Q 1 : Define Company?

Discuss the advantages of

incorporation with reference to case laws?
Synopsis:
Introduction :
Definition and Meaning of a Company
Advantages of Incorporation of a Company
Other Case Laws to non-incorporation of Company
Conclusion

Introduction :
Incorporation of a company is the legal process by which a business entity obtains
recognition as a separate legal entity distinct from its owners. This involves filing the
necessary documentation, such as articles of incorporation, with the relevant
government authority. Once incorporated, the company assumes its own rights,
liabilities and legal status, affording its owners or shareholders, limited liability
protection. This separation of personal and corporate identities allows the company
to own property, enter contracts, sue or be sued and engage in business activities
independently. The process of incorporation establishes the framework for the
company’s existence, operations and legal standing.

Definition & Meaning of a company

Prof. Haney – “A company is an artificial person created by law, having separate
entity, with a perpetual succession and common seal.”

The above definition brings out the meaning of a company in terms of its features. A
company to which the Companies Act applies comes into existence only when it is
registered under the Act. On registration, a company becomes a body
corporate i.e., it acquires a legal personality of its own, separate and distinct from its
members. A registered company is, therefore, created by law and law alone can
regulate, modify or dissolve it.

Advantages of Incorporation of a Company

The advantages of incorporation are:

1) Establishment of a Separate Legal Entity

Incorporating a company creates a distinct and independent legal entity. Members
of the company cannot be held personally responsible for the company’s actions,
even if one member owns a majority of the shares. This principle was established in
the case of Salomon v Salomon & Co. Ltd. (1897) AC 22. Solomon, a bootmaker,
transferred his sole proprietorship business to a newly formed company (Salomon
Ltd.).

Although Salomon and his family constituted the majority of the members, the
company operated as a separate legal entity. When the company faced financial
challenges and went into liquidation, Salomon’s personal liability was limited to his
capital contribution and he was not held responsible for the company’s debts.

2) Perpetual Succession

Incorporated companies enjoy perpetual succession, meaning they continue to exist

regardless of changes in membership. The company persists until legally wound up
according to the provisions of the Companies Act, 2013.

As highlighted in Re Noel Tedman Holdings Pty Ltd (1967) Qd R 56, changes in

company membership do not impact its legal standing, emphasising that the
company remains unaffected by the comings and goings of its members.

3) Ownership of Separate Property

As a separate legal entity, a company can hold property in its own name and
members do not have individual claims to the company’s assets. The Supreme Court,
in Bacha F. Guzdar v CIT Bombay, affirmed that since the company is a distinct
legal person, members cannot claim ownership of the company’s property in their
individual capacity.

Additionally, the case of Macaura v. Northern Assurance Co. Ltd. illustrated that
a shareholder cannot insure company-owned assets in their personal name,
emphasising the separation of personal and company property.

4) Capacity to Sue and Be Sued

An incorporated company has the legal capacity to initiate legal actions or defend
itself in its own name. However, for such legal proceedings, representation by a
natural person is necessary. Failure to comply with this requirement may lead to the
dismissal of a case, similar to the dismissal of an individual complaint in the absence
of the complainant.
 5) Enhanced Access to Capital

Incorporation facilitates easier access to capital for a business. Corporations can

issue shares of stock, providing a convenient means to raise capital. This ease of
capital raising becomes particularly advantageous when seeking bank loans, as banks
generally prefer lending to incorporated businesses.

Therefore, incorporation not only fosters business growth but also increases the
likelihood of securing financing from financial institutions.

Case Laws to non-incorporation of Company:

The legal principle of the “Lifting of Corporate Veil” posits that a company is a
distinct legal person from its members. However, there are instances when the court
may lift or ignore this corporate veil. This occurs to unveil the true nature of the
company or when it is perceived that the corporate form is being misused or abused.

The court, in such cases, exposes the actual character and nature of the concerned
company. This principle is evident in the landmark case of Salomon v. Salomon
and Co. Ltd. (1897) A.C 22, where the court recognized the separate legal identity
of the company but retained the authority to pierce the corporate veil when
necessary to prevent misuse of the corporate structure.

