Definitions — Company, Director, Member (Section 2) →

Section 2 of the Companies Act, 2013 is the dictionary of company law. It opens the statute with ninety-five defined expressions, and three of them carry the entire architecture of the subject: the company [Section 2(20)] is the juristic person the Act brings into being; the member [Section 2(55)] is its owner; and the director [Section 2(34)] is the human agent through whom the artificial person thinks and acts. Each definition is deliberately thin — a single clause apiece — because the substance lives in the operative provisions and, above all, in a line of cases running from Salomon in 1897 to Balwant Rai Saluja in 2015. This chapter reads the bare text of the three definitions against that case-law, and against the cognate definitions of body corporate, promoter, holding and subsidiary company that share the same section.

For the judiciary and CLAT-PG aspirant the definitions are not throat-clearing. They generate some of the most heavily tested propositions in the paper — the separate legal personality of Salomon, the multiplicity of capacities in Lee, the grounds for lifting the veil, and the precise difference between a member and a shareholder. We begin with why the definition section is built the way it is, and proceed clause by clause through company, member and director, before drawing the distinctions out for revision. A companion overview is available in our introduction to the Companies Act, 2013, and the procedural sequel in incorporation of a company.

Why the definition section matters

A statutory definition does two things. It fixes the meaning of a word for the whole Act, displacing the ordinary dictionary sense, and it draws the boundary of the statute's operation — what is in, and what is out. Section 2 of the Companies Act, 2013 is an interpretation clause of the first kind: the expressions it defines bear those meanings throughout the Act "unless the context otherwise requires." Three features of the three core definitions are worth noticing at the outset.

First, each is incorporative rather than descriptive. The definition of company in Section 2(20) does not describe what a company is; it tells us only that a company is one "incorporated under this Act or under any previous company law." The definition of director in Section 2(34) is similarly self-referential — "a director appointed to the Board of a company." The richness of meaning is supplied elsewhere: by the common law for the company, by Sections 149 to 172 for the director, and by Section 88 and the register of members for the member. Second, the definitions interlock. One cannot understand "member" without "share" [Section 2(84)], "director" without "Board of Directors" [Section 2(10)], or "company" without "body corporate" [Section 2(11)]. Third, the definitions carry the policy of the 2013 Act — transparency, accountability and stakeholder protection — into operation, most visibly in the expanded notion of "promoter" and the new category of the One Person Company.

Company — Section 2(20)

The word "company" derives from the Latin com (together) and panis (bread) — literally, those who break bread together — and so connotes an association of persons. Section 2(20) defines a company to mean "a company incorporated under this Act or under any previous company law." The definition is admittedly incomplete: it identifies the mode of birth but not the nature of the creature. For that we turn to Halsbury's classic description of a company as a collection of many individuals united into one body under a special name, having perpetual succession, an artificial form, and a legal personality vested in it by policy of law — separate and distinct from its members.

From this slim text and from Section 9 — which provides that from the date of incorporation the subscribers and members shall be a body corporate capable of exercising all the functions of an incorporated company, with perpetual succession and power to acquire, hold and dispose of property and to sue and be sued — flow the distinctive features of the company: independent corporate existence, perpetual succession, limited liability, separate property, and the capacity to sue and be sued in its own name. The most important of these, and the one that the whole subject rests upon, is the separate legal personality recognised in Salomon.

The Salomon principle and separate personality

The foundational authority is Salomon v. A. Salomon & Co. Ltd., (1897) AC 22. Aron Salomon, a prosperous boot and shoe manufacturer, incorporated his business as a limited company. The subscribers were Salomon, his wife and five children — the statutory minimum of seven then required. Salomon took the bulk of the shares and also took debentures worth £10,000 secured by a floating charge on the company's assets. Within a year the company failed; on winding up, its assets were insufficient to satisfy even the debentures, and the unsecured trade creditors received nothing. They argued that the company was a mere alias or agent for Salomon, who should therefore be personally liable for its debts.

The House of Lords rejected the argument unanimously. Once a company is duly incorporated, it is, in the words of the House, "at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them." The motives of those who formed the company were held irrelevant in discussing what those rights and liabilities are. Salomon, as a secured debenture-holder, was entitled to be paid in priority to the unsecured creditors. The case established two pillars at once — separate legal personality and the legitimacy of limited liability even in a one-man company.

