CORPORATE LAWS

COMPANY LAW
Lecture 1

BY: AVIK BANERJEE

ST. XAVIER’S UNIVERSITY, KOLKATA
Introduction
Gone are the days when sole proprietorship and
partnership were the most preferable form of the
business wherein the persons use to invest and earn
profits out of the business for themselves. Though
these form of businesses still exist but are not the
most common form of business today.

The taste of the consumers has changed, technology

has advanced manifold, etc., which require huge
funds and because of involvement of few persons in
sole proprietorship or partnership this need of huge
investment, production at large scale, etc, was not
possible. So to fulfill these needs company form of
business came into existence.
You may have come across the names of organization with suffix
limited/private limited, for example Hindustan Motors Ltd., Parle
Products Pvt. Ltd. etc.

Have you ever thought what does this indicate?

Names of organizations with Ltd./Pvt. Ltd. indicates that these are

forms of organizations that differ from sole proprietorship or
partnership. These are called companies.

As you know that the sole proprietorship and partnership forms of

organization could not meet the growing needs of huge capital and
managerial skills required for increased scale of business and
growing economic activities. Also, the liability of owner/owners of
these organizations are unlimited. In order to overcome these
problems a new form of business organization known as company
came into existence.

In this Semester, we shall study about company in details.

 The Concept
A corporation is an organization—usually a group
of people authorized to act as a single entity (a legal
entity; a legal person) and recognized as such in
law for certain purposes. Early incorporated
entities were established by charter granted by a
Monarch.

The word ‘company’ is derived from Latin word

and originally referred to an association of persons
who took their meals together. The company have
many striking features but is not a citizen under
the citizenship Act, 1955 or the Constitution of
India.
 Meaning
•A business entity which acts as an artificial legal person, formed by
a natural person/persons to engage in or carry on a business
•A company is a voluntary association of individuals formed to carry
on business to earn profits or for non profit purposes, these
persons contribute towards the capital by buying its shares
•A company is an association of individuals incorporated under the
Companies Act, possessing a common share capital contributed by
the members comprising it for the purpose of employing it in some
business to earn profit
•It is no more required to be an association of persons to form a
company. A company can also be started as a single person
company (one-person company).
•A company is a body corporate that can be a limited or an unlimited
company, private or a public company, company limited by
guarantee or a company having a share capital
A company is a corporate body and a legal person having status and
personality distinct and separate from the members constituting it.

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 can enjoy 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.
 Characteristics
Artificial legal person: A company is an artificial person as it is created by
law. It has almost all the rights and powers of a natural person. It can enter
into contract in its own name, has the rights to acquire or dispose of any
property, It can sue in its own name and can be sued.

Incorporated body: A company must be registered under Companies Act.

By virtue of this, it is vested with corporate personality. It has an identity
of its own. Although the capital is contributed by its members called
shareholders yet the property purchased out of the capital belongs to the
company and not to its shareholders. A company has to fulfill
requirements in terms of documents (MOA, AOA), shareholders, directors,
and share capital to be deemed as a legal association.

Perpetual existence/succession: Unlike other non-registered business

entities, a company is a stable business organization. Its life doesn’t
depend on the life of its shareholders, directors, or employees. Members
may come and go but the company goes on forever.
 Characteristics
Separate Legal Entity : A company has a distinct entity and is
independent of its members or people controlling it. A separate legal entity
means that only the company is responsible to repay creditors and to get
sued for its deeds. The individual members cannot be sued for actions
performed by the company. Similarly, the company is not liable to pay
personal debts of the members.
Limited Liability: A company may be limited by guarantee or limited by
shares. In a company limited by shares, the liability of the shareholders is
limited to the unpaid value of their shares. In a company limited by
guarantee, the liability of the members is limited to the amount they had
agreed upon to contribute to the assets of the company in the event of it
being wound up.
Representative Management: The number of shareholders is so large
that they cannot manage the affairs of the company collectively. Therefore
they elect some persons called the ‘directors’ of the company, collectively
called the Board of Directors.
 Characteristics
Capital divisible into shares: The capital of the company is divided into
shares. A share is an indivisible unit of capital. The face value of a share is
generally of a small denomination which may be of Rs 10, Rs 25 or Rs 100.
Transferability of shares: The capital of a company is divided into parts,
called shares. The shares are said to be a movable property and subject to
conditions are freely transferable, so that no shareholder is permanently
wedded to a company. The shares can be bought and sold in the stock
market.
Common seal: A common seal is the official signature of the company. A
company being an artificial legal person, uses its common seal (with the
name of the company engraved on it) as a substitute for its signature. Any
document bearing the common seal of the company will be legally binding
on the company
CASE STUDY ON INDEPENDENT CORPORATE
EXISTENCE & SEPARATE LEGAL ENTITY

SALOMON VS SALOMON & CO. LTD.

 ARON SALOMON Business of Selling Shoes (Sole Proprietorship)

hip rox)
r s p
One of his son was interested to join his business r i eto s (ap
P rop ound
S ole 00 P
Incorporates a Company s his 40,0
u ire s for
Salomon & Co. Ltd. q
Ac sines
Bu

Members Creditors Directors

Aron Salomon – 20,000 Equity Shares Aron Salomon – Debentures worth Aron Salomon
(1 Pound Each) 10,000 Pounds, having charge on & 2 Sons
Wife – 1 Share the Company’s Assets
Daughter – 1 Share
Other unsecured Creditors
4 Sons – 1 Share each

Rest 10,000 Pound (approx) was taken as Cash

His business was in sound condition & there was a substantial surplus of Assets
over Liabilities.
BUT,
After the Business was converted into a Public Limited Company, it started facing
financial difficulties and went into Liquidation within a year.

ASSETS LIABILITIES
During Liquidation

6000 Pounds 16000 Pounds

After paying the Debenture Holder (Aron Salomon himself), nothing would be left
for the Unsecured Creditors.

During Winding Up, secured Creditors are paid first, the Unsecured Creditors
contended that though incorporated under the Act, it was in fact Salomon under
another name, and the Co. was a mere Sham or Fraud.
BUT,
It was held that Salomon & Co. Ltd. was a real Company having fulfilled all the
legal requirements, and is to be considered as a independent Corporation having
Separate Legal Entity.
Managing Director &
The New Zealand court refused to hold that Lee was a worker because
a man could not in effect employ himself. However, the Privy
Council held Mrs. Lee was entitled for compensation because
even though Lee maybe controller of the Company, it is
separate legal entity.
 REGISTRAR OF COMPANIES (ROC)
ROC is an office managed by the Ministry of Corporate Affairs, that deals with the
administration of Companies and LLPs across the country. As per Sec- 609 of the
Companies Act, ROCs are tasked with the principal duty of registering both the
companies and LLPs across the states and union territories. It maintains a registry of
records of the companies that are registered with them and permits the general
public to access information on payment of a stipulated fee.

Functions of ROC
• Registrar of Companies is liable to register a company in the country.
• It meets all regulation and reporting of companies and their shareholders, directors
and also administers government reporting of several matters, including annual
filings of various documents.
• It serves as an essential role to foster and facilitate business culture.
• Since every company in a country need the approval of the ROC for its
establishment, ROC provides incorporation certificate that serves as the evidence of
the existence of the company. Once incorporated, a company cannot cease unless
the name of the company is struck-off from the register of companies.
• ROC also demands supplementary information from any company. It might search
the premises and seize the books of accounts with prior approval of the court.
• The Registrar of Companies also files a petition to wind up a company.