You are on page 1of 6

Company The Company Company is the most popular form of business and form of business organization which dominates

almost the entire business world. What is a Company ? Though the company form of business is more than 100 years old, surprisingly, the word company has no single, standard or an exhaustive definition which has universal application. A company is an artificial person and a fiction of law. An artificial person has no body or soul or conscience. A company too does not have a body or soul or conscience nor is it subject to human emotions. It is not visible, save and except to the eye of law. These physical disabilities make a company an artificial person. But, then a company really exists. It is a fiction of law as it is created by process of law. It exists only in contemplation of law. It has no physical existence. But, it is regarded by the law as a person, just as any human being like Radha or Krishna. In common parlance, the word company means a group of persons associated together for attainment of a common purpose. Sometimes the meaning is reserved for those associated for economic purpose. Economic purpose basically means an activity undertaken for gain or profit. Company is also called a voluntary association of persons. In broad sense, it may mean an association of individuals formed for some common purpose. In still more broad sense, it represents different kinds of associations both business or non-business like charitable organization. The word company is also loosely used by business community for a partnership as also for a company registered under the Companies Act, 1956. For a layman, in non-technical language it is an association of 2 or more persons. Oxford English dictionary defines a company as : (1) Bringing together with another or others (2) A group of persons (3) Number of persons united for business or commerce. Used in the aforesaid senses, the word company in simple terms, may be described to mean a voluntary association of persons who have come together for carrying on some business and sharing the profits of the business. Chief Justice Marshall of USA has given a definition which is oft quoted. He defined company, as a person, artificial, invisible, intangible and existing only in the eyes of law. Being a mere creation of law, it possesses only those properties which the charter of its creation confers upon it either expressly or as accidental to its very existence. Trustees of Darmouth College Vs. Woodward (1819) 17US 518 Indian law provides two main types organizations : partnership and company. Although the word company is colloquially applied to both, the statute regards companies and company law as distinct from partnerships and partnership law.

Under the Companies Act, 1956 under Sec. 3(i) means a company formed and registered under this Act. Under the Companies Act, 1956 under Sec.3(ii), a company also mean an existing company formed and registered under any previous Company Law prior to the Companies Act, 1956. This definition under the Companies Act, 1956 does not indicate with any clarity as to what is the nature or what are the characteristic features of a company. That being so, many definitions have been given by English and Indian authors from time to time to explain the meaning in different words ultimately leading to the following characteristics. In view of the above, it would be most simple and easy to explain that a company is a group of persons or an association registered under the Companies Act, 1956. Characteristic features of a company 1.Incorporated Association : The company must be incorporated or registered under the Companies Act, 1956. Minimum number required for this association is seven in the case of a public company and two in the case of a private company (Sec12). It may be mentioned that an association of more than 10 persons in the case of banking business and 20 persons in other commercial activities, if not registered as a company under any other law, becomes an illegal association (Sec.11). 2.Separate Legal Entity : This is the very essence of a company. On formation and registration a company is born with an existence of its own, name of its own, identity of its own and life of its own which is totally different, distinct and separate from its members. Salomon Vs. Salomon & Co. Ltd. (1897) AC 22 Lee Vs. Lees Air Farming Ltd. (1961) AC 12 Kondoli Tea Co. Ltd. (1886) ILR 13 Cal.43 Abdul Haq Vs. Das Mal (1910) IC 595 Rramachandran Vs. State of Kerala (1984) 55 Comp. Cas 590 (Ker) Tata Engineering & Locomotive Co. Vs. State of Bihar AIR 1965 SC 40 Bacha F. Gazdar Vs. The Commr. of Income Tax, Bombay AIR 1955 SC 74 3.Limited Liability : It is a principal advantage of doing business under the corporate form of business. A company may be a company limited by shares or a company limited by guarantee. The liability of members limited by shares is limited only to the extent of the unpaid value of the share in the company and the liability of a member limited by guarantee is limited only to the extent of the amount guaranteed and not further. If the liability of members, as is usual, is limited by shares, each member is bound to pay the nominal value of the shares held by him and his liability ends there. For eg., if the face value of a share in a company is Rs.10/- and a member has already paid Rs.7/- per share, he can be called upon to pay not more than Rs.3/- per share during the life time of the company. In a company limited by guarantee, the liability of members is limited to such amount as the members may undertake to contribute to the assets of the company, in the event of its being wound up. In either case, the liability of a member can not extend to the members personal property because a company is a separate legal entity and members are separate legal entities. The liability of the members is not the liability of the members and vice versa. Therefore, the members are completely free from any personal liability and their liability is limited to the extent as aforesaid.

