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NATURE OF COMPANYDefinition and meaning of a company
Sec. 3(1) of the
Companies
Act, 1956
company
[Sec.3(1)(i)]
It means a company formed and registered under thisAct, or
- An existing company. existing company[Sec.3(1)(ii)]
It means a company formed and registered under any ofprevious
companies laws.
Justice
Marshall
A company is an artificial person. It has no physical existence.
It is invisible and intangible. It exists only in contemplation of
law.
Justice James A company is an association of persons united for
a common object.
Professor
Haney
A company is an artificial person created by law having
Separate identity Perpetual succession Common seal.
JusticeLindley
A company is an association of persons These persons contribute
money or moneys worth to a common stock. The common stock so
contributed is denoted in money and is called as capital
of the company. The persons who contribute the capital are
called as members of the company. The capital is employed in some
trade or business. The members share the profits and losses arising
from such business. The proportion of capital to which each member
is entitled is called as his
share. The shares are always transferable although the right to
transfer is often more
or less restricted.
Characteristics of features of a Company1.
Incorporated
association
A company is formed and registered (i.e. incorporated) by
complying with theprescribed formalities prescribed under the
Act.
2. Artificial
person
A company is an artificial legal person, i.e., a juristic
person. But it is not a fictitiousperson.
3. Separate
legal entity
A company is a legal person in the eyes of law distinct from its
members. Case References- Salomon v Solomon & Co. Ltd., Lee v
Lees Air Farming
Ltd.
4. Perpetual
Succession
Death, insolvency, insanity etc. of any member does not affect
the continuity ofthe company. Thus, the life of the company does
not depend upon the life of its
members. Any change in membership of the company (byway of
transfer or transmission
of share) does not anyway affect the status of the company.
Therefore, a company has perpetual succession, i.e., it shall
continue forever
(until it is wound up and dissolved) irrespective of the
continuity of itsmembers and directors.
It is generally said that members may come and go, but the
company goes onforever. Thus, a company never dies. The continued
existence of the company
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is not affected by the continuous change in its membership.
5. Limited
Liability
The members of a company cannot be held liable for the debts
incurred by thecompany.
In case of a limited company, the liability of members is
limited. The membersare liable to pay only such amount as is due
from them to the company (as per
the provisions of the Act and memorandum), which is explained
below:Nature of company Extent of liability of members
Company limited by
shares
Amount unpaid on the shares held by everymember.
Company limited by
guarantee
Amount guaranteed by every member.
Company limited by
guarantee and having
share capital
Aggregate of amount unpaid on the shares held
by a member and the amount guaranteed byhim.
Unlimited company Liable to contribute to the assets of the
companyuntil all the debts of the company are paid in
full.
6. Common
seal
Common seal is the official signature of the company. Any
document on whichcommon seal is affixed, is deemed to be signed by
the company.
7.
Transferabilit
y of shares
Shares are movable property transferable in the manner provided
in articles(Sec.82).
However, in a public company, shares are freely transferable.8.
Separation
of ownership
from
management
The members do not participate in day-to-day affairs of the
company. The management of company lies in the hands of elected
representatives of
members, commonly called as Board of directors or directors or
simply theBoard.
The directors are appointed as well as removed by the members.
Thus, the acthas ensured the ultimate control of members over the
company.
9. Separate
property
A company can own and enjoy property in its own name. No member
is the owner or co-owner of the companys property during its
lifetime or even on its winding up. Assets of the company are
not the assets of the members. As a result, a member
has no insurable interest in the property of the company.Macaura
v Northern Assurance Co. Ltd.
M owned all the shares except one in a company. The timber
belonging to the company was insured in the name of M. The timber
was destroyed by fire. The insurance claim was rejected by the
insurance company for want of
insurable interest. In other words, since the company was the
owner of timber, only the company
had insurable interest in timber. Therefore, any insurance taken
by a personhaving no insurable interest did not result in a valid
contract of insurance.
10. Capacity to
sue and be
sued in its own
name
A company is a legal person. A company acts in its own name, and
not as anagent of its members. It has its own rights and
obligations. Consequently, a
company can sue others and be sued in its own name. The
creditors can make their claims only against the company and
cannot
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proceed against the shareholders.
