SUBJECT: - COMPANY LAW

TOPIC: - Meaning, Character and Kinds of Company and how it

is distinguished from other Business Organizations

SUBMITTED TO: - SUBMITTED BY: -

Prof. Dr. GURWINDER SINGH PRAKSH YADAV

LLB 4th Sem

Section: - B

Roll no. 19225LLB173

Enrolment no. 373503

 ACKNOWLEDGEMENT

I would like to take this opportunity to express my profound gratitude and deep
regard to DR. GURWINDER SINGH for his guidance and valuable feedback
and constant support throughout the duration of project. His suggestions were of
monumental help in the rough work of my project.

I am thankful to my parents and friends for their constant support and

coordination in the completion of the research work. Lastly, I would also like to
thank the library staff for constant support.
Meaning and Definition of Company: -

Company is an association of person who takes their meals together. The term is
derived from the Latin word (“com” meaning “with” or “together”; “panis” that
is “bread”) Section 2(20) of Companies Act, 2013 states that a company means
any association of person registered under the present or the previous
companies act. 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.

Literary meaning of the word ‘company’ is an association of persons formed for

common object. A company is a voluntary association of persons recognised by
law, having a distinctive name and common seal, formed to carry on business
for profit, with capital divisible into transferable shares, limited liability, a
corporate body and perpetual succession.

Definition of Company: -

The main definition of a company are given below:

1. According to Justice James, “A company is an association of persons united

for a common object.”

2. According to Lord Lindley, “By a ‘company’ is meant an association of

many persons who contribute money or money’s worth to a common stock and
employ it for some common purpose. The common stock so contributed is
denoted in money and is the capital of the company. The persons who
contribute it or to whom it belongs are members. The proportion of capital to
which each partner is entitled is his share.”

3. According to Kimball and Kimball, “A corporation is by nature an artificial

person created or authorised by the legal stature for some specific purpose.”

4. According to Prof. Haney, “A company is an artificial person created by law

having a separate entity with a perpetual succession and a common seal.”
5. Section 2(20) of Companies Act, 2013 states that a company means any
association of person registered under the present or the previous companies act.
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.

Characteristics of Company: -

On the basis of definitions mentioned above, the following are

the characteristics of a company:

1. An Artificial Person Created by Law: -

A company is a creation of law, and is, sometimes called an artificial person. It

does not take birth like natural person but comes into existence through law. But
a company enjoys all the rights of a natural person. It has right to enter into
contracts and own property. It can sue other and can be sued. But it is an
artificial person, so it cannot take oath, cannot be presented in court and it
cannot be divorced or married.

2. Separate Legal Entity: -

The outstanding feature of a company is its independent corporate existence. A

company before the law is a person. It is regarded as an entity separate from its
members. By incorporation under the Act, the company is vested with a corporate
personality which is distinct from the members who compose it. No one can say
that he is the owner of the company. Now the business belongs to an institution.
Thus, a company continues to exist even if the members go on changing from
time to time.

In the landmark decision of Salomon v Salomon (1897) AC 22, it was held that
a company has a corporate personality which is distinct from its members or
subscribers. A single shareholder may virtually hold the entire share capital of the
company; even in such a case, the company does not lose its identity. It was
declared that the business belonged to the company and not to a single
shareholder or number of shareholders and neither of them is liable to indemnify
the company for its debts.

In case of Tata Engineering & Locomotive Co. Ltd. v State of Bihar, the
Supreme Court described the legal status of a company as “An incorporated
association” before law is equal to a natural person and has a legal identification
of its own. It has its own-

• Separate seal
• Separate assets from that of its members
• Can sue and be sued exclusively for its own purpose

Its creditors cannot obtain satisfaction from the assets of its member’s liability of
the shareholders and members is limited to the amount invested by them in the
company; similarly, creditors have no to the assets of the corporation. This
position of a corporation is similar since the decision of the Salomon case.

The law recognises the existence of the company quite irrespective of its motives,
intention, schemes, or conduct of the individual shareholders.

