Section 366: Companies Capable of Being Registered

Introduction to Section 366

Section 366 of Companies Act, 2013, is part of chapter XXI which deals with companies authorized to register under this act, lays down the provision for companies capable of being registered. This section along with corresponding rules lays down the procedure and requirement for registration of a company, as broadly defined in this section, under this chapter. This analysis will provide a holistic understanding of this section.

Purpose of Section 366

This section is a very important and briefly lays down the following:

• This section specifies companies, which are capable of being registered under Part XXI. For the purposes of this Part, the word ‘company’ includes any partnership firm, limited liability partnership (LLP), cooperative society, society or any other business entity formed under any other law for the time being in force which applies for registration under this Part.
• In other words, ‘company’ used in Part I of this chapter (Chapter XXI) has a different meaning as that of the ‘company’ used in section 2(20) of the act, 2013.
• Any company, in pursuance of any Act of Parliament, duly constituted according to law and consisting of two or more members (as against 7 or more members specified prior to Companies (Amendment) Act, 2017) may at any time register under this Act as unlimited company, company limited by share or as company limited by guarantee, in the manner as prescribed under rule 3 of Companies (Authorized to Registered) Rules, 2014 and the registration shall not be invalid by only that it has taken place with a view to the company’s being wound up.
• Following conditions are laid down by this section:

a) A company registered under the Indian Companies Act, 1882 or under the Indian Companies Act, 1913 or the Companies Act, 1956, cannot not be registered in this section.

b) A company having the liability of its members limited by any act of parliament other than this act or by any other law in force is also not eligible to register in pursuance of this section as an unlimited company or as a company limited by guarantee.

c) A company can be registered under this section as a company limited by shares only if it has a permanent paid-up or nominal share capital of fixed amount divided into shares, also of fixed amount, or held and transferable as stock, or divided and held partly in the one way and partly in the other, and formed on the principle of having for its members the holders of those shares or that stock, and no other persons.

d) A company cannot be registered under this section without the assent of a majority of such members as are present in person, or where proxies are allowed, by proxy, at a general meeting summoned for the purpose.

e) Where a company not having the liability of its members limited by any act of parliament or any other law for the time being in force is about to register as a limited company, the majority required to assent as aforesaid shall consist of not less than three-fourths of the members present in person, or where proxies are allowed, by proxy, at the meeting.

f) Where a company is about to register as a company limited by guarantee, the assent to its being so registered have to be necessary accompanied by a resolution declaring that each member undertakes to contribute to the assets of the company, in the event of its being wound up while he is a member, or within one year after he ceases to be a member, for payment of the debts and liabilities of the company and of the costs, charges and expenses of winding up, and for the adjustment of the rights of the contributories among themselves etc.

This section must be read with Companies (Authorized to Registered) Rules, 2014, which further provides certain procedural requirements that every company needs to adhere to and follow. The procedural requirements are given with respect to registration of a company, the forms to be submitted and documents that need to be submitted to the registrar.

Rule 3(1) states that the provision of Chapter II relating to incorporation of company will be applicable mutatis mutandis for registration under this part and for the purposes of registration of the company under this part, there shall be seven or more members [1].

Rule 3(1) gives the following list of documents and information that need to be filled in form no. URC 1, with the registrar for a company limited by shares[2]: (i) A list showing names and other particulars of members along with details of shares held by them, who on a day, not being more than six clear days before the day of seeking registration, were partners of the limited liability partnership (ii) a list of persons proposed as the first directors of the company, their names, the DIN, passport number with expiry date, residential addresses etc. along with their consent to act as directors of the company (iii) an affidavit from the first directors, stating that he is not disqualified to be a director and that the documents filed with the Registrar for registration of the company contain correct, complete and true information to the best of his knowledge and belief (iv) a  list of names and addresses of the partners of the limited liability partnership (v) a copy of the act of parliament or other instrument constituting or regulating the company (vi) a statement specifying: the nominal share capital of the company, number of shares into which it is divided, no. of shares taken, amount paid on each share, the name of the company, with the addition of the word “Limited” or “Private Limited” (vii) written consent or no objection certificate from all the secured creditors. (viii) Written consent from majority of members whether present in person or proxy at a general meeting agreeing for registration under this part.

