UNIT-IV

Course Name: B.B.A.

Semester Number: III
Subject Code: BBA-302
Subject Name: Business Law
Faculty Name: Himanshu Upadhyay
Designation: Assistant Professor

Unit-IV-BBA-302-Business Law
 The Companies Act, 1956

Now a days, to start or carry on a business requires huge investments. It may not be
possible for a single person to fulfill all his financial requirements. Thus, the persons are
generally desirous of carrying on joint business enterprises. To such persons, the law
offers a choice between a partnership and a company. The partnership is suitable for
small-scale business, in which the partners take personal interest and work together with
mutual trust and confidence. But sometimes, the persons like to start business on large
scale, requiring huge investments which cannot be financed by the resources of few
persons. In such cases, the formation of a company is the only choice. It may however, be
noted that even for a small-scale business, a company offers certain privileges as
compared to partnership, such as the limited personal liability of the members. The law
relating to companies is contained in The Companies Act, 1956.
The expression ‘Company Law’ may be defined as a branch of law governing the
companies. It deals with all aspects relating to companies; such as incorporation of
companies, allotment of shares and share capital, membership in companies, borrowings
by companies, management and administration of companies, winding up of companies.
Thus, the company law is that branch of law which exclusively deals with all matters
relating to companies. The Company Law, in India, is codified, and contained in The
Companies Act, 1956. This Act extends to the whole of India, and came into force on 1st
April, 1956.

Objects of Company Law OR Companies Act, 1956

The objects of company law are those with which the Company Act, 1956 was passed,
and may be summarized as under:
1. To ensure that the activities of companies are carried on not only in the interest of
those directly concerned with them but also in furtherance of the ultimate ends of
our economic and social policy which the country has accepted.
2. To fix up minimum standards of business integrity and conduct in the promotion
and management of company’s affair.
3. To protect the legitimate interest of the shareholders by ensuring effective
participation and control by them.
4. To prevent misconduct and malpractices on the part of company management and
abuse of power vested in them by general body of shareholders.
5. To enforce proper prominence of duties by persons responsible for the
management of companies.
6. To require full and fair disclosure of all reasonable information relating to the
affairs of the companies.

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 7. To adjust the rights of the management vis-à-vis the shareholders and other
concerned persons.
8. To empower the government to intervene and investigate into the affairs of the
company where the business is being carried on in a manner prejudicial to the
interest of the shareholders, the company or the general public.

Definitions of a Company

The term ‘company’ may be defined as a group of persons associated together to achieve
some common objective. In legal sense, a company means an association of persons
incorporated under the existing law of a country. The legal definition of a company is
given in Section 3(1)(i) of the Companies Act, 1956 which is as below:
“Company means a company formed and registered under this Act or an existing
company”.
Thus, in legal sense, a company is one which is formed and registered under the
Companies Act, 1956, or which is an existing company. An existing company means a
company formed and registered under any of the previous Companies Acts.
This definition, however, is not exhaustive. Strictly speaking, the term ‘company’ is not
defined in Section 3(1)(i). It simply emphasizes the formation and registration of the
company. The legal meaning of the term ‘company’ may be summed up as under:
“A company is a voluntary association of persons formed under the Company Law, to
achieve some common objectives, having a separate legal entity, independent and
separate from its members, with a perpetual succession and a common seal, and with
capital divisible into transferable shares”.
Following points are important to be noted with regard to the definition of a company:
a. Legally, a company is regarded as a person, which has rights and duties at law.
However, it is not a natural person as human beings are. It is only a legal or
artificial person, recognized by the law. Since, the company is created by law i.e.,
by registration under the Companies Act, it is known as a legal person, and as it
has no body, no soul or conscience, no physical existence except in the eyes of
law, it is known as artificial person.
b. Though the company is a legal or artificial person, yet it really exists and is not a
fictitious person.
c. A company, being an artificial legal person, possesses similar rights and owes
similar obligations like natural persons. Thus, a company can do everything like a
natural person except the acts which are purely of personal nature, e.g., taking
oath, seeking election, marriage or divorce.
d. Though, the company is a person, the sentence of imprisonment cannot be
imposed on a company. Thus, where the violation of any provision of the

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 Companies Act attracts penalty by way of imprisonment only, the company
cannot be punished for the violation of such a provision.

