COMPANY LAW

Introduction to Company Law: Meaning, Nature and Characteristics:

Introduction

The concept of ‘Company’ or ‘Corporation’ in business is not new but was dealt with, in 4th century
BC itself during ‘Arthashastra days . Its’ shape got revamped over a period of time according to the
needs of business dynamics. Company form of business has certain distinct advantages over other
forms of businesses like Sole Proprietorship/Partnership etc. It includes features such as Limited
Liability, Perpetual, Succession etc.

I. 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.

Nowadays, business matters have become more complicated and cannot be discussed at festive
gatherings. Therefore, the company form of organization has assumed greater importance. It denotes a
joint-stock enterprise in which the capital is contributed by several 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 the members constituting it.”
i.e. “A company is a separate legal entity”.

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 a process other than natural birth. It is, for this reason, sometimes called an artificial legal
person. As a legal person, a corporation is capable of enjoying many of the rights and incurring many
of the liabilities of a natural person.

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An incorporated company owes its existence either to a special Act of Parliament or to company law.
Public corporations like Life Insurance Corporation of India, SBI etc., have been brought into
existence by special Acts of Parliament, whereas companies like Tata Steel Ltd., Reliance Industries
Limited have been formed under the Company law i.e. Companies Act, 1956 which is being replaced
by the Companies Act, 2013.

II. Definition of Company

In the legal sense, a company is an association of both natural and artificial persons (and is
incorporated under the existing law of a country). In terms of the Companies Act, 2013 (Act No. 18 of
2013) a “company” means a company incorporated under this Act or under any previous company law
[Section 2(20)].

Sec. 2(11) defines ‘Body Corporate’ ―body corporate or corporation includes a company
incorporated outside India, but does not include—
(i) a co-operative society registered under any law relating to co-operative societies; and
(ii) any other body corporate (not being a company as defined in this Act), which the Central
Government may, by notification, specify in this behalf;

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 also acquires
a corporate character and falls within the meaning of a company by reason of a license issued under
Section 8(1) of the Act.

A company is not merely a legal institution. It is rather a legal device for the attainment of the social
and economic end. It is, therefore, a combined political, social, economic and legal institution. Thus,
the term company has been described in many ways.

“It is a means of cooperation and organization in the conduct of an enterprise”.

It is “an intricate, centralized, economic and administrative structure run by professional managers
who hire capital from the investor(s)”.

Lord Justice Lindley has defined a company as “ an association of many persons who contribute
money or money’s worth to common stock and employ it in some trade or business and who share the
profit and loss arising therefrom. The common stock so contributed is denoted in money and is the
capital of the company.”

The persons who contributed in it or form it, or to whom it belongs, are members. The proportion of
capital to which each member is entitled is his “share”. The shares are always transferable although the
right to transfer them may be restricted.”

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From the foregoing discussion, it is clear that a company has its own corporate and legal personality
distinct which is separate from its members. A brief description of the various attributes is given here
to explain the nature and characteristics of the company as a corporate body.

III. Nature and Characteristics of a Company

Since a corporate body (i.e. a company) is the creation of law, it is not a human being, it is an artificial
juridical person (i.e. created by law); it is clothed with many rights, obligations, powers, and duties
prescribed by law; it is called a ‘person’.

Being the creation of law, it possesses only the powers conferred upon it by its Memorandum of
Association which is the charter of the company. Within the limits of powers conferred by the charter,
it can do all acts as a natural person may do.

The most striking characteristics of a company are:

(1) Independent Corporate personality

A company incorporated under the Act is vested with a corporate personality so it redundant bears its
own name, acts under a name, has a seal of its own and its assets are separate and distinct from those
of its members. It is a different ‘person’ from the members who compose it. Therefore it is capable of
owning property, incurring debts, borrowing money, having a bank account, employing people,
entering into contracts and suing or being sued in the same manner as an individual.

Its members are its owners however they can be its creditors simultaneously. A shareholder cannot be
held liable for the acts of the company even if he holds virtually the entire share capital.