3. Perpetual Succession: -
An incorporated company never dies, as it is an entity with perpetual succession.
For understanding this point more clearly let’s assume M, N, and O are the only
members of a company, holding all its shares. Their shares may be transferred to
or inherited by P, Q, or R who may, therefore, become the new members and
members of the company as they are now the shareholders of the company. But
the company will remain the same entity, with same name, privileges and
immunities, property and assets.

Hence in the case of Punjab National Bank v Lakshmi Industrial & Trading
co ltd. it was held by the Allahabad High court that perpetual succession means
that membership of a company may keep on changing from time to time, but that
does not affect the company’s continuity. A company has a perpetual
existence i.e., it has no soul to be saved or body to be kicked.

Since a company has no physical existence, it must act through its agents and all
such contracts entered into by its agents should be under the company’s seal.

4. Common Seal: -

A Company becomes a legal entity by perpetual succession and also by

a common seal. In fact, a common seal of a company is a symbol of its
incorporation. It is considered as the official signature of a company. But now by
the virtue of 2015 amendment to the Companies Act, a company may or may not
have a common seal. As per section 21 of Companies Act, authentication of
documents, proceedings and contracts on behalf of a company, signed by any key
managerial personnel or an officer of the company duly authorised by the board
in this behalf.

According to section 22, a company may, under its common seal can authorise
any person generally or in respect of any specified matters, to act as an attorney
to execute other deeds on behalf of the company, such deeds can be in or outside
India. Such signed deeds by its attorney on behalf of the company binds the
company. Provided that in case if a company does not have its common seal as
per the amendment of 2015, the authorisation shall be made by two directors or
by director and company secretary

5. Limited Liability: -

A company having its separate legal entity is the owner of its own assets and
bound by its liabilities. Members are neither the owner nor liable for its debts. All
the debts of a company are to be paid by itself rather than by its members.
Member’s liability becomes limited or restricted to the nominal value of the
shares taken by them in a company limited by shares or the amount guaranteed
by them in a company limited by guarantee. Limited liability is a principal
advantage of doing business under a corporate form of organisation.
Exceptions to the principle of limited liability

• Incorporation by furnishing false information

According to section 7(7), (b) of the Act, tribunal may on an application made to
it in regards to any fraudulent or false information being furnished by a company
during its incorporation and on being satisfied with the same, direct
that liability of the members of such company shall be unlimited.

• Fraudulent conduct of business

Under section 339(1), during the course of winding up a company if it appears

that any business of a company is carried on with the intent to defraud creditors
of the company or any other persons, the tribunal may on the application of
the Official Liquidator or the Company Liquidator or any other creditor on being
satisfied declare that any person who is or has been a director, manager or officer
of the company or any other person knowing part of aforesaid business shall be
personally responsible, without any limitation of liability.

• Unlimited company

When the company is incorporated under section 3(2)(c) of the Act as

an unlimited company. Then as the name clearly suggests that the liability of its
members will be unlimited.

• Misleading prospectus

As per section 35(3) companies act, where it is proved that a prospectus is issued
with an intention to defraud or mislead an applicant for securities of a company
or any other person for any fraudulent purpose, then every person who was a
director at the time of issuance of such prospectus or has been named as director
in the prospectus shall be personally responsible without any limitation of liability
for all and any of the losses or damages.
 • Acceptance of deposit with a fraudulent intention

As per section 75(1), when a company fails to repay the deposit or part thereof
or any interest referred under section 74 within specified time and it is proved
that deposit is accepted with the intent to defraud the depositors or for
any fraudulent purpose, every officer of the company who was responsible
acceptance of those deposits shall be liable of all or any of the losses or damages
that may have been incurred by depositors.

6. Transferability of Shares: -

Section 44 companies act of the Act, declares that “the shares or debentures or
any other interest of any member in a company shall be a movable property that
can be transferred in the manner provided in the article of the company.”
Thus, incorporation of a company allows its member to sell their shares in an
open market and to get back his investment without any hassle of withdrawing
money from the company. This unique feature of incorporation
provides liquidity to the investor and stability to the company because on the
other hand in a partnership firm partners can’t sell their share in an open market
except with unanimous consent of all the partners
7. Limitation of Work: -

The field of work of a company is fixed by its charter. The Memorandum of

Association. A company cannot do anything beyond the powers defined in it. Its
action is, therefore, limited. In order to do the work beyond the memorandum of
association, there is a need for its alteration.

