Important Terminologies Under Company Law

Khushi Malviya

26 August 20251 min read

Introduction

Corporate law is a vast and intricate field that governs the formation, operation, and dissolution of companies and other business entities. For law students, mastering the specific terminology used in this area is not just about learning definitions; it’s about understanding the underlying legal principles, relationships, and processes that shape the corporate world.

This article introduces some of the most fundamental terms you will encounter in your study of corporate law, particularly within the Indian context, providing a foundation for deeper learning based on the Companies Act, 2013.

The Concept of a Company

At the heart of corporate law is the concept of a “company.” In India, the primary legislation governing companies is the Companies Act, 2013.

Company: A company is a legal entity distinct from its members (shareholders). It is an artificial person created by law, with perpetual succession (meaning it continues to exist regardless of changes in its membership) and a common seal (though the requirement for a common seal has been made optional under the Companies Act, 2013, replaced by authorisation by directors and key managerial personnel). This principle of separate legal personality, established in the landmark case of Salomon v A Salomon & Co Ltd [1897] AC 22, means the company can own property, enter into contracts, sue, and be sued in its own name, independent of its owners.This separation also implies limited liability for the members, meaning their liability for the company’s debts is limited to the amount unpaid on their shares.
Incorporation: The process by which a company is legally formed and registered with the Registrar of Companies (RoC) under the Companies Act, 2013. Upon incorporation, the company acquires its separate legal identity and perpetual succession.The process involves filing necessary documents like the Memorandum of Association and Articles of Association.
Memorandum of Association (MoA): This is the foundational document of a company, considered its charter. It outlines the company’s name, registered office, objects (the purposes for which the company is formed – the objects clause is crucial as it defines the scope of the company’s activities), liability of members (whether limited or unlimited), and share capital (the capital clause specifies the authorised share capital). It defines the company’s relationship with the outside world and the extent of its powers.

Types of Companies

Companies can be classified based on various criteria, primarily liability, number of members, and control:

One Person Company (OPC): Introduced by the Companies Act, 2013, an OPC is a company formed with only one person as a member. It provides the benefits of a separate legal entity and limited liability to a single entrepreneur.
Private Company: Defined by restrictions in its AoA, a private company typically restricts the right to transfer its shares, limits the number of its members (to a maximum of 200, excluding past and present employee members), and prohibits any invitation to the public to subscribe for its shares or debentures.
Public Company: A company that is not a private company. It can invite the public to subscribe for its shares and debentures, and there are no restrictions on the transfer of shares (though the AoA may contain regulations regarding procedure).
Holding Company and Subsidiary Company: A company is a holding company of another if it controls the composition of the other company’s Board of Directors, or holds more than one-half of the total voting power of the other company, or holds more than one-half of the issued share capital of the other company. The other company is then a subsidiary company.

Share Capital: The total amount of money raised by a company by issuing shares.
- Authorised Share Capital: The maximum amount of share capital that a company is authorised by its MoA to issue to its shareholders.
- Issued Share Capital: The part of the authorised share capital that has been offered to subscribers for shares.
- Subscribed Share Capital: The part of the issued share capital for which shareholders have agreed to take shares.
- Paid-up Share Capital: The part of the subscribed share capital that has been paid by the shareholders to the company.
Share: A unit into which the total share capital of a company is divided. Shares represent ownership in the company.

Management and Governance

Board of Directors (BoD): The collective body of individuals elected by the shareholders to oversee the management of the company. Directors are fiduciaries who owe duties to the company.
Director: An individual appointed to the Board of Directors. Directors are responsible for the strategic direction and management of the company’s business.
Managing Director (MD): A director who is entrusted with substantial powers of management of the affairs of the company, either by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board of Directors or by virtue of its memorandum or articles of association.
Whole-Time Director (WTD): A director who is in the whole-time employment of the company and is entrusted with substantial powers of management.
Independent Director: A non-executive director who is not an employee, not a promoter, and not related to promoters or directors, and who does not have any pecuniary relationship with the company, its promoters, or directors, which may affect his independence. Their role is to provide an objective view in the board’s deliberations.

Corporate Finance

Dividend: A distribution of a portion of a company’s profits to its shareholders.
Prospectus: A formal document issued by a public company when it invites the public to subscribe for its shares or debentures. It provides detailed information about the company, its business, financial performance, and the terms of the offer.
Allotment of Shares: The process by which a company allocates shares to applicants in response to a share issue.

Corporate Restructuring and Dissolution

Merger/Amalgamation: The combination of two or more companies into a single larger company.
Acquisition/Takeover: The process by which one company acquires control of another company, usually by purchasing a majority of its shares.
Winding Up (or Liquidation): The process by which a company’s existence is brought to an end, its assets are realised, its debts are paid, and any surplus is distributed among its members. Winding up can be voluntary or by order of the Tribunal.
Insolvency: A state where a company is unable to pay its debts as they fall due. This can lead to winding up or other insolvency resolution processes under the Insolvency and Bankruptcy Code, 2016.

