1. What is a Company?
The word 'Company' has no strictly technical or legal meaning.
It may be described to imply an association of persons for some common object/s.
It may be described to mean a voluntary association of persons who have come together for carrying on some business and sharing the profits there from.
S.2(20) of the 2013 Act defines a Company to mean a Company incorporated under this Act or under any previous Company.
Professor Haney defines Company as- "A Company is an artificial person created by law, having separate entity, with a perpetual succession and common seal."
3. Characteristic Features of a Company:
They are as follows-
(i) Incorporated Association:
A Company must be registered or incorporated under the Companies Act. The minimum number of persons required for this purpose is 7 in case of a Public Company and 2 in case of a Private Company. However, s.3 allows the formation of a One Person Company also.
(ii) Legal Entity Distinct from its Members:
Unlike Partnership, the Company is distinct from the persons who constitute it. Hence, it is capable of enjoying rights and incurring liabilities and duties which are not the same as those enjoyed or borne by its members. Lord Macnaughten puts it as follows- "The Company is at law a different person altogether from the subscribers."
Case: Kandoli Tea Co. Ltd.
Facts: This was the first case on the subject. In this case certain persons transferred a tea estate to a Company and claimed exemption from ad valorem duty on the ground that they themselves were the shareholders in the Company and therefore, it was nothing but a transfer from them in one to themselves under another name.
Held: Rejecting this, the Calcutta HC observed that- "The Company was a separate entity, a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property, as if the shareholders had been totally different persons."
Case: Rajendra Nath Datta v. Shibendra Nath Mukherjee
Held: For any wrong done, the Company must sue or be sued in its own name.
Even where a single shareholder virtually holds the entire share capital, a Company is to be differentiated from such a shareholder.
Case: Salomon v. Salomon & Co. Ltd. [landmark case]Facts: They are as follows-
- Salomon was a prosperous leather merchant.
- He converted his business into a limited Company called Salomon & Co. Ltd.
- Salomon, his wife and his 5 children were the members of that Company.
- Salomon & Co. Ltd. purchased the business of Salomon for 39, 000 pounds. [1000 pounds in debentures, 2000 pounds in fully paid up shares, 9000 pounds in cash]
- Salomon & Co. Ltd. ran into liquidation in less than 1 year.
- The assets were not sufficient to discharge the debentures (held by Salomon himself).
Held: The House of Lords unanimously held that the Company had been validly constituted, since the Act only required 7 members holding at least 1 share each. It said nothing about their being independent, or that there should be anything like a balance power in the constitution of the Company. Hence, the business belonged to the Company and not Salomon. Salomon was its agent. The Company was not the agent of Salomon.
Case: Chamundeeswari v. CTO, Vellore Rural
Held: The Madras HC held that a Company being a legal entity by itself, any dues from the Company have to be recovered from the Company and not from its Directors.
(iii) Artificial Person:
The Company, though a juristic person, does not possess the body of a natural being. Being an artificial person, it has to depend upon natural persons namely, the Directors, officers, shareholders, etc. for getting its work done.
(iv) Limited Liability:
One of the principal advantages of trading th3ough the medium of a limited Company is that the members of the Company are only liable to contribute towards the payment of its debt to a limited extent.
(v) Separate Property:
Shareholders are not, in the eyes of the law, part owners of the undertaking. In India, this principle of separate property was best laid down by the SC in a landmark case.
Case: Bacha F. Guzdar v. CIT Bombay
Held: The SC held that a shareholder is not the part owner of the Company or its property, he is only given certain rights by law, for example, to vote or to attend meetings, or to receive dividends.
(vi) Perpetual Succession:
A Company being an artificial person cannot be incapacitated by illness and it does not have an allotted span of life. Being distinct from the members, the death, insolvency or retirement of its members leaves the Company unaffected. Members may come and go, but the Company can go on forever. It continues even if all its human members are dead.
(vii) Common Seal:
A Company being an artificial person is not bestowed with a body of a natural being. Therefore, it does not have the mind or limbs of a human being. It has to work th3ough the agency of human beings namely, the Directors and other officers and employees of the Company. But, it can be held bound by only those documents which bear its signature. A Common Seal is the official signature of a Company.
4. