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COMPANY LAW STUDY MATERIALS

Meaning of a Company
The word „company‟ is derived from the Latin word (Com=with or
together; panis =bread), and it originally referred to an association of
persons who took their meals together. In the leisurely past, merchants
took advantage of festive gatherings, to discuss business matters. Now a
days, the business matters have become more complicated and cannot be
discussed at length at festive gatherings. Therefore, the word company has
assumed greater importance. It denotes a joint stock enterprise in which
the capital is contributed by a large number of people. Thus, in popular
parlance, a company denotes an association of likeminded persons formed
for the purpose of carrying on some business or undertaking. A company
is a corporate body and a legal person having status and personality
distinct and separate from that of the members constituting it.

It is called a body corporate because the persons composing it are made into
one body by incorporating it according to the law and clothing it with legal
personality. The word “corporation‟ is derived from the Latin term ‘corpus’
which means ‘body’. Accordingly, “corporation‟ is a legal person created by
the process other than natural birth. It is, for this reason, sometimes called
artificial legal person. As a legal person, a corporate is capable of enjoying
many of the rights and incurring many of the liabilities of a natural person.

The incorporated company owes its existence either to a special Act of
Parliament or to company legislation. The public corporations like Life
Insurance Corporation of India and Damodar Valley Corporation have been
brought into existence through special Acts of Parliament, whereas companies
like Tata Iron and Steel Co. Ltd., Reliance Industries Limited have been
formed under the Company’s Legislation i.e. Companies Act, 1956. The
trading partnership which is governed by Partnership Act is the most apt
example of an unincorporated association.
In the legal sense, a company is an association of both natural and
artificial persons incorporated under the existing law of a country. In terms of
the Companies
Act, 1956 (Act No. 1 of 1956) [hereinafter referred to as the Act] a “company
means a company formed and registered under the Companies Act, 1956 or
under the previous laws relating to companies" [Section 3(1)(ii)]. In common
law, a company is a “legal person” or “legal entity” separate from, and
capable of surviving beyond the lives of its members. However, an
association formed not for profit acquires a corporate life and falls within the
meaning of a company by reason of a license under Section 25(1) of the Act.
But a company is not merely a legal institution. It is rather a legal device
for the attainment of any social or economic end. It is, therefore, a combined

Being a separate legal entity it bears its own name and acts under a corporate name. Within the limits of powers conferred by the charter. the entity acts like a natural person but only through a designated person. centralized. A brief description of the various attributes is given here to explain the nature and characteristics of the company as a corporate body. the term company has been described in many ways.1 . it is an artificial person (i. Thus. Its members are its owners but they can be its creditors simultaneously as it has a separate legal entity. incurring debts. economic and legal institution. employing people. it can do all acts as a natural person may do. Lord Justice James has defined a company as “an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business and who share the profit and loss arising therefrom. It is “an intricate. it is clothed with many rights. “It is a means of cooperation and organization in the conduct of an enterprise”. it is not a human being. or to whom it belongs. It is also a different “person‟ from the members who compose it. having a bank account. whose acts are processed within the ambit of law. it is called a „person‟. From the foregoing discussion it is clear that a company has its own corporate and legal personality distinct and separate from that of its members. powers and duties prescribed by law. obligations. The common stock so contributed is denoted in money and is the capital of the company. borrowing money. Being the creation of law. In other words. Its assets are separate and distinct from those of its members. a company) is the creation of law. are members. The proportion of capital to which each member is entitled is his “share”. social. nor can they be sued in respect of its liabilities.e. The shareholders are not the agents of the company and so they cannot bind it by their acts. As such it is capable of owning property. The persons who form it. A juristic person is in law also conferred with rights and obligations and is dealt with in accordance with law. It has a seal of its own. Nature and Characteristics of a Company Since a corporate body (i. „incorporation‟ is the act of forming a legal corporation as a juristic person. entering into contracts and suing or being sued in the same manner as an individual.e. CASE EXAMPLE 1. A shareholder cannot be held liable for the acts of the company even if he holds virtually the entire share capital.political. The most striking characteristics of a company are: (i) Corporate personality By incorporation under the Act. economic and administrative structure run by professional managers who hire capital from the investor(s)”. Thus. The company does not hold its property as an agent or trustee for its members and they cannot sue to enforce its rights. it possesses only the properties conferred upon it by its Memorandum of Association. the company is vested with a corporate personality quite distinct from individuals who are its members. created by law).