Principle of separate legal entityMeaning A company is a legal
entity separate from its owners (i.e., members). It is aperson
distinct from the persons who form it.
It is known by its own name, has rights and liabilities of its
own. Thus, a company is a body corporate.
Salomon v
Solomon & co.
ltd.
Transfer of sole proprietorship business to company.Mr. Salomon
wascarrying on the business of boot manufacturing as a sole
proprietor. Heincorporated a company named Salomon & Co. Ltd.
for the purpose of taking
over this business.
Payment of purchase consideration by the company.(a) total
consideration Rs. 39,000
(b) cash paid Rs. 9,000
(c) fully paid shares of Rs. 1 each issued to salomon Rs.
20,000(d) secured debentures issued to salomon Rs. 10,000
Other members were family members of salomon.The 6 members of
thefamily of Mr. Salomon were issued one share each.
Salomon & Co. was a one man company.Since Salomon was the
leadingshareholder and all other shareholders were nominees of
Salomon (i.e.,Salomon held virtually the entire share capital of
the company), Salomon &Co. Ltd. is commonly called as one man
company.
Salomon had control over management. Salomon was the
managingdirector of Salomon & Co. Ltd.
Inability to pay debts by the company in liquidation. In the
course ofbusiness, the company borrowed from creditors to the
extent of Rs. 7,000.
Due to trade depression, the company ran into financial
difficulties andeventually went into liquidation. The assets
realised only Rs. 6,000.
Contention of unsecured creditorsone man cannot owe money
tohimself. The unsecured creditors contended that Salomon was
carrying on
business in the name of Salomon & Cp. Ltd. Thus, Salomon co.
ltd. was mereagent for S.
Decision of the court. It was held that Salomon & Co. was a
real companyfulfilling all legal requirements. It had an identity
different from its members,and therefore the secured debentures
even though held by Salomon, were to
be paid in priority to unsecured creditors.
Lee v Lees Air
Farming Ltd.
Lee was a qualified pilot. He virtually owned all the shares and
he was the sole governing director. He was also receiving salary
from the company for being a chief pilot underthe company. He was
killed in an air accident while working for the company. It was
held that Lee was a separate person from the company he had
formed.
Therefore, he could be legitimately employed under the
company.
As he was killed in the course of employment under the company,
his widowwas entitled to compensation.
Bacha F. A shareholder received dividend income from a company
carrying on
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Guzdar v
Commissioner
of Income Tax
agricultural business. The income from agriculture business was
exempt from tax. The shareholder contended that her dividend income
should be treated as
agricultural income and therefore exempt from tax. The Court
held that the company was a separate person from its members,.
Having its own business, and its own income. The income received
by theshareholders was not the same income as earned by the
company.
Implications of
the Rule of
separate legal
entity
There can be a transfer of property from a member to the company
and viceversa.
A person can be a member, director, employee and creditor of the
company atthe same time.
A member can enter into a contract with the company in the same
manner asany other person can.
Thus, a company has the rights and duties of its own, which are
different fromthe rights and duties of its members.
A company shall have a separate legal identity even if virtually
entire capitalof the company is held by one person.
IS COMPANY IS CITISEN?A company is not a
citizen
Citizenship under the Citizenship Act is available only to an
individual.Therefore, no company can be a citizen of India.
No rights of citizens The constitution of India grants certain
fundamental rights to citizens. Since acompany is not a citizen,
the fundamental rights which are available only to acitizen, are
not available to a company.
A company has
other fundamental
rights
The constitution of India grants certain fundamental rights to
every person.Whether a citizen or not. Thus, a company registered
in India can enjoy all the
fundamental rights which are available to all persons.
USE OF WORDS LIMITED OR PRIVATE LIMITEDRequirements of
Sec.13
Every public limited company shall use the word limited at the
end ofits name.
Similarly, every private limited company shall use the words
privatelimited at the end of its name
Prohibition of
improper use of
word limited or
private limited
(Sec. 631)
No person shall use the word limited or private limited at the
end of the nameor title under which he carries on business unless
the following conditions aresatisfied:
a) The association is a company as defined u/s 3(1)(i).b) Such
company is a company limited by shares or guarantee.