8. Voluntary Association for Profits: -

A company is a voluntary association of persons to earn profits. It is formed for

the accomplishment of some public good and whatsoever profit is divided
among its shareholders. A company cannot be formed to carry on an activity
against the public policy and having no profit motive.
9. Representative Management: -

The shareholders of company are widely scattered. It is not possible for all the
shareholders to take part in the management. They leave their task to the
representatives the Board of Directors and the company is managed by Board of
Directors.

10. Termination of Existence: -

A company is created by law, carries on its affairs according to law and

ultimately is affected by law. Generally, the existence of a company is
terminated by means of winding up.

11.Company, not a citizen: -

According to Citizenship Act 1955, only a natural person can be a citizen of

India, not a juristic person will be considered as citizen same stated by the
Supreme Court in case of The State Trading Corporation Of India Ltd. vs The
Commercial Tax Officer. Even though the company does not get the citizenship
status of a country, it still can get a residential status.

12.Capacity to sue and be sued: -

Being a body corporate company possesses individual capacity being sued and
suing others in its own name. A company’s right to sue arises when some loss is
caused to the company i.e., to property or personality of the company. A company
also has a right to sue whenever any defamatory material published about it that
may affect its business.

The criminal complaint can be filed by a company but it must be represented by

a natural person. Not necessarily be represented throughout by the same person
but the absence of such representative may result in dismissal of the complaint.
Similarly, any default on the part of the company can be sued by the victim on
the name of the company only.

Kinds of Companies: -

Companies may be classified into various kinds on the following basis:

1. On the Basis of Incorporation: -

On the basis of incorporation companies may be classified into the

following two categories:

• Statutory Companies

Companies’ incorporation under a special act of parliament or state

legislature not under any of the companies act and provisions of the same do not
apply to such companies. Example are- RBI, SBI, Employees State Insurance
Corporation etc.

• Registered Companies

Companies which are incorporated under section 7 of the companies act 2013 or
any other previous companies law. For example- Tata, Reliance, Infosys etc.

2. On the Basis of Liability: -

On the basis of liability, company may be classified into:

1. Limited companies: -
Liability of its members is either limited to the share bought by them or limited
to the amount each member consented to contribute to the assets of the company
at its winding up.

• Limited by share

Liability of members is limited to the number of shares bought by them in a

company limited by share. A company having the liability of its members limited
by the memorandum to the amount, if any, due on shares held by them
respectively is called company limited by shares according to section 2(22).

• Limited by guarantee

Limited by guarantee is one whose members liability is limited by the

memorandum. This liability will be limited to such amount as members
respectively undertake to contribute to the assets of the company in the process
of its winding up. Liability of the members is limited to the fixed sum specified
in the memorandum agreed by the members to contribute.

2. Unlimited companies: -

Limited liability is a desirable option by the members but is not a necessary

adjunct to incorporation. According to section 2(92) of the Act, any company not
having’s limit on the liability of its members is termed as an unlimited
company. These types of companies are rarely formed now. AOA is must for such
companies stating the number of members with which the company is registered
and amount of capital share if it has. Liability of the member is like partners of a
firm for all trade debt without any limit

3. On the Basis of Number of Members: -

On the basis of number of members, a company may be classified into:

There are three forms of companies classified on the basis of the number of
members required for its incorporation.
 • One person company

Section 2(62) of companies act 2013 defines one person company as a company
that is to be incorporated with one person as a member. Whereas section-3
companies act specifies certain exceptions that are to be followed for
making registration of a one-person company. For example- AVV AD Avenue
(OPC) Pt. Ltd. company, etc.

• Private companies

According to section 2(68), a private company except in the case of one person
company limits the number of its members to two hundred, minimum paid-up
capital is as may be prescribed. Such companies prevent any public invitation to
subscribe to any of its securities.