A Company is an artificial person created by law. It is not a human being but it acts through human
beings. It is considered as a legal person which can enter into contracts, possess properties in its own
name, sue and can be sued by others etc. It is called a n artificial person since it is invisible, intangible,
existing only in the contemplation of law. It is capable of enjoying rights and being subject to duties.

The decision of the House of Lords in Salomon v. Salomon & Co. Ltd. (1897 AC 22) is an
authority on this principle:

One Salomon incorporated a company to take over his personal business of manufacturing shoes
and boots. The seven subscribers to the memorandum were all his family members, each taking only
one share. The Board of Directors composed of Salomon as managing director and his four sons. The
business was transferred to the company at 40,000 pounds. Salomon took 20,000 shares of 1 pound
each and debentures worth 10,000 pounds. Within a year the company came to be wound up and the
state if affairs was like this: Assets- 6,000 pounds; Liabilities- Debenture creditors-10,000 pounds,
Unsecured creditors- 7,000 pounds.
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 It was argued on behalf of the unsecured creditors that, though the company was incorporated, it
never had an independent existence. It was Salomon himself trading under another name, but the
House of Lords held Salomon & Co. Ltd. must be regarded as a separate person from Salomon.

(2) Limited Liability

The company, being a separate entity, leading its own business life, the members are not liable for its
debts. The liability of members is limited by shares; each member is bound to pay the nominal value
of shares held by them and his liability ends there.

The liability of a member as a shareholder extends to the contribution to the capital of the company up
to the nominal value of the shares held and not paid by him. Members, even as a whole, are neither the
owners of the company’s undertakings nor liable for its debts. There are various exceptions to the
principle of limited liability.

In other words, a shareholder is liable to pay the balance, if any, due on the shares held by him, when
called upon to pay and nothing more, even if the liabilities of the company far exceed its assets. This
means that the liability of a member is limited.

(3) Perpetual succession- An incorporated company never dies. Members may come and go, but the
company will go on forever. During the war all the members of a private company, while in general
meeting, were killed by a bomb. But the company survived, not even a hydrogen bomb could have
destroyed it (K/9 Meat Supplies (Guildford) Ltd., Re, 1966 (3) All E.R. 320).

(4) Common seal- Since a company has no physical existence, it must act through its agents and all
such contracts entered into by such agents must be under the seal of the company. The common seal
acts as the official seal of the company.

(5) Separate Property

A company is a legal person and entirely distinct from its members, is capable of owning, enjoying
and disposing of property in its own name. The company is the real person in which all its property is
vested, and by which it is controlled, managed and disposed of.

Their Lordships of the Madras High Court in R.F. Perumal v. H. John Deavin, A.I.R. 1960 Mad.
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”. A member does not even have an insurable interest in the property of
the company.

(6) Transferablility of shares-

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The capital of a company is divided into parts, called shares. The shares are said to be a movable
property and, subject to certain conditions, freely transferable, so that no shareholder is permanently or
necessarily wedded to a company.

when joint stock companies were established the great object was that the shares should be capable of
being easily transferred. Sec 44 of the Company Act, 2013 gives expression to this principle by
providing that “the shares or other interest of any member shall be movable property, transferable in
the manner provided by the articles of the company.”

If the articles do not provide anything for the transfer of shares and the Regulations contained in Table
“F” in Schedule I to the Companies Act, 2013, are also expressly excluded, the transfer of shares will
be governed by the general law relating to the transfer of shares will be governed by the general law
relating to the transfer of movable property.

A member may sell his shares in the open market and realize the money invested by him. This
provides liquidity to a member (as he can freely sell his shares) and ensures stability to the company
(as the member is not withdrawing his money from the company). The Stock Exchanges provide
adequate facilities for the sale and purchase of shares.

(7) Capacity to sue and be sued:

A company can sue and be sued in its own name. The names of managerial members need not
be impleaded A company’s right to sue arises when some loss is caused to the company, i.e. to the
property or the personality of the company. Hence, the company is entitled to sue for damages in libel
or slander as the case may be [Floating Services Ltd. v. MV San Fransceco Dipaloa (2004) 52 SCL
762 (Guj)].