Conclusion
The decision to incorporate a company involves weighing both advantages and
disadvantages of incorporation. On the positive side, incorporation provides legal
protection, perpetual existence, property ownership, enhanced legal capacity and
improved access to capital. However, the drawbacks include initial and ongoing
costs, the potential for double taxation, loss of individual control, strict structural
requirements, continuous paperwork and challenges in the dissolution process.

#Legal Griffins
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Team 5G, Team Octopus
Q 3 : Explain the Legal position of the directors of the
company?
Synophsis :
• Introduction
• ‘Directors’ under companies Act
• Legal Position of a Director in a Company:
• Conclusion

Introduction:
In a company shareholder are the owners as they contribute capital to run the
business. But the directors are the actual people who are responsible for running the
company for the very purpose it was created for. Only certain decisions which are of
core importance are taken by shareholders whereas directors are responsible for the
entire day to day administration of the company.

Directors Under Companies Act:

There is no precise definition of directors given under companies’ act, but there are
some explanation of the term mentioned under various sections. According to Sec.
2(13) of the Companies Act, “Director includes any person occupying the position of
director by whatever name called.” The definition given by the Companies Act does
not provide the clear meaning of the term director, but it can be drawn as a person
who performs the duties of a director will be deemed director irrespective of
whatever name he may be called. According to Sec.303 Explanation (1), “Any
person, in accordance with whose directions or instructions, the Board of Directors
of the company is accustomed to act, shall be deemed to be director of the
company.”

Legal Position of Directors:

Since Companies Act doesn’t give precise definition as to the legal position of
directors in a company, they are referred as trustees, agents, managing partners, etc
in one situation or other. Therefore, a director of a company attains following roles
as per their situation:

1.Directors as Agents:
The management of the company is entrusted by shareholders to directors. They are
the elected representatives of the shareholders. When the directors run the business
of the company on behalf of the shareholders. They may be termed as agents of the
company.
The case of Ferguson vs. Wilson, stated the position of the directors as, “They are
merely agents of the company. The company itself cannot act in its own persons for
it has no person, it can act ‘only through directors’ and the case is, as regards those
directors, merely the ordinary case of principal and agent, for whenever an agent is
liable, those directors would be liable. Where the liability would attach to the
principal and the principal only, the liability is the liability of the company.” In Great
Eastern Railway vs. Turner, it was held that “the directors are agents in the
transaction which they enter into on behalf of the company.” Agents have no
independent power while the directors have independent powers on certain
matters. So, whenever the director is acting ultra vires, it cannot be held liable as an
agent of the company.

2.Directors as Trustees:
In the case Smith vs. Anderson, James L.J. observed, “A trustee is a man who is the
owner of property and deals with it as principal, as owner and as master, subject
only to an equitable obligation to account to some persons to whom he stands in
relation of a trustee. The office of director is that of a paid servant of the company. A
director never enters into a contract for himself, but he enters into a contract for his
principal i.e., for the company of which he is a director or for whom he is acting.”
This clearly differentiated the role of directors as a trustee.
Directors occupy a fiduciary position in relation to the company and they are
considered trustees with respect to powers assigned to them by shareholders as well
as for the company’s property and money. However, no director is a trustee for any
shareholder individually. It can only be held as trustee for the company as a whole.

3. Directors as Managing Partner:

Directors are considered as the managing partners because they are entrusted with
management and control of the affairs of the company. Most of the time directors
are also shareholders of the company, having large shareholdings.
However, directors are not viewed as ‘partners’ under Partnership Act because
liability of a partner is unlimited. While the liability of a director as a member is
limited as an owner of the share. Further unlike a partner, the act of director is not
binding on other directors.

4. Directors as Employees:
The directors may be considered as the employees of the company as they work
under contract of service with the company and are paid remuneration according to
the contract.

5.Directors as Organs of the Company:

Directors have also been treated, in judicial decisions, organs of the company for
whose action the company is to be held liable just as a natural person is liable for the
actions of his limbs. In Bath vs. Standard Land Co., Neville J. stated, “The board of
directors are the brain and the only brain of the company which is the body and the
company can and does act only through them.”

Conclusion:
The legal position of the director is not certain, fix or precise. But it can be safely said
that directors can be held liable for any act exceeding its authority. However, if
directors are working for the company, it can be treated as an agent. Therefore, the
role director changes as and when the situation demands it.

#Legal Griffins
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Team 5G, Team Octopus