Characteristics/Nature of a Company OR Advantages of Incorporation

A company formed and registered under the Companies Act has certain special
characteristics, which reveal the nature of a company. These characteristics are also
called the advantages of a company as compared with other business organizations; these
are in fact beneficial for a company. Following are the special characteristics of a
company:
1. It has a separate legal entity: It is an important characteristic of a company that
it has a separate legal entity. It means that the existence of a company is
independent and separate from its members. In law, the company is regarded as
an artificial legal person, which deals in its own name. Thus, a member of a
company cannot be held liable for the acts of a company even if he holds the
substantial part of company’s share capital.

Case: Saloman Vs. Saloman & Co. Ltd. (1897)

a. Transfer of sole proprietorship business to company: Mr. Salomon was

carrying on the business of boot manufacturing as a sole proprietor. He
incorporated a company named Salomon & Co. Ltd. for the purpose of taking
over this business.
b. Payment of purchase consideration by the company: Saloman’s earlier
business was transferred to this company for £ 40,000. In payment of this
consideration, Saloman took 20,000 shares of £1 each, and debentures worth
£10,000. These debentures imply that the company owed £10,000 to Saloman,
and for repayment of this, a charge was created in his favour on the assets of the
company. One share was given to each remaining member of Saloman’s family.
c. Constitution of Salomon & Co. Ltd: This company was formed by him for the
purpose of taking over and carrying on his earlier business. The members of this
new company were Saloman himself, his wife, four sons and a daughter. And the
members of the Board of Directors were Saloman and his two sons. Salomon was
the managing director of Salomon & Co. Ltd. Salomon & Co. Ltd. is commonly
called as 'one-man company'.
d. Inability to pay debts by the company in liquidation: In the course of business,
the company borrowed from creditors to the extent of £ 7000. Due to trade
depression the company ran into financial difficulties and eventually went into
liquidation. The assets realized only £ 6,000, which were insufficient to discharge

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 the debentures (held entirely by Saloman himself) and thus nothing was left for
the unsecured creditors.
e. Contention of unsecured creditors: The unsecured creditors contented that the
company never has separate existence. It was, in fact, Saloman under another
name, as such he could not owe money to himself. And thus, they should be paid
first their £ 7,000. One man cannot owe money to himself. The unsecured
creditors contended that Salomon was carrying on business in the name of
Salomon & Co. Ltd. Thus, Salomon & Co. Ltd. was agent for Saloman.
f. Decision of the Court: Unsecured creditor’s contention was rejected by the
House of Lords, and it was held that ‘Saloman & Co. Ltd.’, was a real company
fulfilling all the requirements of the legislature, and it had a separate legal entity,
independent from its members. The business belonged to the company and not to
Salomon and therefore the secured debentures (held by Salomon) were to be paid
in priority to unsecured creditors. Therefore, Saloman was entitled to be paid his
dues first as a secured creditor. It was held by Lord Mac Naughten: “The
Company is at law a different person altogether from the subscribers to the
memorandum, and though it may be that after incorporation the business is
precisely the same as it was before and the same persons are managers, and the
same hands receive the profits, the company is not in law the agent of the
subscribers or trustees for them. Nor are the subscribers, as members, liable, in
any shape or form, except to the extent and in the manner provided by the Act.”
Thus, a company formed and registered under the Companies Act has a separate
legal existence different and independent from its members. The principle of
Saloman’s case is also applicable in India. As a matter of fact, this principle was
recognized in India even earlier to Saloman’s case.

Case: Abdul Haq Vs Das Mal

In this case, the employee of a company was not paid his salary for few months.
So, he filed a case against the director and secretary of the company to recover his
salary but he was not successful. The court said that he must file a case against the
company to recover his salary because the company is a separate legal entity.
2. It has a perpetual succession: The term ‘perpetual succession’ may be defined
as the continuous existence. A company has a perpetual succession i.e., company
never dies. The membership of a company may change from time to time, but it
does not affect the company’s continuity. In other words, the members may come
and go, but the company can go on forever. This, however, does not mean that a
company can never come to an end. As a company is created by the process of
law, it can also be brought to an end by the process of law. Thus, a company

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 comes to an end when it is wound up according to the provisions of the
Companies Act.
Example: A, B and C were the only members of a private company named Good
Luck Co. Pvt Ltd. They held all the shares of the company. After some time, A
died in an accident. In this case, the company does not come to an end due to A’s
death. It continues to exist.
If A, B and C transfer all their shares to X, Y and Z, the new members, the
original company will not come to end. It will remain in existence with the
changed members.
It is to be kept in mind that a company does not come to an end, even if all its
members die. On the death of a member, his legal representatives become entitled
to the shares by way of transmission.
3. It has a separate property: As we know that company is a legal person in the
eyes of law. It can therefore, hold the property in its own name. All the property
in the name of the company is its separate property which is controlled, managed
and disposed of by the company in its own name. Thus, company is the owner of
its assets and capital. The members cannot claim to be the owner of the
company’s property.