Where video cassettes were prepared by the workmen of a company showing, their struggle against
the company’s management, it was held to be not actionable unless shown that the contents of the
cassette would be defamatory. The court did not restrain the exhibition of the cassette. [TVS
Employees Federation v. TVS and Sons Ltd., (1996) 87 Com Cases 37].The company is not liable for
contempt committed by its officer. [Lalit Surajmal Kanodia v. Office Tiger Database Systems India
(P) Ltd., (2006) 129 Com Cases 192 Mad].

(8) Contractual Rights:

A company, being a legal entity different from its members, can enter into contracts for the conduct of
the business in its own name. A shareholder cannot enforce a contract made by his company; he is
neither a party to the contract nor be entitled to the benefit derived from of it, as a company is not a
trustee for its shareholders.
(9) Limitation of action:

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A company cannot go beyond the power stated in its Memorandum of Association. 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.

(10) Separate management:

As already noted, the members may derive profits without being burdened with the management of the
company. They do not have effective and intimate control over its working and they elect their
representatives as Directors on the Board of Directors of the company to conduct corporate functions
through managerial personnel employed by them.

In other words, the company is administered and managed by its managerial personal

(11) Voluntary Association for Profit

A company is a voluntary association for profit. It is formed for the

accomplishment of some stated goals and whatsoever profit is gained is divided among its
shareholders or saved for the future expansion of the company. Only a Section 8 company can be
formed with no profit motive.

(12) Termination of existence :

A company, being an artificial juridical person, does not die a natural death. It is created by law,
carries on its affairs according to law throughout its life and ultimately is effaced by law. Generally,
the existence of a company is terminated by means of winding up. However, to avoid winding up,
sometimes companies adopt strategies like reorganization, reconstruction, and amalgamation.

Disadvantages of incorporation

(1) Lifting of corporate veil- though for all purposes of law a company is regarded as a separate
entity it is sometimes necessary to look at the persons behind the corporate veil.

(a) Determination of character- The House of Lords in Daimler Co Ltd. v. Continental Tyre &
Rubber Co. Ltd (1916)2AC , A company was incorporated in England for the purpose of
selling tyres manufactured in Germany by a German company. The German company held the
bulk of the shares in the English company and all the directors of the company were Germans,

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 resident in Germany. During the First World War the English company commenced an action to
recover a trade debt. And the question was whether the company had become an enemy company
and should therefore be barred from maintaining the action.

The House of Lords held that though the company was registered in England it is not a natural
person with a mind or conscience. It is neither loyal nor disloyal; neither friend nor enemy. But it
would assume an enemy character if the persons in de facto control of the company are residents of an
enemy country.

(b) For benefit of revenue- The separate existence of a company may be disregarded when
the only purpose for which it appears to have been formed is the evasion of taxes. –
Sir Dinshaw Maneckjee, Re (1927)29 BOMLR 447 , In this case the assessee was a
wealthy man enjoying large dividend and interest income. He formed four private
companies and agreed with each to hold a block of investment as an agent for it. Income
received was credited in the company accounts but company handed the amount to him as
pretended loan. Thus he divided his income in four parts to reduce his tax liability. The
Court disregarded corporate entity as it was formed only to evade taxes.

Commissioner of Income Tax v. Meenakshi Mills Ltd.(1916)1 AC 405

(c) Fraud or improper conduct- In Gilford Motor Co v. Horne (1933) Ch 935, H was
appointed as the managing director of the plaintiff company on the condition that he shall
not solicit the customers of the company. He formed a new company which undertook
solicitation of plaintiff’s customers. The company was restrained by the Court.

(d) Agency or Trust of a company- The separate existence of a company may be ignored
when it is being used as an agent or trustee. In State of UP v. Renusagar Power Co. AIR
1988 SC 1737, it was held that a power generating unit created by a company for its
exclusive supply was not regarded as a separate entity for the purpose of excise.

(e) To avoid welfare legislation- where it was found that the sole purpose of formation of new
company was to use it as a device to reduce the amount to be paid by way of bonus to
workmen, the SC pierced its corporate veil. –The Workmen Employed in Associated
Rubber Industries Ltd. v. The Associated Rubber Industries Ltd, Bhavnagar.