Salomaon Vs. Salomon & Co. Ltd. (1897) AC 22 Jenkin Vs. Pharmaceutical Society of Great Britain (1921) I Ch. 392 4.Perpetual Succession : It is said, An incorporated company never dies. According to Prof. Gower, Members may come and go but, the company can go on for ever. It continues even if all its human members are dead. During the war all the members of one private company, while in one general meeting, were killed by a bomb. But, the company survived; not even a hydrogen bomb could kill it. Thus, the illness, death or insolvency of members does not affect the continued existence of the company. The company remains the same entity. Even retirement or incapacity of members to act does not affect the company at all. K/9 Meat Suppliers (Guildford) Ltd. Re. (1966) 3 All ER 320 King is dead, long live the King very aptly applies to the company form of organization. (Here, the first King is used to refer to the individual monarch and the second King refers to the office of King, i.e., the institution of monarchy). Since the birth of a company is through the process of law, death of a company can also be by the process of law. Perpetual succession, therefore, means that a companys existence persists irrespective of the change in the composition of its membership. Thus, its continued existence is not affected by constant change in its membership in the like manner as the river Thames is still the same river, though the parts which compose it are changing every instant. So, as a river is running stream of water known by a certain name, so is a company a running stream of fiction, composed of a certain number of members which may be constantly changing. The company, like a river, remains unaffected. 5.Separate Property : As stated aforesaid, company being a separate legal person owns property in its own name like any individual owning a property. Therefore, it is capable of enjoying and disposing of property in its own name. No member, not even all the members can claim ownership of any item of the companys assets. It cannot be said that the members forming a company are even joint owners of the property of the company by virtue of their share holding. For eg., a member owning shares worth Rs.1,000/- of a company can not pinpoint a particular property or even a part thereof which may be attributable to the value of his shares as belonging to him individually or along with others. Even if a shareholder is holding almost the entire share capital of the company, he still does not become the owner of the property of the company. On a change in the membership, the shares are transferred and the transferee makes payment to the transferor but the companys property will remain untouched and unaffected. Bacha F. Gazdar Vs. CIT, Bombay AIR 1955 SC 74 Macaura Vs. Northern Assurance Co. Ltd. (1925) AC 619 Gramophone & Typewriter Co. Ltd. Vs. Stanley (1908) 2 KB 89 6.Common Seal : As we have seen that a company does not have a body or soul or conscience of a human being, it also does not have a mind or limbs of a human being as it has no physical existence. Therefore, it must act through human agency. In order to give authenticity to their acts, the human agents who are Directors or Managers of the company, must act under the common seal of the company to make it binding on the company. The common seal acts as the official signature of the company. 7.Sue and being sued : A company can sue and be sued in its corporate name. It can enter into contract in its own name. Legal action by or against the company, can be taken In the name of the company itself and not in the name of any member or members or manager or director or secretary of the company.

8.Transferability of Shares : The capital of a company is divided into parts, called shares. The shares of a company are easily transferable. They can be transferred at any time without seeking the permission or consent of the other members. Freedom of members to transfer their shares will not be affected by the unwillingness of other members. By purchasing shares of a company, a person is not wedded to the company. The unique advantage of transferability of shares is that a member may sell his shares at any time in the open market and get back his money, without affecting the capital structure of the company and sever his connections with the company without any difficulty. 9.Infinite Membership : Another advantage of incorporation is that there is no limit to the maximum number of members in a public company. Thereby very large number of people including juristic ones can combine and contribute to the formation and functioning of the company. An off shoot of this is the easy access for people not from the business background or possessing great economic resources to be a co-shareholder in the business of the company. 10.Monies from General public : If a company formed is a public company, one of the greatest advantage is that the capital required for the business can be raised from the public. 11.Mobilization of Huge Resources : Because of the participation of unlimited number of persons in the form of business venture, huge amounts can be collected from them to undertake all sorts of business ventures including ones requiring huge investment that no individual or a small collection of people can afford or provide. Disadvantages of incorporation Certain disadvantages and inconveniences caused by the incorporation, as under : (1)Formality and expense : Incorporation of a company is a complicated, expansive and a time consuming affair. It requires number of procedural and documentary formalities required to be complied with not only for the formation of the company but also for its administration. The formalities and expenses for a company are required not only at its birth, but also through-out its day-today working and even for its winding up. Non-compliance of formalities entail penalties. People connected with business find them to be time consuming, cumbersome and coming in the way of free business. They have a feeling that much of the time needed to do business is lost in paper work in a company. Some formalities are : : Various returns and documents are required to be filed with the Registrar of the Companies : Giving notices of meetings within the prescribed time, holding of meetings, preparing minutes : Auditing of accounts : Presenting audit accounts to the shareholders, etc. : Certain books and registers are compulsorily required to be maintained Other forms of business organizations are comparatively free from these legal compulsions and formalities. (2) Loss of privacy : Another disadvantage of incorporation is loss of privacy. Various returns, resolutions and documents are required to be filed with the Registrar of Companies. The office of the Registrar of Companies is a public office. Any member of the public can, by filing an application and payment of prescribed fees, can inspect any of the document of any company filed before the Registrar of Companies.