Case: Macaura Vs. Northern Assurance Co. Ltd.

Macaura was the shareholder of a timber company. He held all the shares except
one. He was also a substantial creditor of the company. Macaura insured
company’s timber against fire, and took the insurance policy in his own name.
The timber was destroyed in fire, and Macaura claimed the compensation from
the insurance company. It was held that the insurance company was not liable to
Macaura as he was neither the owner of the property (timber) nor had any
insurance interest in it.
Thus, the property of the company is not the property of the shareholders. It is the
property of the company.
4. It has capacity to sue and being sued: Company is a legal person and has
independent existence. Being a legal person, the company can file suits against
others in its own name. Similarly, the suits against the company can also file in
company’s name.
Example: A, a company, was carrying on a cycle manufacturing business. It
purchased certain cycle parts from B, another company, and paid the price of the
same. But B supplied the cycle parts of substandard quality. In this case, A may
file a suit against B for the recovery of the damages.

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 If, in the above example, B supplies the cycle parts of standard i.e., contracts
quality but A fails to pay the price, then B can file a suit against A for the
recovery of the price of the cycle parts.
5. It has a common seal: Company is a legal person, but it is not, physically in
existence. Thus, it cannot sign its name. It has a common seal which is used as a
substitute for its signature. The common seal is the official signature of a
company. As a matter of fact, every company must have a common seal with its
name engraved on the same. The company being not physically in existence, it
acts through natural persons, who are directors of the company.
6. Its members have limited liability: As a matter of fact, it is the principal
advantage of carrying the business under limited companies. A company may be
limited by shares or by guarantee. In a company limited by shares, the liability of
a member is limited to the extent of nominal value of the shares held by him. If
the shares are partly paid, the liability of a member is limited to the extent of
unpaid value of shares held by him. And if the shares are fully paid, the liability
of the member is nil.
Example: A was a member of a company limited by shares, and held 100 shares
of the face value of Rs. 10 each. Rs. 8 on each share had already been paid by
him. In this case, A’s liability is limited to the extent of Rs. 200 (the amount
which is unpaid on the shares). In any circumstances, he cannot be asked to
contribute more than Rs. 200. This liability can be enforced during the existence
of the company or during the winding up of the company.
In a company limited by guarantee, the liability of a member is limited to such
amount as the member may undertake to contribute to the assets of the company
in the event of the company wound up. If a company limited by guarantee has no
share capital, the liability of the members arises only when the company goes into
liquidation i.e., when it is wound up.
Example: A was a member of a company limited by guarantee. He guaranteed
that in the event of winding up of the company he would contribute Rs. 1000 to
the assets of the company. In this case, A’s liability is limited to the extent of Rs.
1000 and no more. And liability will arise only when the company goes into
liquidation.
7. Its shares are freely transferable: The capital of a company is divided into
parts, and each part is called the shares. The shares of a company are freely
transferable and can be purchased and sold in share market. This characteristic of
a company is recognized by Section 44 of the new Companies Act, 2013 which is
as under:
“The shares or debentures or other interest of any member in a company shall be
movable property, transferable in the manner provided by the articles of the
company”.

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 Thus, the shares of the company are transferable like a movable property. This
provides liquidity to the investor (member) and stability to the company. It may,
however, be noted that restrictions on transferability of shares are imposed in case
of private limited company. In case of a private limited company, the shares can
be transferred only according to the conditions laid down in the Articles of
Association of the company.
8. It has several other advantages: Apart from the above advantages available to a
company, it enjoys several other advantages also, such as:
a) A company has an autonomy and independence to form its own policies
and implement them in accordance with the provisions contained in its
memorandum, articles of association and the Companies Act.
b) A company attracts professional management, and thus helps in promotion
of professional management and efficiency.
c) A company has the privilege of colleting interest free money from the
public, for its business, by making a public issue or through private
placement of shares and other securities.
d) The restriction, with certain exception, on the purchase of its own shares
by the company, provide permanence of capital collected and stability to
the company and protection to some extent to the creditors of the
company.

Unit-IV-BBA-302-Business Law