Statutory Company under the Companies Act, 2013

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Introduction

This article is focused on discussing the nuances of a statutory company. To understand the meaning and working of a statutory company it is quint-essential to delve into the perusal of meaning of a company and the types of companies that are incorporated in India.

With the emergence of large-scale industries, the country has witnessed a huge increase in the incorporation of new and huge companies. The industrial sector has grown with a rapid increase in the output and such changes require such stringent laws which are quintessential in regulating the transactions and actions of the companies to prevent fraud and abuse of power by such big corporations. Such laws are mandatory for companies and the smooth functioning of the corporate world. According to Companies Act, 2013 (hereinafter referred as Act of 2013), under Section 2(20), a company is the one which has been incorporated under the Companies Act, 2013 or any other previous law. Other companies Act in India were passed in the years viz. 1850, 1866, 1882, 1913 and 1956.This definition of company is not exhaustive and fails to comprehend and describe the basic features of a company. To elucidate the meaning of a company, a perusal of definition bestowed by Prof. Henry is necessary. He stated company as an incorporated association which is created by law, having a separate legal entity with perpetual succession and a common goal. A company also has limited liability. Companies further have distinct categories which serve as the reason for existence and incorporation of different and distinct categories of the companies in the country.

Types of Companies

The types of companies are as follows:

  1. The Royal Chartered company
  2. Statutory companies
  3. Registered companies
  4. A company limited by guarantee
  5. A company limited by shares
  6. Unlimited companies
  7. Holding and subsidiary companies
  8. Private companies
  9. Public companies
  10. Foreign companies
  11. One Person company and
  12. Companies not for Profit

Features of a Company

Since the definition of the company under the Act of 2013 fails to acknowledge the features of the company and a detailed perusal in this context is necessary. The basic features are mentioned hereinafter:

Incorporated Association: A company is an association of members incorporated under  the prevalent the Act of 2013. The Act of 2013 makes it mandatory for companies having more than 50 members, carrying on business in the country to get registered under the Act. The repercussions of non-compliance of this provision shall make such unregistered companies an illegal association.[1] It shall be noted that to form a public company at least an association of seven members is required whereas for forming a private association, an association of two members is required. The Act of 2013 has enabled the incorporation of one person companies also where to form a private company only one person is required.

Artificial Legal Personality: A company is considered as an artificial legal person as comes into existence through the operation of law and the company also has a legal personality which is determined to be distinct from its members. It has a legal personality as its existence is determined and acknowledged by law. At certain times and situations, a company acts like a natural person does like it can make contracts of its own name, it can purchase and sell goods, it can face penalties in the court of law, can get sued by parties and it can also sue other parties. Though he acts through the body of the board of directors of the company, who are responsible for making the major decisions of the company.

Separate Legal Entity: Under the provisions of Act of 2013, the companies are considered to have a separate legal entity in the eyes of law than their members. In simpler terms, it means that the company cannot be sued for the acts of its members and members shall not be sued for any act transacted by the company or on behalf of the company. It also means that the property and other assets of the company are the company’s property and it cannot be claimed by any of the members of the company. Also, it shall be noted that a member’s liability is limited to his/her shareholding and the creditors of the company cannot proceed against the members of the company for obtaining their money invested in the company. But an exceptional concept has been given birth to identify the real culprit behind the transactions of the company, i.e. “the lifting of the corporate veil.”

Also Read  Sarla Verma & Ors. v. Delhi Transport Corporation & Anr. (2009)

Perpetual Succession: The term means that a company’s existence is independent of its members and the life of a company does not end with the life of its members. A member may die, get affected from lunacy or other diseases, or may simply get bankrupted, but the company may continue to do its business in the market. It is pointed out that a company comes into existence by operation of law and shall cease to exist through of operation of law. In general circumstances, if any members of a company die then the legal representatives and heirs of such member shall continue the business of the company.

Limited Liability: When the liability of a company is limited by shares then the liability of such members is limited to the extent of shares they have subscribed. In circumstances, where the company is limited by guarantee then their liability is limited to the extent of guarantee given by them.

Statutory Company

The concept of companies was introduced in the country through the Companies Act, 1956 which paved the way for the introduction of corporate structure in the country. It also introduced various categories of companies and one of such companies is Statutory companies. A statutory company comes under the purview of categories of companies introduced under the Act of 2013. Although there is no specific definition of the Statutory companies, Herbert Morrison has described it as a public corporation which is a combination of public ownership, public accountability and business management functioning with the intent to meet public needs. When a company is incorporated through a Special Act passed by the Central Government or State Government, as the case may be, the incorporated corporation is known as Statutory Company. These companies are formed with the intent to carry out some special public undertaking.[2] The companies are also governed by the Special Acts they are incorporated under. The companies are incorporated with the intention to meet public needs and do social good rather than earning profits which are generally considered to be the objective behind the incorporation of a company. The main highlight of the formation of such companies is that the audit of the companies is undertaken by the Comptroller and Auditor General of India (hereinafter referred as CAG), State Bank of India (hereinafter referred as SBI) or Life Insurance Company (hereinafter referred as LIC) are some example of giant statutory companies. These companies fail to come under the purview of public companies and private companies and are also distinct from Government companies. The government companies do not need a Memorandum of Association (hereinafter referred as MOA) for governing of the functions of the company as they are governed through the acts they are incorporated under. The “Statue” purports to define the rules and regulations, plans & policies, rights & powers, limits & scope for working of the corporation.[3] Notwithstanding this, the statutory companies are still bound to comply with the provisions of Act of 2013 unless the provisions of Act of 2013 are contrary to the provisions of the Statutory Act they are incorporated under.[4] The liability of such members is limited in nature but still, it cannot use the term “limited” in its name.