(3) Detailed Winding up procedure : Even if a company wants to wind up its business, again, it is required to comply with a detailed procedure which is equally expensive, cumbersome and time consuming. (4) Control by few people : Few people can have control with low percentage of holding in the share capital of the company. Such people can have control over vast economic resources of the company and build business empires. (5) Possibility of frauds : Since the control over the resources is in few hands and despite greater public accountability there is possibility to defraud other unsuspecting people who have contributed funds to the company by diversion of funds of the company into ventures not concerned with the company, thereby leaving the company and others high and dry. Satyam scam is very recent in the roaster of corporate frauds. (6) Company is not a citizen : A company is a legal person and it has nationality, residence/domicile. A company resides where the central control and management of its business is exercised. But, a company is not a citizen either under the Constitution of India or under the Citizenship Act, 1955. That being so, it has no fundamental right under the Constitution which are expressly available to the citizens of India. It can only claim the protection of those fundamental rights which are available to all persons, whether citizens or not, for e.g., the right to own property and right to equality. A company is not allowed to lay claim to fundamental rights on the basis of its being an aggregation of citizens. After a company is formed and registered, then, the business of the company is not the business of the citizens but that of the company and company alone. The rights of the company cannot be judged on the assumption that they are the rights attributable to the business of individual citizens. The Supreme Court extended the rule by stating, it is now clear that the fundamental rights of shareholders as citizens are not lost when they associate to form the company. Heavy Engineering Mazdoor Union Vs. State of Bihar (1969) 39 Comp. Cas. 905 (SC) State Trading Corporation of India Vs. CTO (1963) 33 Comp. Cas. 1057 Telco Ltd. Vs. State of Bihar (1964) 34 Comp. Cas. 458 (SC) Narasaopeta Electric Corpn. Vs. State of Madras (1951) 21 Comp. Cas. 297 Mad. Chiranjilal Chaudhri Vs. Union of India (1951) 21 Comp. Cas. 33 (SC) Bennet Coleman Co. Vs. Union of India (1972) SCC 788 (7) Lifting the corporate veil : The advantages which we discussed above about the incorporation follow from the principle that for all purposes of law a company is and should be treated as a separate entity, distinct and separate from its share holders/members. The incorporation puts a veil/curtain on shareholder/members. As a result, the shareholders/members go behind the veil. Generally and if everything goes well, then, the courts normally do not lift the veil/curtain. This advantage is, however, reduced to a great extent as the courts have been given powers in certain circumstances to lift the corporate veil/curtain and look at the conduct of persons behind the veil. In case, there is a fraud committed, then, the he separate entity of the company is disregarded, fraud is investigated to find out the truth and the real intention of the persons behind. This is known as lifting the corporate veil. Although, in general, the courts do not interfere and essentially go by the principle of separate entity as laid down in Salomons case and endorsed in many others but in the interest of the members in general or in public interest to identify and punish the persons who misuse the medium of corporate personality or corporate veil, the veil/curtain is lifted. Satyam Computers corporate fraud is the latest e.g., where the corporate veil was lifted and Mr. Ramalinga Raju sent to jail.. United States Vs. Milwaukee Refrigerator Co. (1905) Cotton Corporation of India Vs. GC Odusumathd (1999) 22 SCL 228 (Kar.) Life Insurance Corporation of India Vs. Escorts Ltd. (1986) 59 Comp. Cas. 548 (SC) state of UP Vs. Renusagar Power Co. (1991) 70 Comp. Cas. 127