Private Company Corporate law notes

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question : Define a ‘Private Company’. Describe the legal and concessions enjoyed by a private company.

Define a Private Company. What privileges and exemptions?

which such companies may enjoy under-the Companies Act ?

“The law not only recognised a private company but also bestow its benedictions on the same.” Comment Meaning and Characteristics

Ans.
of Private Company “Private company” as defined by Section 2 (68) means a company having a mini!num paid-up share capital as may be prescribed and which by its articles of åssociation :

(i) restricts the right of the members to transfer its shares

(ii) Except in case of one person company (OPC) limit the number of its members to 200, excluding members who are or were in the employment of the company.

(iii) prohibits any invitation to the public to subscribe for any securities of the company.

(iv) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.

persons or It is further provided that where more shares in a com an jointly, they shall, for the purposes—of this defInition, be treated as a single member. Addition certain words with the name : The name of a private company must end with words ‘Private Limited’ or ‘Pvt. Ltd.’ But the name of every OPC shall include the •letters ‘OPC’ in brackets after its registered (Section 4 (1)1 name. Special Privileges And Exemptions of A Private Company Since a private company does not involve funds from the public it needs less stringent control; from the regulatory provisions. Accordingly, certain provisions of the Companies Act which are applicable to public companies do not apply to private companies. These exemptions are referred as the privileges or advantages of a private company. These are:

1. Minimum number of members—Every private company (except a OPC) may be formed with 2 members whereas a public company must have at least 7 members. By such facilities, the formation as well as smooth functioning of the company can be done easily and quickly.

2. Prospectus—A private company need not and cannot issue prospectus for issue of its securities. But a public company is required to issue a prospectus before it offers its securities to the public.

3. Minimum subscription—A private company can allot securities even before receiving minimum subscription. But public company cannot allot securities to the public without receiving minimum subscription Within the specified time.

4. Exemption regarding share capital—Restrictions applicable to public companies regarding kinds of share capital, voting rights, -issue of shares with disproportionate voting, rights and termination of disproportionate excessive rights do not apply to private companies. Further, a private company can give financial assistance for the purchase of subscription of its own shares or its holding company.

5. Exemption regarding directors—A private company ‘enjoys following exemptions regarding directors:

A private company except a OFC. may have two directors as against minimum 3 in the case of a public company.
A private company is not required to, appoint independent directors.
Directors of private company need not retire by rotation.
Persons holding an office of profit can be appointed as dire@tors of a company without passing a special resolution.
The provision excluding an interested director from participating in voting at board proceedings does not apply to a private company.

6. Number of Directorship—The restriction as to maximum number of companies of which a person may be appointed as director is 20 in case Company Law/ Corporate Law of private company and 10 in a public company.

7. Exemption regarding managerial remuneration—The provisions Of the Act regarding the remuneration of managerial personnel of Section 1971 a company are not applicable to private companies.

8. Quorum—Unless the articles provide for a large number, only 2 persons personally present shall be the quorum for a meeting in case of a private company.

9. Audit Committee—-A private company is not required constitute an audit co

(Section 1771.

lus, a private company, on one hand, is able to enjoy all-the-benefits of a joint stock company such as legal entity, perpetual existence, limited liability etc., and on the other hand, it is free from numerous legal restrictions which apply to a public—company. This grants it a greater freedom of action than a public company in several respects.

Q. 5. Explain difference between Public Company and Private

Company ? How can a private company be converted into a Public

Company ?

Distinguish between Public Company and Private Company.

What is a Public Company ? Can it be converted into a private company ? If so, how ?

Discuss the provisions of Companies Act, 2013, regarding

following :

(a) Conversion of a private company into a public company.

(b)Conversion of -a public company into a private

company.

Ans.

