1. Owned by Producers: Only farmers, agriculturists, or producers can
be members (shareholders).
2. Minimum Members Required:
o 10 or more individual producers OR
o 2 or more producer institutions (e.g., farmer groups)
o OR a combination of both.
3. Limited Liability: Members' liability is limited to their shareholding.
4. Objective: Focuses on agriculture and rural development.
5. No Maximum Members: Unlike private companies, there is no upper
limit on members.

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 6. Profit Sharing: Profits can be shared among members and also used
for community development.

Activities of a Producer Company:

● Production, harvesting, and processing of crops.
● Sale and export of agricultural products.
● Dairy, poultry, horticulture, and floriculture.
● Input procurement: Buying fertilizers, seeds, and machinery at lower
costs for farmers.
● Credit facility for farmer members.

Examples of Producer Companies:

● Amul (Gujarat Co-operative Milk Marketing Federation) – Owned by
dairy farmers.
● Mahindra Agribusiness – Supports farmers with technology and supply
chain.
● Indian Organic Farmers Producer Company Limited (IOFPCL) – A
cooperative of organic farmers.

Advantages of Producer Companies:

✔ Empowers farmers and rural producers.
✔ Better market access and bargaining power.
✔ Reduces costs through bulk purchasing and shared resources.
✔ Limited liability protection for members.
✔ Encourages innovation in agriculture through technology adoption.

Disadvantages of Producer Companies:

✖ Requires compliance and documentation under the Companies Act.
✖ Dependence on government support and subsidies.
✖ Difficulties in management due to a large number of farmer members.

Association Not for Profit

Definition:
An Association Not for Profit is a legal entity formed for promoting
charitable, religious, educational, scientific, social welfare, or similar
purposes without the intention of earning profits.

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In India, such associations can be registered as a Company under Section 8
of the Companies Act, 2013, or as a Trust or Society under other laws.

Key Features:
1. No Profit Motive: The primary objective is charitable or social work, not
profit-making.
2. Income Utilization: Any profits or surplus generated must be
reinvested in the organization's activities and cannot be distributed as
dividends to members.
3. Legal Registration: It can be registered under:
o Section 8 of the Companies Act, 2013 (Company status)
o The Indian Trusts Act, 1882 (as a Trust)
o The Societies Registration Act, 1860 (as a Society)
4. Limited Liability: Members of the association have limited liability.
5. Exemption from Taxes: Such associations may get tax benefits under
Section 12A and 80G of the Income Tax Act.
6. Governance: Managed by a Board of Directors or Trustees.

Examples of Association Not for Profit:

● Tata Trusts (Charity & education)
● Infosys Foundation (Social welfare)
● Indian Red Cross Society (Healthcare & disaster relief)
● The Akshaya Patra Foundation (Mid-day meal programs for students)

Advantages of Association Not for Profit:

✔ Helps in social development and public welfare.
✔ Tax benefits for both the association and donors.
✔ Encourages volunteering and corporate social responsibility (CSR).

Disadvantages of Association Not for Profit:

✖ Strict regulations and audits required.
✖ Limited funding options as they cannot raise capital like private
businesses.
✖ Cannot distribute profits to members.

Illegal Association
Definition:

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An Illegal Association is a group of more than 50 persons (in India) engaged
in business activities without proper registration under the Companies Act
or other applicable laws.

Key Features:
1. Not Recognized by Law: An illegal association cannot sue or be sued in
court.
2. Limited Membership Rule: As per the Companies Act, 2013, an
association with more than 50 members, if not registered, is
considered illegal.
3. No Legal Existence: It has no separate legal identity.
4. No Limited Liability Protection: Members are personally liable for
debts and legal issues.
5. Penalty: Engaging in an illegal association can result in fines up to ₹1
lakh per member or imprisonment.

Examples of Illegal Association:

● Unregistered investment groups with over 50 members.
● Unregistered chit funds operating without approval.
● Unregistered cooperative businesses exceeding legal membership
limits.

Consequences of Illegal Association:

1. Fines and Penalties: Members may be fined or jailed.
2. Contracts are Void: Any agreement made by such an association is not
legally enforceable.
3. Personal Liability: If debts occur, members must pay from their
personal assets.
4. No Legal Protection: Members cannot take legal action to protect the
association’s interests.

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Theory Questions
1. What is a company? Discuss its key characteristics.

2. What does the term 'Lifting of the Corporate Veil' mean? Under what
circumstances can the corporate veil be lifted?

3. Explain the administration of company law in India. Who is responsible for

the administration, and what are their key functions?

4. Differentiate between a private company and a public company. Discuss

their key features and legal implications.

5. What is a government company? Explain its features and how it differs

from a private company.

6. What is a foreign company? Discuss the rules and regulations governing

the establishment of a foreign company in India.

7. What is a One Person Company (OPC)? Discuss its features and

advantages.

8. Explain the concept of a small company. What are the advantages of

being classified as a small company under the Companies Act, 2013?

9. What is an associate company, a dormant company, and a producer

company? Discuss their respective characteristics.

10. What is an association not for profit? How does it differ from an illegal
association?

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