The term ‘private company’ has been defined under section 3 (1) (iii) of the companies Act, 1956. A Private company means a company, which has a minimum paid-up share capital of Rs. 1 lac or such higher capital as may be prescribed and which by its articles provides the following:-

1. restricts the right to transfer its shares, if any;

2. Limits the number of its members to fifty excluding past and present employees who continue to be the members of the company (here joint members shall be counted as one);

3. In which public cannot subscribe for any share in, or debentures of, the company; and

4. Prohibits any invitation or acceptance of deposits from person other than its members, directors or their relatives (provided it is not out of borrowed funds).

The term ‘relative’ has been defined under Section 6 of the Companies Act, 1956. As per this, a person shall be deemed to a relative of another if, and only if, —

1. They are the members of HUF;

2. They are husband and wife; of

3. The one is related to the other in the manner indicated in Schedule IA.

There should be at least two person to form a private company i.e., the minimum no. of members in a private company is two. A private company should have at lease two directors.  The name of a private company must end with the words “Private Limited”.

The provisions regarding the minimum paid – up share capital of Rs. 1 lac shall also apply to the existing companies i.e., companies existing before the commencement of Companies ( Amendment) Act, 2000 ( w.e.f. 13th December 2000). The existing companies have to increase their plaid – up capital to Rs. 1 lac within a period of 2 years from the effective date of Companies ( Amendment) Act, 2000 (i.e., up to 13/12/2002). If an existing company does not enhance its paid – up capital within the said period, it will be written off by the Registrar of Companies as a defunct company u/s 560.

Further, existing private companies will also have to amend their articles of association thereby incorporating the fourth clause regarding prohibition on invitation or acceptance of deposits from persons other than its members, directors or their relatives.

In G. Venkitapathy v. Prakathi Spinners Pvt. Ltd., it was held that non-insertion of  fourth restriction i.e., prohibition on invitation or acceptance of deposits in the Articles of Association does not means that a private company can take the deposits, because no one is allowed to take the advantage of his own wrong. Further, in such a situation, Section 9 of the Companies Act shall operate which provides that Companies Act has the overriding effect over the Memorandum and Articles of any company.