(f) Under statutory provisions- The Act sometimes imposes personal liability on persons
behind the veil in some instances like, where business is carried on beyond six months after
the knowledge that the membership of company has gone below statutory minimum(sec

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 45), when contract is made by misdescribing the name of the company(sec 147), when
business is carried on only to defraud creditors(sec 542).

(2) Formality and expense- Incorporation is a very expensive affair. It requires a number of
formalities to be complied with both as to the formation and administration of affairs.

(3) Company not a citizen-

A company, though a legal person, is not a citizen. This has been the conclusion of a special bench of
the Supreme Court in State Trading Corporation of India v. CTO (AIR 1963 SC 1811).

The State Trading Corporation of India is incorporated as a private company under the Companies
Act, 1956. All the shares are held by the President of India and two secretaries in their official
capacities. The question was whether the corporation was a citizen. One of the contentions put forth on
behalf of the corporation was that “if the corporate veil is pierced, one sees three persons who are
admittedly the citizens of India”, and, therefore, the corporation should also be regarded as a citizen.

But it was held that, “neither the provisions of the Constitution, Part II, nor of the Citizenship Act,
either confer the right of citizenship on or recognize as citizen, any person other than a natural person.
In striking words the Supreme Court observed,

“If all the members are citizens of India the company does not become a citizen of India any more
than, if all are married the company would not be a married person.”

A company can have the benefit of only such fundamental rights as guaranteed to every “person”
whether a citizen or not. However, it has a nationality, domicile and residence.

The hardship caused by the above pronouncement was later modified by holding that a citizen
shareholder may petition, proceeding on behalf of the company, against violation of his company’s
fundamental rights.

Distinction between Company and Partnership.(M)

The principal points of distinction between a company and a partnership are:

1) Legal status- A company is a distinct legal person. A partnership firm is not distinct from the
several members who compose it.

2) Property- In partnership, the property of the firm is the property of the members comprising it.
In a company, it belongs to the company and not to the members comprising it.

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3) Mode of creation- A company comes into existence after registration under the Companies Act,
1956, while registration is not compulsory in case of a partnership firm.

4) Agents- Partners are the agents of the firm, but members of a company are not its agents.

5) Contracts- A partner cannot contract with his firm, whereas a member of a company can.

6) Transferability of shares- A partner cannot transfer his share and make the transferee a member
of the firm without the consent of other partners whereas a company’s share can easily be
transferred unless the Articles provide otherwise and the transferee becomes a member of the firm.

7) Liability- A partner’s share is always unlimited whereas that of a shareholder may be limited
either by shares or a guarantee.

8) Perpetual succession- The death or insolvency of a shareholder or all of them does not affect the
life of the company, whereas the death or insolvency of a partner dissolves the firm, unless
otherwise provided.

9) Audit- A company is legally required to have its accounts audited annually by a chartered
accountant, whereas the accounts of the partnership are audited at the discretion of its members.

10) Number of members- The minimum number of partners in a firm is 2 and maximum is 20 in any
business and 10 in banking business. In case of a private company the minimum number of
members are 2 and maximum is 50. In case of a public company the min num of members are 7
and no max limit.

11) Dissolution- a company can only be dissolved as laid down by law. A partnership firm can be
dissolved at any time by an agreement.

Distinction between Company and Hindu Undivided Family Business :

1 A company consists of heterogeneous (varied or diverse) members, where as a Hindu

Undivided Family Business consists of homogenous (unvarying) members since it consists of
members of the joint family itself.

2 In a Hindu Undivided Family business, the Karta (manager) has the sole authority to contract
debts for the purpose of the business, other coparceners cannot do so. There is no such system in a
company.

3 A person becomes a member of a Hindu Undivided Family business by virtue of birth. There
is no provision to that effect in the company.

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4 No registration is compulsory for carrying on a business for gain by a Hindu Undivided Family
even if the number of members exceeds twenty [Shyamlal Roy v. Madhusudan Roy, AIR 1959 Cal.
380 (385)]. Registration of a company is compulsory.

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