Private Company: What it is?

Author: Abhinav Gaur, Research Associate

What is a Private Company?

Section 3(1) (iii), as amended by the Companies (Amendment) Act, 2000, provides that a private company means a company which has paid-up capital of Rs. 1 lakh or such higher paid-up capital as may be prescribed, and by its articles of association:

  • restricts the right of members to transfer shares, if any;
  • limits the number of its members to 50, excluding members who are or were in the employment of company;
  • prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company; and
  • Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.

Where two or more persons hold one or more shares jointly in the company, they shall be treated as a single member for the purpose of this definition ((Section 3(1) (iii) of The Companies Act, 1956)).

In a private company without share capital, the articles need not contain the provisions restricting the rights of members to transfer shares ((Section 27 (3) of The Companies Act, 1956)).

The minimum number required to form a private company is 2. It is noteworthy that while calculating the number of members, not only present employee-members but also persons who were previously employees and who during their employment became members, are to be excluded.

It is furthermore mandatory for the private company to add the words ‘private limited’ at the end of its name, and it may commence its business immediately after obtaining a certificate of incorporation. It is conventional that the private companies are usually family concerns, since shares are generally held by members of the family. The basic point of private company is that shareholders have the advantage of limited liability and its affairs remain secret to a considerable extent.

ADVANTAGES OF A PRIVATE LIMITED COMPANY OVER A PUBLIC LIMITED COMPANY

A private company enjoys innumerable advantages or relaxations under the Act as compared to a public limited company, such exemptions and privileges enjoyed by a private company, as provided in the Companies Act, 1956, are stated below:

  • A private company may be formed with only two (2) persons as members ((Section 12(1) of The Companies Act, 1956)).
  • It may commence allotment of shares even before the minimum subscription is subscribed for or paid ((Section 69 of The Companies Act, 1956)).
  • It is not required either issue a prospectus to the public or file a statement in lieu of a prospectus ((Section 70 (3) of The Companies Act, 1956)).
  • A Private Company including subsidiary of a Public Company can issue its further shares to any person in any manner as it thinks best in its own interest. Restrictions imposed on public companies regarding further issue of capital do not apply on private companies ((Section 81 (3) of The Companies Act, 1956)).
  • Provisions of Sections 114 and 115 relating to share warrants shall not apply to it ((Section 114 of The Companies Act, 1956)).
  • It need not keep an index of members ((Section 151 of The Companies Act, 1956)).
  • It can commence its business after obtaining a certificate of incorporation. A certificate of commencement of business is not required ((Section 149 (7) of The Companies Act, 1956)).
  • It need not hold statutory meeting or file a statutory report ((Section 165 (10) of The Companies Act, 1956)).
  • Unless the articles provide for a larger number, only two persons personally present shall form the quorum in case of a private company, while at least 5 members personally present form the quorum in case of a public company ((Section 174 of The Companies Act, 1956)).
  • In case of a private company, poll can be demanded by 1 member if not more than 7 members at present and by 2 members if more than 7 members are present ((Section 179 of The Companies Act, 1956)).
  • It need not have more than 2 directors while public company must have at least 3 directors ((Section 252 of The Companies Act, 1956)).
  • A director is not required to file his consent to act a s such with the registrar ((Section 266 (5) (b) of The Companies Act, 1956)).
  • Provisions in section 284, regarding removal of director by the company in general meeting shall not apply to a life director appointed by a private company on or before 1st April 1952 ((Section 284 (1) of The Companies Act, 1956)).
  • A private company is not prohibited from giving financial assistance directly or indirectly for purchase or subscription of its own shares ((Section 77 (2) of The Companies Act, 1956)).
  • No person other than a member of the private company is entitled to inspect or obtain copies of the profit and loss account and the balance sheet filed with the Registrar ((Section 220 (1) of The Companies Act, 1956)).
  • The right of appeal to the Company Law Board against rejection of a transfer of shares is not available as long as the Private Company is only enforcing the provisions of its articles in rejecting a particular transfer. It appears from this section that a right of appeal will be available where the rejection is outside the provisions of the Private Company’s Articles. The right of appeal is also available where there is transmission by court sale or sale by other public authority ((Section 111 (13) and Section 111 (11) of The Companies Act, 1956)).
  • Passing of resolution by Postal Ballot is not relevant for Private Company ((Section 192 A of The Companies Act, 1956)).
  • The provision requiring giving 14 day notice by new candidates seeking election as directors and depositing of certain amount (Rs. 500) are not mandatory for Private Company which is not a subsidiary of Public Company ((Section 257 of The Companies Act, 1956)).
  • It is exempted from many provisions of the Act relating to directors, managing director, or manager, as given below:

(a) All its directors can be permanent life directors and the provisions relating to retirement of directors by rotation (1/3rd every year) shall not apply to it ((Section 255 and 256 of The Companies Act, 1956)).

(b) Two or more directors may be appointed by a single resolution ((Section 263 of The Companies Act, 1956)).

(c) Provisions requiring sanction of the central government for increasing the number of directors beyond the limit fixed by the articles shall not apply to a private company ((Section 259 of The Companies Act, 1956)).

(d) Provision prohibiting the appointment of managing director or manager for more than 5 years at a time shall not apply to it ((section 317 of The Companies Act, 1956)).

(e) No government approval is required for appointment or re-appointment of managing or whole time director or manager ((section 268 and 269 of The Companies Act, 1956)).

(f) A private company may provide additional disqualifications in its articles for the appointment of director ((Section 274 of The Companies Act, 1956)).

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