Further, it has been observed by the Hon’ble Supreme Court of India in the matter of Ajay Hasia v. Khalid Majit, where it has been held that it is not necessary that whether the corporation has been created by statute or under a statute. It can be a statutory company or a Government company incorporated under Companies Act, 2013 or a Society registered under Societies Registration Act, 1860 or any other similar statute but it would be covered under the definition and meaning of a State under Article 12 of the Constitution of India.

Features of a Statutory Company

The features and characteristics of a Statutory Company are as follows:

  1. It has a legal existence and can enter into contracts and transaction on its own. Such companies can also carry on and undertake any kind of business under its name.
  2. The management is in the hands of the board of directors of the Statutory Companies which are appointed by the Government of India.
  3. These corporations are under public scrutiny and hence are accountable to the parliament and public. The accounts are also audited by the CAG to ensure public accountability.
  4. The appointment and recruitments in a statutory company are liberal and are not guided by any stringent procedure. They can also make transfers and promotions according to the requirement of the company. But the employees working in such corporations are not to be treated as public servants.[6]
  5. It has also been observed that there shall be no political interference in the day to day working of the company to maintain the smooth and transparent function of the company.
  6. The financials of a statutory company are funded by the Government of India but it does enjoy financial autonomy and independence. It can also borrow money for utilising it in the business with the prior permission of the Government of India or State Government, as the case may be.
Also Read  Sarla Verma & Ors. v. Delhi Transport Corporation & Anr. (2009)

Difference between Statutory Company and Government Company

The distinction between both the companies are as follows:

  1. The Government Companies are incorporated under the Companies Act of 2013 or any other Companies Act prevalent whereas a Statutory Company is incorporated under specific Acts governing and determining the functions and objects of the company.
  2. Government companies shall comply to the MOA and Act of 2013 mandatorily whereas the Statutory Companies comply with the Acts they are incorporated under and have no MOA for this purpose.
  3. In Government companies the State Government, Central Government or both of them, as the case may be, shall attain a paid-up share capital of 51 per cent whereas in the Statutory Companies, the Government of India or the State Government, as the case may be, wholly owns the company.
  4. The annual accounts of the Government Companies are laid before the Parliament whereas the audit of the Statutory companies is done by the CAG, as mentioned earlier in the article, and later on laid before the Parliament.
  5. The Government Company has a profit objective whereas the Statutory companies are incorporated to meet public needs.

Merits of a Statutory Company

 There are a lot of merits of a Statutory Company. Some of them are as follows:

  1. The operations and management of a statutory company are flexible and does not require the interference of the government. Also, this helps in attaining efficiency in the business.
  2. The decisions relating to the functions and business of the company are taken without any delays as there is less paperwork and the compliances and formalities are less as compared to other corporates.
  3. Since the corporations are state-owned and are funded by the Government of India or the State Government, as the case may be, the raising of capital becomes easy for such corporations and that too at a low-interest rate. The public also considers it safe as they are public or government-funded.
  4. The functions of the Statutory Corporations are discussed and perused in the Parliament which ensures public accountability.

Demerits of a Statutory Company

There are certain demerits of the Statutory company also, which are as follows:

  1. Though the political interference is condemned in the Statutory Companies but originally the interference of political parties and ministers are prevalent in the day to day working of such corporations.
  2. Since the government compensates for the losses incurred by the public corporations, the employees take less initiative to reduce the losses of the company and increase the profits of the company.
  3. The rules governing the corporations can be rigid as it will require amending the statute for making any kind of change in such rules and regulations governing the corporations.
  4. There are also clashes as there exist a lot of members in the corporations. Such a large number people may have divergent interests which may lead to clashes and hampering of the smooth functioning of the company.

Conclusion

This article focusses on the working and functioning of a Statutory company. The Article also distinguishes between a Government company and a statutory company, which prima facie may look similar. The article goes on to elaborate features, merits and demerits of such companies.

It is pointed out that the government shall formulate a structure which ensures that the company carries on its working in good faith and is not involved in fraud and other malpractices. Endeavours shall be made to increase public accountability which shall further ensure smooth functioning of such companies. All this shall be done with the intent to attain ulterior motive behind the incorporation of such companies which is to ensure that the companies are working to meet public needs.


[1] Define a company. Explain its characteristics, https://www.owlgen.com/question/define-a-company-explain-its-characteristics

[2]Types of Companies in India: Detailed Breakdown, https://www.lawyered.in/legal-disrupt/articles/types-companies-india-detailed-breakdown/

[3]Mohammed Julfekar Haider, What is Statutory Corporations, https://www.indiastudychannel.com/resources/125343-What-Statutory-Corporations.aspx

[4]Government Company, Legal Services India, http://www.legalservicesindia.com/article/1443/Government-Companies.html

[5]AIR 1985 SC 487 

[6]Statutory Corporations, https://www.toppr.com/guides/business-studies/private-public-and-global-enterprises/statutory-corporations/

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