In the case.782 was paid to Salomon in cash. though there be only seven shares taken. The company soon ran into difficulties and the debenture holders appointed a receiver and the company went into liquidation. was ultimately responsible for the debts incurred by his agent or trustee on his behalf. The company is at law a different person altogether from the subscribers of the memorandum. carried on a prosperous business as a leather merchant and boot manufacturer. the company is not in law their agent or trustee. who also applied for and received an allotment of 20. Their Lordships of the House of Lords observed: “When the memorandum is duly signed and registered. and whether he holds those shares beneficially or as a mere trustee. on the ground that. or that there should be anything like a balance of power in the constitution of company. The statute enacts nothing as to the extent or degree of interest which may be held by each of the seven or as to the proportion of interest. his wife. The total assets of the company amounted to £6050. Ltd.000 £ 1 fully paid shares. They further pleaded that Salomon.000 secured by debentures.. The remaining amount of £8. to the Company for the sum of £ 38.The case of Salomon v.C. He formed a limited company consisting of himself. as the company was a mere „alias‟ or agent for Salomon. In part payment of the purchase money for the business sold to the company. its liabilities were £10..782. Salomon had. and the same hands receive the profits. all of whom subscribed for 1 share each so that the actual cash paid as capital was £ 7. the subscribers are a body corporate capable forthwith of exercising all the functions of an incorporated company. as principal beneficiary. £8.000 in £ 1 shares. and though it may be that after incorporation the business is precisely the same as before. (1897) A. they were entitled to payment of their debts in priority to debentures. viz. £6. the same persons are managers. There is nothing in the Act requiring that the subscribers to the memorandum should be independent or unconnected.000 owning to unsecured trade creditors. or that they should have a mind or will of their own. or influence possessed by one or majority of the shareholders over others.050. for some years. The company’s nominal capital was £ 40. It is difficult to understand how a body corporate thus created by statute can lose its individuality by issuing the bulk of its capital to one person. Salomon sold his business (which was perfectly solvent at that time).000 secured by a floating charge on the company’s assets were issued to Salomon. debentures of the amount of £10. Salomon was the managing director and two of his sons were other directors. who claimed the whole of the company’s assets. or that they or any of them should take a substantial interest in the undertakings.” . 22 The above case has clearly established the principle that once a company has been validly constituted under Companies Act. Salomon and Co. his daughter and his four sons as the shareholders. it becomes a legal person distinct from its members and for this purpose it is immaterial whether any member has a large or small proportion of the shares.

extends to contribution to the assets of the company up to the nominal value of the shares held and not paid by him. being a separate legal person is unaffected by death or departure of any member and remains the same entity. when called upon to pay and nothing more. but that does not affect its continuity. the amount remaining unpaid on his shares. due on the shares held by him. the liability of members is limited to a specified amount mentioned in the memorandum. perpetual succession denotes the ability of a company to maintain its existence by the constant succession of new individuals who step into the shoes of those who cease to be members of the company.(ii) Limited Liability “The privilege of limited liability for business debts is one of the principal advantages of doing business under the corporate form of organization. means that the membership of a company may keep changing from time to time. being a separate person. Perumal v. Perpetual succession. H. is the owner of its assets and bound by its liabilities. The liability of a member as shareholder. even if the liabilities of the company far exceed its assets. This means that the liability of a member is limited. (iii) Perpetual Succession An incorporated company never dies except when it is wound up as per law. nor liable for its debts. A member does not even have an insurable interest in . iv) Separate Property A company being a legal person and entirely distinct from its members. A company’s life is determined by the terms of its Memorandum of Association. In other words.000 and has already paid Rs. In the case of a company limited by guarantee. he cannot be called upon to pay more than Rs. is capable of owning. if A holds shares of the total nominal value of Rs.(or 50% of the value) as part payment at the time of allotment. he has no further liability to pay even if the company is declared insolvent.F. It may be perpetual or it may continue for a specified time to carry on a task or object as laid down in the Memorandum of Association. even as a whole. Thus. Their Lordships of the Madras High Court in R. and by which it is controlled. 500/. therefore. managed and disposed off.R. John Deavin. The membership of an incorporated company may change either because one shareholder has transferred his shares to another or his shares devolve on his legal representatives on his death or he ceases to be a member under some other provisions of the Companies Act.500/-. 43 held that “no member can claim himself to be the owner of the company’s property during its existence or in its winding-up”. despite total change in the membership.” The company. 1960 Mad. If he holds fully-paid shares. if any. For example. A.I. are neither the owners of the company’s undertakings.1. The company is the real person in which all its property is vested. Members. enjoying and disposing of property in its own name. a shareholder is liable to pay the balance. A company.