Distinction Between

Private Company And Public Company

Basis of Difference	Private Company	Public company
1. Number of Members	Except a OPC, minimum number of members is 2 and maximum number of members is 200 excluding past and present employees.	A Public company must have at least 7 members and there is no limit on the maximum number
2. Invitation for Purchasing the shares	Private company cannot invite the public to buy securities.	A public company invites the public to invest in its shares an debentures.
3. Minimum Subscription	A private company can allot securities even receiving without minimum subscription for the issue.	A public company can not allot securities to the public without receiving minimum subscription within the specified time
4. Issue of Prospectus	It cannot issue a prospectus or a statement in lieu ofa prospectus.	It must issue and file a prospectus before alloting shares.
5. Transfer of shares	The shares of a private company are transferable, subject to the restrictions imposed by its articles.	Its shares are freely transferable.
6. Number of directors	Except a OPC, every private company must have at least two directors.	A public company must have at least three directors.
7. Retirement of Directors	The directors of a private company need not retire by rotation.	At least 2/3 of the directors of public company must be liable to retire by rotation.
8. Independent Director	The Board of directors of private company need not have independent directors.	Every listed public company is required to have at least 1/3 of the total number of directors on its Board asindependent directors.
9. End-words of the name	The words “private Limited’ must be added at the end of its name.	The word ‘Limited’ only must be added at the end of its name.
10. Managerial remuneration	No resrictions are applied on a private company regarding managerial remunera-tion.	Total managerial remu- neration cannot exceed I I percent ofthe net profits.
11. Quorum	Unless the articles provide for a large number, only 2 member personally present in the meeting can form quorum of a meeting of a private company.	At least 5 members must be personally present ‘to form quorum of the meeting if the number of member does not exceed 1,000.
12. Public Deposits	It cannot invite and accept deposits from the public. In can accept deposits from its members, their friends and relatives.	Ii can invite and accept deposits from members as well as public.
13. Articles of Association	Every private com an as o prepare Its articles of association. The companies act does not provide any model set of articles for private companies.	A public company may prepare or adopt the model articles appended to the act.
14. Report on Annual General meeting (AGM)	No provide company is required to prepare and file a report on AGM to the registrar	Every listed company has to prepare a report on its ever AGM and file it to the registrar.
15. Secretarial Audit Report	No private company is required to annex a secretarial audit report with its directors’ report.	Every listed public company having a paid up share capital of Rs. 250 crore or more shall annex a secretarial audit report with its directors’ report.

Conversion of a Private Company into a Public Company A private company may either automatically become a public company or can be deliberately converted into a public company :

Automatic conversion by default : Automatic conversion of a private company into a public company ,takes place by operation of law where a private company -makes a default in complying with the essential statutory requirements as laid down in Section 2(68) of the Act (i.e., if its membership exceeds 200, it permits free transfer of shares, or invites public to subscribe to its securities), it becomes a public company automatically.

It is to be noted that a private company which becomes a public company automatically by virtue of the above provisions need not comply with any legal formality prescribed in the case of deliberate conversion.

Deliberate Conversion : A private company may convert into a public company by following the provisions of Section 14 of the Companies Act, 2013. The provisions are:

(a) Passing of a special resolution to alter its articles of association to exclude the restrictions of private company viz. transferability of shares, maximum number of members and prohibition on inviting the public for subscription of securities, For becoming a public company, the company will have to increase the number of its members to at least seven and that of its directors to at least’ three. Further, the company will also have to enhance its paid up share capital to the prescribed limit, if any, if its existing paid up share capital was less than the prescribed minimum requirement for a public company, if any. Upon becoming a public company, the word ‘Private’ will be deleted from the name of the company.

(b) Filing of altered articles of association along with a copy of special resolution in the prescribed form (INC 27) to the concerned Registrar of Companies within 15 days of passing of resolution. The Registrar shall register the same and close the former registration of the company and issue a new certificate of incorporation.

The company shall cease to be a private company as from the date of alteration of articles of association.

Conversion of a Public Company into a Private Company

A public company may convert into a private company by following the provisions of Section• 14 of the Companies Act, 2013. ne provisions are :

(a) Passing of a special resolution to alter its articles of asSociation to include the restrictions of private company viz. transferability of shares, maximum number of members and invitation to the public for subscription of securities. The company will also reduce the number of its members in accordance with the legal requirement for a private company if the existing number is more than that.

(b) Approval of the Tribunal for the changes in the articles of association (not yet enforced as the Tribunal has not yet been constituted. Till that the approval from the Central Government is to be taken).

(c) Filing of a copy of order of the Tribunal approval, copy of the altered articles of association along with a copy ‘of special resolution in the prescribed form to the concerned Registrar of companies within 15 days of approval from the Tribunal. The Registrar of companies shall, on an application made by the company, close the former registration of the company and issue a new certificate of incorporation.

The company shall become a private company from the date of approval from the Tribunal,

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