Indian courts have applied the principle without qualification. In Electronics Corporation of India Ltd. v. Secretary, Revenue Department, Government of Andhra Pradesh, AIR 1999 SC 1734, the Supreme Court reaffirmed the clear distinction between a company and its shareholders: in the eye of the law a company is a distinct legal entity. In Shiromani Gurudwara Prabandhak Committee v. Shri Som Nath Das, AIR 2000 SC 1421, the Court explained that incorporation is the act of forming a legal corporation as a juristic personality — an entity that, like a natural person, acts only through designated persons whose acts are processed within the ambit of law. The separate-personality doctrine, in short, is the bedrock on which incorporation, the memorandum of association, and the entire scheme of the Act are built.

Lee and the multiplicity of capacities

If the company is a person distinct from its members, then a single human being may relate to it in several capacities at once — as shareholder, as director, and even as employee. That logical consequence of Salomon was confirmed by the Privy Council in Lee v. Lee's Air Farming Ltd., (1961) AC 12, an appeal from New Zealand. Geoffrey Lee formed a company to carry on the business of aerial top-dressing. He held 2,999 of its 3,000 shares, was its sole governing director, and was also employed by it as chief pilot at a salary. When he was killed in a flying accident in the course of that employment, his widow claimed compensation under the Workers' Compensation Act, which required that the deceased be a "worker" — that is, a person employed under a contract of service.

The company resisted on the ground that one cannot employ oneself; the controlling director and the employee were, it said, the same person. The Privy Council rejected this. Applying Salomon, it held that the company was a legal entity distinct from Mr Lee, so that there was no impossibility in Mr Lee, as agent of the company, giving orders to himself as the company's servant. A genuine contract of employment could and did exist between the company and the man who controlled it. Mrs Lee was therefore entitled to compensation. Lee is the practical demonstration that the corporate veil cuts both ways: it not only shields members from the company's liabilities, it also permits members to deal with the company at arm's length, contracting with it, lending to it, and working for it as a separate person.

Lifting the corporate veil

The veil of incorporation is not impenetrable. Because the company can act only through natural persons, the courts will, in defined circumstances, look behind the corporate form to reach the persons who in reality control it. The classic statement of the judicial attitude is Lord Denning's in Littlewoods Mail Order Stores Ltd. v. Inland Revenue Commissioners, (1969) 1 WLR 1241: the doctrine in Salomon "has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited company through which the courts cannot see. But that is not true. The courts can, and often do, pull off the mask. They look to see what really lies behind."

The leading Indian synthesis is Life Insurance Corporation of India v. Escorts Ltd., (1986) 1 SCC 264, where the Supreme Court held that the corporate veil may be lifted where the statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented, or a taxing statute is sought to be evaded, or where associated companies are inextricably connected as to be, in reality, part of one concern. The grounds recognised in the Indian decisions fall into four broad heads. To determine the true character of the company, as in Daimler Co. Ltd. v. Continental Tyre and Rubber Co., (1916) 2 AC 307 — a company incorporated in England to sell tyres made in Germany, all but one of whose shares were held by Germans and whose directors were German, was held an enemy company during the First World War, because the real control lay in enemy hands. To protect revenue, as in CIT v. Sri Meenakshi Mills Ltd., AIR 1967 SC 819, where the Court held it is entitled to lift the veil where the corporate entity is used for tax evasion. To prevent fraud or improper conduct, as in Delhi Development Authority v. Skipper Construction Co. (P) Ltd., AIR 1996 SC 2005, where the veil was pierced to reach the real persons defrauding purchasers by corrupt and illegal means. And to defeat the evasion of a legal obligation.

The modern restatement is Balwant Rai Saluja v. Air India Ltd., (2014) 7 SCC 663, where the Supreme Court explained that the doctrine of piercing the veil allows the court to disregard the separate legal personality of a company and impose liability upon the persons exercising real control over it; but the principle is to be invoked sparingly and only on satisfaction of stringent tests. The same restraint appears in State of Karnataka v. Selvi J. Jayalalithaa, (2017) 6 SCC 263, which stressed that a company is a separate entity from its members, the exception arising only where the corporate entity is a mere cloak or sham. The veil, in other words, is lifted as an exception, not as a rule; Salomon remains the starting point.

Body corporate and the classification of companies

Section 2(11) defines "body corporate" or "corporation" to include a company incorporated outside India, but to exclude a co-operative society registered under any law relating to co-operative societies and any other body corporate (not being a company under the Act) that the Central Government may notify. The expression is therefore wider than "company": every company is a body corporate, but not every body corporate is a company. The distinction matters for several operative provisions, including the definition of "officer" and the related-party regime.

