On the basis of the number of members ,a registered company in India may be of 2 types : (1) private company, or (2) public company.
1. Private company :
A “Private Company” is defined by Section 3 (1) (iii) of the Act as a company which, by its articles” of association:
(a) restricts the right of the members to transfer shares, ‘if any;
(b) limits the number of its members to fifty, excluding members who are or were in the employment of the company; and
(c) prohibits any invitation to the public to subscribe for any shares in, or debentures of the company.
The significance of the words if any used in sub-clause (a) above may be borne in mind. As a result of these words, the articles of association of a private company having no share capita! shall have to place restrictions specified in the aforesaid sub-clauses (b) and (c) only. In other words, in the case of a private company having no share capital, articles of association need not contain restriction regarding the right of the members to transfer shares.
For the purpose of counting the number of members in compliance of sub-clause (6) of the above definition, the Section further lays down that:
(i) members who have been formerly in the employment of the company shall not be counted provided they were members while in that employment and have continued to be members after the employment ceased; and
(ii) where two or more persons hold one or more shares of the company jointly, they shall be treated as a single member.
The minimum number of members required to form a private company is two. Such a company must add the word “Private” in its name. A private company enjoys some special privileges (i.e., some of the provisions of the Companies Act do not apply to such a company) which will be discussed later in this chapter.
2. Public company :
The Companies Act does not provide any positive definition of a “Public Company”.
Section 3 (1) (iv) defines it as, “A public company means a company which is not a private company.”
Elaborating the above definition, a ‘Public Company is one which:
(i) does not have any restriction on the transfer of shares;
(ii) does not limit the maximum number of members; and
(iii) can invite public for the subscription of its shares and debentures. (Of course it is under no legal obligation to invite public for this purpose if it is confident of obtaining the required capital privately.
The minimum number of members required to form a public company is seven.
3. Unlimited companies :
A company having no limit on the liability of its members is an unlimited company [Sec. 12 (2)(c)]. Thus the liability of members in this type of companies is unlimited, i.e., it may extend to the personal property of the members. Like partnership every member is liable to contribute, in proportion to his interest in the company, towards the amount required for payment in full of the total liabilities of the company, and if one is unable to contribute anything then the additional deficiency is to be shared among the remaining members in proportion to their capital in the company.
But it is different from an ordinary partnership in one important respect, i.e., creditors of such a company cannot sue members directly and they can only resort to the winding up of the company on default, the reason is that being a registered company it has a separate entity in law. It must be noted, however, that here also the liability of a member is enforceable only at the time of winding up.
Such a company may or may not have share capital. The articles of association of an unlimited company must state the number of members with which the company is to be registered and, if the company has a share capital, the amount of share capital with which the company is to be registered [Sec. 27 (1)]. As the capital, if any, is stated in the articles and not in the memorandum, it may be varied—increased or reduced—by passing a special resolution, without ‘the sanction of the court (Re Borough, etc., Building Society). Again, an unlimited company is free from the restriction imposed by Section 77 and can purchase its own shares. Such companies are, however, rare these days.