freely transferable. To sue. A . 1956. When the joint stock companies were established. 1956 enunciates the principle by providing that the shares held by the members are movable property and can be transferred from one person to another in the manner provided by the articles. Section 82 of the Companies Act.the property of the company. the company may bring an action against anyone in its own name. (v) Transferability of Shares The capital of a company is divided into parts. may even sue one of its own members for libel. to the property of the personality of the company. i. are also expressly excluded. Similarly. the transfer of shares will be governed by the general law relating to transfer of movable property.e. subject to certain conditions. A company’s right to sue arises when some loss is caused to the company. Hence. can enter into contracts for the conduct of the business in its own name. the object was that their shares should be capable of being easily transferred. the company is entitled to sue for damages in libel or slander as the case may be. so that no shareholder is permanently or necessarily wedded to a company. means to institute legal proceedings against (a person) or to bring a suit in a court of law. A document not bearing common seal of the company is not authentic and has no legal force behind it. as a person separate from its members. (viii) Contractual Rights A company. A company. The shares are said to be movable property and. vii) Capacity to Sue and Be Sued A company being a body corporate. A company has a right to seek damages where a defamatory material published about it. If the articles do not provide anything for the transfer of shares and the Regulations contained in Table “A” in Schedule I to the Companies Act. affects its business. The name of the company must be engraved on its common seal. A rubber stamp does not serve the purpose. instrument or a document to which seal is improperly or fraudulently affixed will involve the company in legal action and litigation. The person authorised to use the seal should ensure that it is kept under his personal custody and is used very carefully because any deed. called shares. . a company acquires legal entity with perpetual succession and a common seal. All legal proceedings against the company are to be instituted in its own name. it must act through its agents and all such contracts entered into by its agents must be under the seal of the company. being a separate legal entity different from its members. The Common Seal acts as the official signature of a company. can sue and be sued in its own name. Since the company has no physical existence. (vi) Common Seal On incorporation.

he is neither a party to the contract nor entitled to the benefit of it. It is formed for the accomplishment of some public goals and whatsoever profit is gained is divided among its shareholders or restored for the future expansion of the company. and in consequence a shareholder is induced to enter into a contract with the director which he would not have entered into had there been disclosure. It is created by law. reconstruction and amalgamation. (ix) Limitation of Action A company cannot go beyond the power stated in the Memorandum of Association. it cannot go beyond these powers unless the Memorandum of Association is itself altered prior to doing so. Its rights and duties are distinct from those of its constituent members. carries on its affairs according to law throughout its life and ultimately is effaced by law. having corporate entity . does not die a natural death.shareholder cannot enforce a contract made by his company. “a company is a voluntary association for profit with capital divisible into transferable shares with limited liability. if a director fails to disclose a breach of his duties to his company. as a company is not a trustee for its shareholders. The distinction between a company and its members is not confined to the rules of privity. Therefore. to avoid winding up sometimes companies change their form by means of reorganization. the existence of a company is terminated by means of winding up. (x) Separate Management As already noted. To sum up. However. however. The Memorandum of Association of the company regulates the powers and fixes the objects of the company and provides the edifice upon which the entire structure of the company rests. In order to enable it to carry out its actions without such restrictions and limitations in most cases. But once the powers have been laid down. it permeates the whole law of contract. (xi) Voluntary Association for Profit A company is a voluntary association for profit. They do not have effective and intimate control over its working and elect their representatives to conduct corporate functioning. The actions and objects of the company are limited within the scope of its Memorandum of Association. being an abstract and artificial person. Only a Section 25 company can be formed with no profit motive. sufficient powers are granted in the Memorandum of Association. Likewise. the company is administered and managed by its managerial personnel. the company as a legal person can take action to enforce its legal rights or be sued for breach of its legal duties. the members may derive profits without being burdened with the management of the company. Thus. Generally. (xii) Termination of Existence A company. the shareholder cannot rescind the contract. a shareholder cannot be sued on contracts made by his company. In other words.

.and a common seal with perpetual succession”.