The defined company comes in several statutory shapes, each turning on its own clause in Section 2. A private company [Section 2(68)] is one whose articles restrict the right to transfer its shares, limit the number of its members to two hundred (excluding the sole member of a One Person Company), and prohibit any invitation to the public to subscribe for its securities. A public company [Section 2(71)] is, by contrast, simply a company that is not a private company and that meets the prescribed minimum paid-up capital; a private company that is a subsidiary of a public company is deemed public. A Government company [Section 2(45)] is one in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, any State Government, or a combination of them. The relational pair of holding [Section 2(46)] and subsidiary [Section 2(87)] companies turns on control of the composition of the Board or control of more than half the total voting power. These classifications are taken up in detail in our chapter on the introduction and classification of companies; here it is enough to note that each is anchored in a Section 2 definition.

Member — Section 2(55)

The members are the corporators who, for the time being, constitute the company. Section 2(55) defines "member," in relation to a company, in three limbs. First, the subscriber to the memorandum is deemed to have agreed to become a member and, on registration of the company, is entered as a member in its register of members. Second, every other person who agrees in writing to become a member and whose name is entered in the register of members is a member. Third, every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository is a member.

The first limb is the most instructive. A subscriber to the memorandum becomes a member by force of his subscription and the registration of the company — he need not apply for shares, need not have shares allotted, and need not even have his name entered in the register before he acquires membership. The second and third limbs, by contrast, make entry in the register (or in the depository's beneficial-owner records, post-dematerialisation) the operative act. The register of members, kept under Section 88 for each class of equity and preference shares, is thus the central record of membership.

Acquiring and terminating membership

Membership is acquired in four recognised ways. By subscription to the memorandum — the subscriber is a member on registration even without entry in the register, by the deeming limb of Section 2(55)(i). By agreement and allotment — a person who applies for shares makes an offer; allotment is the company's acceptance; on entry of his name in the register he becomes a member. By transfer — shares are movable property transferable in the manner prescribed by the articles under Section 44, and the transferee becomes a member when the duly executed and stamped instrument of transfer is registered under Section 56. By operation of law — on the death of a member, the legal heir entitled under succession may have the shares transmitted and registered in his name, and an official assignee takes the shares of an insolvent member; these are transmissions, not transfers, and require no instrument.

Membership terminates in a corresponding set of situations: when a member transfers all his shares and the transfer is registered; when his shares are forfeited, surrendered, or sold by the company; when redeemable preference shares held by him are redeemed; on his death or insolvency; when he validly rescinds the contract of membership for fraud or misrepresentation; and when he takes a share warrant in respect of fully paid shares (the warrant-holder being a shareholder but not a member). The members, collectively, enjoy substantial rights — to receive audited financial statements, to inspect the statutory registers, to attend meetings and vote, to requisition an extraordinary general meeting, to remove a director by ordinary resolution under Section 169, and to seek relief against oppression and mismanagement.

Member versus shareholder

"Member" and "shareholder" are used interchangeably in everyday speech, but they are not synonyms, and the difference is a perennial examination point. The two expressions coincide in the ordinary case of a company limited by shares, but they can come apart in four well-known situations, each of which repays memorising.

The governing principle is that membership turns on entry in the register of members, while shareholding turns on title to the shares. Every registered shareholder of a company limited by shares is therefore a member, but not every member is a shareholder — a person may be a member of a company limited by guarantee without holding any share, and a transferee or share-warrant holder may own shares without being a member. The point is reinforced by the definition of "share" in Section 2(84) and by Borland's Trustee v. Steel Brothers & Co. Ltd., (1901) 1 Ch 279, where a share was famously described as the interest of a shareholder in the company measured by a sum of money, made up of a bundle of mutual covenants — not the sum of money itself.

Director — Section 2(34)

A company, being an artificial person, can form no intention and perform no act of its own. It must act through human agency, and the persons charged with directing its affairs are its directors. Section 2(34) defines "director" to mean "a director appointed to the Board of a company." As with the definition of company, the clause is deliberately spare and self-referential; its content is supplied by the operative provisions and by the case-law that has, over more than a century, described directors variously as agents, as trustees, and as managing partners of the company.

None of the traditional labels is exhaustive. A director is an agent in that he contracts on the company's behalf and binds it, not himself; he is a trustee in that he holds a fiduciary position with respect to the company's money and property and must act bona fide for its benefit; and he resembles a managing partner in that he manages the business while the general body of members stands back. The 2013 Act recognises several species of director — the independent director [Section 149(6)], who must be a person of integrity with no disqualifying pecuniary relationship; the woman director required of prescribed classes of company; the resident director who must have stayed in India for at least 182 days in the previous financial year; and the additional, alternate and nominee directors appointed under Section 161. The bare definition in Section 2(34) embraces them all.

