Course: LL.B. III Semester & B.A. LL.B.

9th Semester
Subject: Company Law
Subject Code: LLB- 304, Law-914

Module –I: Formation, Registration and Incorporation of Company

Meaning and Nature of Company:

The word ‘company’ is derived from the Latin words ‘Com’ which means together
and ‘panis’ which means bread and it originally referred to an association of
persons who took their meals together.
Definition : Definition: As per Sec. 2(20) of the Companies Act, 2013, ‘company’
means a company incorporated “under this Act”; or “under any previous company
law”

According to Lord Justice Lindley 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.”

Nature: A company has a dual nature, as an association of its members but also as
a person separate from its members. As soon as necessary formalities of
incorporation are satisfied, a new entity comes into existence which is separate and
distinct from its directors and shareholders.
A company is an artificial person created by law, having “separate identity” and
“perpetual succession”.

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.
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.

Concept of 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.

     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.

In an another leading case MACAURA v NORTHERN ASSURANCE CO LTD

(1925) AC 619
Fact - Macaura own land on which stood timber. He sold the land and timber to a
company he formed and received as consideration all the fully paid shares. The
company carried the business of felling and milling timber. A fire destroyed all
timber which had been felled. Macaura had earlier insured the timber against loss
by fire in his own name. He had not transferred the insurance policy to the
company.
Issue - When Macaura made a claim his insurers refused to pay arguing that he had
no insurable interest in the timber. Only persons with a legal or equitable interest in
property are regarded as having interest in it.
Held By House Of Lords The insurers were not liable. Only Macaura’s company,
as owner of the timber, which had the requisite insurable interest in it. Only the
company, and not Macaura, could insure its property against loss or damage.
Shareholders have no legal or equitable interest in their company’s property.
Conclusion: Thus it is clear from the above discussion that a company is separate
legal entity distinct from its members and the members are not the owners of the
company’s property in spite of the owner of the company.