27 Jun 2010

Company not established under Companies Act: Supreme Court

In a recently reported decision the Supreme Court has made an interesting observation that companies are not established under the Companies Act, 1956 and also the incorporated company does not owe its existence to the provisions of the Companies Act. The Supreme Court, examining whether a private company was covered under the provisions of the law relating to equal opportunity for persons with disabilities, observed that a company did not owe its existence to a law but was instead created by an act of parties who complied with the requirements of the Companies Act to dismiss the challenge. 

The Bench inter alia observed as under;

6. Let us examine the meaning of the crucial word ‘establishment’ used in sub-section (1) of section 47 of the Act. The definition of the word ‘establishment’ in section 2(k), when analyzed, shows that it is an exhaustive definition, and covers the following categories of employers:
(i) a corporation established by or under a Central, Provincial, or State Act;
(ii) an authority or a body owned or controlled or aided by the Government;
(iii) a local authority;
(iv) a Government company as defined in Section 617 of the Companies Act, 1956; and
(v) Departments of a Government. 
It is not in dispute that the employers in these two cases are companies incorporated under the Companies Act, 1956 which do not fall under categories (ii) to (v) specified in Section 2(k) of the Act. 
7. The employee contends that a company incorporated under the Companies Act is a Corporation falling under the first category enumerated in section 2(k), that is ‘Corporation established by or under a Central, Provincial or State Act’, on the following reasoning : that a corporation refers to a company; that Companies Act is a Central Act; and that therefore a company incorporated and registered under the Companies Act is a Corporation established under a Central Act. He contends that the use of the words “by or under” is crucial. According to him, ‘a corporation established by an Act’ would refer to a corporation brought into existence by an Act; and a ‘corporation established under an Act’ would refer to a company incorporated under the Companies Act. On the other hand, the employer contends that the term ‘Corporation established by or under a Central, Provincial or State Act’ refers to a statutory Corporation which is brought into existence by a statute, or under a statute and does not include a company which is registered under the Companies Act. It is submitted that Companies Act merely facilitates and lays down the procedure for incorporation of a company which, when incorporated, will be governed by the provisions of the said Act and therefore, a company registered under the Companies Act, is not a corporation established under an Act.
8. The words “a Corporation established by or under a Central, Provincial or State Act” is a standard term used in several enactments to denote a statutory corporation established or brought into existence by or under statute. For example, it is used in sub-clause (b) of Clause Twelfth of Section 21 of the Indian Penal Code (‘IPC’ for short) and Section 2(c)(iii) of the Prevention of Corruption Act, 1988 (‘PC Act’ for short). Both these statutes provide that a person in the service of a ‘Corporation established by or under a Central, Provincial or State Act’ is a public servant. The Prevention of Damage to Public Property Act, 1984 defines ‘public property’ as meaning any property owned by, or in the possession of, or under the control of (i) the Central Government (ii) any state government; or (iii) any local authority; or (iv) any corporation established by, or under, a Central, Provincial or State Act; or (v) any company as defined in Section 617 of the Companies Act, 1956; or (vi) any institution, concern or undertaking which the Central Government may, by notification in the Official Gazette, specify in that behalf provided that the Central Government shall not specify any institution, concern or undertaking under that sub-clause unless such institution, concern or undertaking is financed wholly or substantially by funds provided directly or indirectly by the Central Government or by one or more State Governments, or partly by the Central Government and partly by one or more State Governments. Thus the term is always used to denote certain categories of authorities which are ‘State’ as contrasted from non-statutory companies which do not fall under the ambit of ‘State’.
9. The meaning of the term came up for consideration in S. S. Dhanoa vs. Municipal Corporation, Delhi and Ors. - 1981 (3) SCC 431 with reference to section 21 of IPC. This Court held: 
“Clause Twelfth does not use the words "body corporate", and the question is whether the expression "corporation" contained therein, taken in collocation of the words "established by or under a Central, Provincial or State Act" would bring within its sweep a cooperative society. Indubitably, the Cooperative Store Limited is not a corporation established by a Central or State Act. The crux of the matter is whether the word 'under' occurring in Clause Twelfth of Section 21 of the Indian Penal Code makes a difference. Does the mere act of incorporation of a body or society under a Central or a State Act make it a corporation within the meaning of Clause Twelfth of Section 21. In our opinion, the expression 'corporation' must, in the context, mean a corporation created by the Legislature and not a body or society brought into existence by an act of a group of individuals. A cooperative society is, therefore, not a corporation established by or under an Act of the Central or State Legislature
A corporation is an artificial being created by law having a legal entity entirely separate and distinct from the individuals who compose it with the capacity of continuous existence and succession, notwithstanding changes in its membership. …….. The term 'corporation' is, therefore, wide enough to include private corporations. But, in the context of Clause Twelfth of Section 21 of the Indian Penal Code, the expression 'corporation' must be given a narrow legal connotation.