The Board and its composition

Section 149(1) requires every company to have a Board of Directors consisting of individuals, and fixes the numerical limits: a minimum of three directors for a public company, two for a private company, and one for a One Person Company, and a maximum of fifteen directors. A company may appoint more than fifteen directors by passing a special resolution. Every company must have at least one director who has stayed in India for a total period of not less than 182 days in the previous financial year, and prescribed classes of companies must appoint at least one woman director. Every listed public company must have at least one-third of its directors as independent directors.

The minimum-and-maximum scheme is a frequent prelims target, and is easily confused with the membership thresholds: two members minimum for a private company against two directors; seven members minimum for a public company against three directors. The Board is the company's directing mind; its decisions, taken collectively at properly convened meetings, are the company's decisions. The directors who compose it are bound by the disclosure, disqualification and duty provisions that follow, and the company itself cannot dispense with a Board, for the artificial person has no other organ through which to will and to act.

Appointment, disqualification and duties

The appointment of directors is governed by Section 152. Where the articles make no provision for the first directors, the individual subscribers to the memorandum are deemed to be the first directors until directors are duly appointed; in a One Person Company the sole member is deemed the first director. Every director must be appointed by the company in general meeting, must hold a Director Identification Number allotted under Section 154, and must file his written consent to act with the Registrar within thirty days of appointment. The Board may, where the articles permit, appoint additional, alternate and nominee directors under Section 161.

Section 164 lists the disqualifications: unsoundness of mind declared by a competent court, undischarged insolvency, a pending insolvency application, conviction of an offence with a sentence of imprisonment of not less than six months where five years have not elapsed, a subsisting court or Tribunal order of disqualification, failure to pay calls, and conviction of a related-party-transaction offence under Section 188 within the preceding five years. Section 165 caps the number of directorships at twenty companies, of which not more than ten may be public companies. The fiduciary content of the office is codified for the first time in Section 166, which requires a director to act in good faith to promote the objects of the company for the benefit of its members as a whole, to exercise due and reasonable care, skill and diligence with independent judgment, to avoid conflicts of interest, not to achieve any undue gain, and not to assign his office. The office is vacated under Section 167, and a director may resign under Section 168 or be removed by ordinary resolution under Section 169 after a reasonable opportunity of being heard.

MCQ angle — recurring distinctions

Four propositions recur with high frequency. First, the Salomon principle: a company is a separate legal person distinct from its members, even where one person controls practically all the shares — and the leading Indian applications are Electronics Corporation of India and Shiromani Gurudwara Prabandhak Committee. Second, the multiplicity of capacities in Lee v. Lee's Air Farming Ltd. — sole shareholder, sole director and employee, all in one person. Third, the grounds for lifting the veil as catalogued in LIC v. Escorts — statutory contemplation, fraud or improper conduct, evasion of tax, and inextricably connected companies — with Daimler (enemy character), Sri Meenakshi Mills (tax) and Skipper Construction (fraud) as the stock illustrations.

Fourth, the member–shareholder distinction: every registered shareholder is a member but not every member is a shareholder; the subscriber is a member without allotment, the unregistered transferee and the share-warrant holder are shareholders without membership, and a member of a guarantee company holds no share at all. Two further pairings reward attention — the numerical limits on the Board under Section 149 (three / two / one, maximum fifteen) as against the membership limits, and the width of "body corporate" [Section 2(11)] as against the narrower "company" [Section 2(20)].

Practical takeaways

Three points for the answer-writer. First, always open a separate-personality question with Salomon, state the principle crisply, and only then turn to the exception of veil-lifting — the order of treatment signals that you understand that the veil is lifted as a controlled exception and not at large. Second, when distinguishing member from shareholder, anchor the answer in the operative act: membership in entry in the register under Section 2(55) read with Section 88; shareholding in title to the shares. Marshalling the four standard situations — subscriber, unregistered transferee, share-warrant holder, guarantee-company member — converts a vague distinction into a precise one.

Third, treat the three definitions as a system rather than as isolated clauses. The company is the juristic person; the members own it and supply the will of the general meeting; the directors are the organ through which that person acts day to day. The remainder of the syllabus — the memorandum of association that sets the company's outer limits, the articles of association that govern its internal management, and the procedure for incorporation — is a working-out of these three definitions. For the wider map of the subject, return to the Companies Act notes hub.