Rule 3(2) also mandates the following documents for registration of a company as company limited by guarantee or as an unlisted company[3]: (i) a list containing names, and particulars of all persons who are members of the company with proof of membership (ii) a list containing the particulars of persons proposed as the first directors of the company (iii) an affidavit from each of the first directors, that he is not disqualified to be a director and that all the documents filed with the registrar for registration of the company contain information that is correct, complete and true to the best of his knowledge and belief (iv) a list of the names and addresses of the partners of the limited liability partnership (v) a copy of the act of parliament or other Indian law, regulating the company (vi) in the case of a company intended to be registered as a company limited by guarantee, a copy of the resolution declaring the amount guarantee (vii) written consent or no objection certificate from all the secured creditors of the applicant (viii) written consent from the majority of members whether present in person or by proxy at a general meeting agreeing for registration under this part.

Rule 3(3) provides that an affidavit, from all the members/ partners stating providing for registration as a company, all the necessary documents must be submitted to the registering with which the company was earlier registered, for its dissolution as a limited liability Partnership [4].

Rule 3(4) provides that a list of members, directors and any other particulars relating to the company have to be verified by the declaration of any two or more proposed directors, or two or more designated partners of the limited liability partnership [5].

These rules supplement this section and provide for a better understanding of this section.

Situation Before Enactment of Section 366

This section corresponds to section 565 (Companies capable of being registered) of the 1956 Act. The act, 2013 explicitly defines the term ‘company’ under this Part I of Chapter XXI to include partnership firms, society, etc., whereas, under the act, 1956 the term “company” used in Part IX (corresponding provision) was not explicitly defined to include partnership firms, society, etc. However, the intent was clear under the act, 1956 by virtue of wordings of section read with several case laws like Valli Pattabhirama Rao v. Sri Ramanuja Ginning & Rice Factory (P.) Ltd [6]. and Salim Akbarali Nanji v. Union of India [7], to include partnership firms, societies or any other entity formed under any other law for the time being in force but subject to certain exceptions and conditions as stated therein.

It was provided in section 565 that a company that is not a joint stock company shall not register in pursuance of section 565 as a company limited by shares. The expression “joint stock Company”, as used under the act, 1956 in section 566, has been removed but the concept has been retained under clause (iii) of sub-section (2) of the act, 2013. Further, the procedural aspects with respect to registration of companies under this Part I of Chapter XXI have not been provided in the act itself and are provided in the aforementioned Rules, whereas, the same was provided in sections 567 to 573 of the act, 1956.

Application of Section 366

This section is applied when a company needs to be registered under this chapter. This section lays down the procedure and requirements for the same.

Amendments to Section 366

This section has been amended once by the Companies (Amendment) Act, 2017, whereby section 366(2) the phrase “seven or more members” was substituted with “two or more members” and in the proviso after clause (VI), “a company less than seven members shall register as a private company”, was inserted. These amendments brought more clarity to this section.

Cases at a Glance

Following case is important for this section:

Nidhi Securities Ltd. v Crystal Ceramic Industries Kediya Ceramics (Matter of Amalgamation) [8]: The question of law was whether a partnership firm being a body corporate is entitled to maintain the application under sections 230-232 of the act, 2013. Applicant asked the court for its finding on this question of law. The applicant, a partnership firm, is the transferor company, and has submitted a scheme for amalgamation with the transferee company. Section 366 of the act, 2013 allows a partnership firm to be registered as a company under companies act, 2013. Under the 1956 act, under the section for amalgamation, the legislature set forth that transferor company to include anybody corporate, whether it is a company under the act or not. The provision under the new act, 2013 however does not contain the same. Hence the court in this case held that the omission could be interpreted as legislative wisdom and shows that legislation finds it fit to make a provision available only to companies registered under the act, and not body corporate. Thus, it cannot be said body corporate can participate in the scheme of amalgamation.

Concluding Summary

This section is a very important section laying down the procedure and requirements for registration of the company under this chapter. The rules as discussed under this analysis, provide flesh and blood to this section, laying down the procedural requirement in detail along with documentations. The case law also provides a better understanding and application of this section. This analysis gives an overview of this section in detail.

References:

[1] Companies (Authorized to Registered) Rules, 2014, r. 3(1) (MCA).

[2] Companies (Authorized to Registered) Rules, 2014, r. 3(2) (MCA).

[3] Id.

[4] Companies (Authorized to Registered) Rules, 2014, r. 3(3) (MCA).

[5] Companies (Authorized to Registered) Rules, 2014, r. 3(4) (MCA).

[6] Valli Pattabhirama Rao v. Sri Ramanuja Ginning & Rice Factory (P.) Ltd. (1986) 60 CompCas 568 AP

[7] Salim Akbarali Nanji v. Union of India (2003) 113 CompCas 142 (Bom).

[8] Nidhi Securities Ltd. v Crystal Ceramic Industries Kediya Ceramics 2017 SCC Online NCLT 11360.

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