Corporation, in its widest sense, may mean any association of individuals entitled to act as an individual. But that certainly is not the sense in which it is used here. Corporation established by or under an Act of Legislature can only mean a body corporate which owes its existence, and not merely its corporate status, to the Act. For example, a Municipality, a Zilla Parishad or a Gram Panchayat owes its existence and status to an Act of Legislature. On the other hand, an association of persons constituting themselves into a Company under the Companies Act or a Society under the Societies Registration Act owes its existence not to the Act of Legislature but to acts of parties though, it may owe its status as a body corporate to an Act of Legislature. There is a distinction between a corporation established by or under an Act and a body incorporated under an Act. The distinction was brought out by this Court in Sukhdev Singh and Ors. v. Bhagatram Sardar Singh Raghuvanshi & Ors - (1975) 1 SCC 421. It was observed :
A company incorporated under the Companies Act is not created by the Companies Act but comes into existence in accordance with the provisions of the Act. There is thus a well-marked distinction between a body created by a statute and a body which, after coming into existence, is governed in accordance with the provisions of a statute.”
In Executive Committee of Vaish Degree College v. Lakshmi Narain - 1976 (2) SCC 58, this Court explained the position further: 
“In other words the position seems to be that the institution concerned must owe its very existence to a statute which would be the fountainhead of its powers. The question in such case to be asked is, if there is no statute, would the institution have any legal existence. If the answer is in the negative, then undoubtedly it is a statutory body, but if the institution has a separate existence of its own without any reference to the statute concerned but is merely governed by the statutory provisions it cannot be said to be a statutory body.”
10. A ‘company’ is not ‘established’ under the Companies Act. An incorporated company does not ‘owe’ its existence to the Companies Act. An incorporated company is formed by the act of any seven or more persons (or two or more persons for a private company) associated for any lawful purpose subscribing their names to a Memorandum of Association and by complying with the requirements of the Companies Act in respect of registration. Therefore, a ‘company’ is incorporated and registered under the Companies Act and not established under the Companies Act. Per contra, the Companies Act itself establishes the National Company Law Tribunal and National Company Law Appellate Tribunal, and those two statutory authorities owe their existence to the Companies Act.
11. Where the definition of ‘establishment’ uses the term ‘a corporation established by or under an Act’, the emphasis should be on the word ‘established’ in addition to the words ‘by or under’. The word ‘established’ refers to coming into existence by virtue of an enactment. It does not refer to a company, which, when it comes into existence, is governed in accordance with the provisions of the Companies Act. But then, what is the difference between ‘established by a central Act’ and ‘established under a central Act’? The difference is best explained by some illustrations. A corporation is established by an Act, where the Act itself establishes the corporation. For example, Section 3 of State Bank of India Act, 1955 provides that a Bank to be called the State Bank of India shall be constituted to carry on the business of banking. Section 3 of Life Insurance Corporation Act, 1956 provides that with effect from such date as the Central Government may by notification in the Official Gazette appoint, there shall be established a corporation called the Life Insurance Corporation of India. State Bank of India and Life Insurance Corporation of India are two examples of corporations established by “a Central Act”. We may next refer to the State Financial Corporation Act, 1951 which provides for establishment of various Financial Corporations under that Act. Section 3 of that Act relates to establishment of State Financial Corporations and provides that the State Government may, by notification in the Official Gazette establish a Financial Corporation for the State under such name as may be specified in the notification and such Financial Corporation shall be a body corporate by the name notified. Thus, a State Financial Corporation is established under a central Act. Therefore, when the words “by and under an Act” are preceded by the words “established”, it is clear that the reference is to a corporation established, that it is brought into existence, by an Act or under an Act. In short, the term refers to a statutory corporation as contrasted from a non-statutory corporation incorporated or registered under the Companies Act.
12. There is indication in the definition of ‘establishment’ itself, which clearly establishes that all companies incorporated under the Companies Act are not establishments. The enumeration of establishments in the definition of ‘establishment’ specifically includes “a Government Company as defined in Section 617 of the Companies Act, 1956”. This shows that the legislature, took pains to include in the definition of ‘establishment’ only one category of companies incorporated under the Companies Act, that is the ‘Government Companies’ as defined in Section 617 of the Companies Act. If, as contended by the employee, all Companies incorporated under the Companies Act are to be considered as ‘establishments’ for the purposes of Section 2(k), the definition would have simply and clearly stated that ‘a company incorporated or registered under the Companies Act, 1956’ which would have included a Government company defined under Section 617 of the Companies Act, 1956. The inclusion of only a specific category of companies incorporated under the Companies Act, 1956 within the definition of ‘establishment’ necessarily and impliedly excludes all other types of companies registered under the Companies Act, 1956, from the definition of ‘establishment’. It is clear that the legislative intent was to apply section 47 of the Act only to such establishments as were specifically defined as ‘establishment’ under section 2(k) of the Act and not to other establishments. The legislative intent was to define ‘establishment’ so as to be synonymous with the definition of ‘State’ under Article 12 of the Constitution of India. Private employers, whether individuals, partnerships, proprietary concerns or companies (other than Government companies) are clearly excluded from the ‘establishments’ to which section 47 of the Act will apply.

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