• Public companies

Public companies defined under section 2(71), as not a private company, whose
shares are exchanged in an open trade market. It issues its shares via an initial
public offering and the same can be bought by the general public. A minimum
number of members required to form a public company is at least seven and may
extend to unlimited. There is no restriction on the transferability of its shares.

4. On the Basis of Control: -

On the basis of control, companies may be classified into three categories:

• Holding companies

Section 2(46) of the Act states that when one company is having control over the
composition of the board and the company holds the majority of shares in the
other company is known as holding the company of that other company.
 • Subsidiary companies

A company whose control and composition is regulated by the other

company known to be its holding company are called subsidiary companies. Its
composition of the board of directors are being controlled by its holding company
and more than half of its shares are in possession of that company. Section
2(87) of the act define a subsidiary company.

• Associate companies

Company in which the other company has significant influence but the company
is not a subsidiary of the company having such influence (control of at least 20%
of total share capital) is called an associate company according to Section 2(6).
These types of companies include joint venture company.

5. On the basis of the manner of access to capital: -

• Listed company

According to section 2(56), any company whose securities are listed on any
recognised stock exchange for public trading is termed as a listed company.it is
also known as a quoted company.

• Unlisted company

These companies are privately owned companies as they are not listed on
any stock exchange. Hence, they do not find any opportunity to raise funds.
Difference between the company and partnership firm: -

Making a distinction between a company and a partnership firm as both are

formed by no of members agreeing to for either of them.

• Companies are incorporated under the companies act whereas

partnership firms are created on a mutual agreement between the
partners.
• Companies are governed Indian Companies Act, 2013 whereas for
managing and controlling partnership firms there is Indian Partnership
Act, 1932.
• Registration of partnership firms is voluntary unlike of a company
which is obligatory under the Companies Act to be recognized as a
separate legal entity before the law.
• Number of partners required for incorporation of partnership firm is 2
maximum can be 100 and for incorporation of company minimum
number of members that are required is 2 in case of private company
and maximum can be 200, but in public company it has to be a minimum
of 7 persons that can last to unlimited as no fixed number is specified,
also one person company can be incorporated by one member.
• Company is a separate legal entity whereas the partnership firm isn’t.
• A company has a contractual capacity of suing and being sued in its
own name whereas a partnership firm can’t.

Difference between company and Franchise: -

A franchise is owned franchisee who has gained rights over usage of proprietary
information from the Franchisor. In contrast, a company is owned by
shareholders.

A franchise is regulated by the rules of the contract and the regulations of the
Federal Trade Commission (FTC). On the other hand, a company is regulated by
the Board of Directors (BoD).
A franchisor receives payment in the name of royalty from the franchisee. On the
other hand, shareholders receive dividends, and companies receive investments.

The Franchisor is liable for the activities of the franchisee and can also sue the
franchisee for violating the contract agreements. In contrast, shareholders in a
company have limited liability.

A franchise is a chain of outlets of the same company present in different

locations for expansion, whereas a company is a legal entity.

Thus, franchises and companies are two different terms. Where a company
includes people like shareholders and the Board of Directors (BoD), a franchise
includes people like Franchisor and franchisee.

In franchising, the license to use the company’s proprietary information like the
trademark is given to the franchisee under some terms and conditions. Still, no
such licensing takes place in a company. The later is just a legal person formed
by the processes of the law and has the rights and responsibility just like a human.
The revenue for a franchisor is the royalty paid by the franchisee. In contrast, the
shareholders in a company are paid dividends, and the company is run by
investments and/or profits.

Conclusion: -

Any association of person to be called a company is to be registered under the

procedure prescribed by the Law. An incorporated organisation is queued with a
bundle of advantages, which a partnership firm or any other business
organisation does not have. Therefore, indulging in business with an
incorporated organisation is the safest way.
BIBLIOGRAPHY: -
AVATAR SINGH: - COMPANY LAW
N.D. KAPOOR: - ELEMENTS OF COMPANY LAW
COMPANIES ACT , 2013