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Khushi Malviya

Contributing author

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Introduction

The Concept of a Company

At the heart of corporate law is the concept of a “company.” In India, the primary legislation governing companies is the Companies Act, 2013.

Company: A company is a legal entity distinct from its members (shareholders). It is an artificial person created by law, with perpetual succession (meaning it continues to exist regardless of changes in its membership) and a common seal (though the requirement for a common seal has been made optional under the Companies Act, 2013, replaced by authorisation by directors and key managerial personnel). This principle of separate legal personality, established in the landmark case of Salomon v A Salomon & Co Ltd [1897] AC 22, means the company can own property, enter into contracts, sue, and be sued in its own name, independent of its owners.This separation also implies limited liability for the members, meaning their liability for the company’s debts is limited to the amount unpaid on their shares.

Incorporation: The process by which a company is legally formed and registered with the Registrar of Companies (RoC) under the Companies Act, 2013. Upon incorporation, the company acquires its separate legal identity and perpetual succession.The process involves filing necessary documents like the Memorandum of Association and Articles of Association.

Memorandum of Association (MoA): This is the foundational document of a company, considered its charter. It outlines the company’s name, registered office, objects (the purposes for which the company is formed – the objects clause is crucial as it defines the scope of the company’s activities), liability of members (whether limited or unlimited), and share capital (the capital clause specifies the authorised share capital). It defines the company’s relationship with the outside world and the extent of its powers.

Types of Companies

Companies can be classified based on various criteria, primarily liability, number of members, and control:

One Person Company (OPC): Introduced by the Companies Act, 2013, an OPC is a company formed with only one person as a member. It provides the benefits of a separate legal entity and limited liability to a single entrepreneur.

Private Company: Defined by restrictions in its AoA, a private company typically restricts the right to transfer its shares, limits the number of its members (to a maximum of 200, excluding past and present employee members), and prohibits any invitation to the public to subscribe for its shares or debentures.

Public Company: A company that is not a private company. It can invite the public to subscribe for its shares and debentures, and there are no restrictions on the transfer of shares (though the AoA may contain regulations regarding procedure).

Holding Company and Subsidiary Company: A company is a holding company of another if it controls the composition of the other company’s Board of Directors, or holds more than one-half of the total voting power of the other company, or holds more than one-half of the issued share capital of the other company. The other company is then a subsidiary company.

Share Capital and Membership

Share Capital: The total amount of money raised by a company by issuing shares.

Authorised Share Capital: The maximum amount of share capital that a company is authorised by its MoA to issue to its shareholders.
Issued Share Capital: The part of the authorised share capital that has been offered to subscribers for shares.
Subscribed Share Capital: The part of the issued share capital for which shareholders have agreed to take shares.
Paid-up Share Capital: The part of the subscribed share capital that has been paid by the shareholders to the company.

Share: A unit into which the total share capital of a company is divided. Shares represent ownership in the company.

Management and Governance

Board of Directors (BoD): The collective body of individuals elected by the shareholders to oversee the management of the company. Directors are fiduciaries who owe duties to the company.

Director: An individual appointed to the Board of Directors. Directors are responsible for the strategic direction and management of the company’s business.

Managing Director (MD): A director who is entrusted with substantial powers of management of the affairs of the company, either by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board of Directors or by virtue of its memorandum or articles of association.

Whole-Time Director (WTD): A director who is in the whole-time employment of the company and is entrusted with substantial powers of management.

Independent Director: A non-executive director who is not an employee, not a promoter, and not related to promoters or directors, and who does not have any pecuniary relationship with the company, its promoters, or directors, which may affect his independence. Their role is to provide an objective view in the board’s deliberations.

Corporate Finance

Dividend: A distribution of a portion of a company’s profits to its shareholders.

Prospectus: A formal document issued by a public company when it invites the public to subscribe for its shares or debentures. It provides detailed information about the company, its business, financial performance, and the terms of the offer.

Allotment of Shares: The process by which a company allocates shares to applicants in response to a share issue.

Corporate Restructuring and Dissolution

Merger/Amalgamation: The combination of two or more companies into a single larger company.

Acquisition/Takeover: The process by which one company acquires control of another company, usually by purchasing a majority of its shares.

Winding Up (or Liquidation): The process by which a company’s existence is brought to an end, its assets are realised, its debts are paid, and any surplus is distributed among its members. Winding up can be voluntary or by order of the Tribunal.

Insolvency: A state where a company is unable to pay its debts as they fall due. This can lead to winding up or other insolvency resolution processes under the Insolvency and Bankruptcy Code, 2016.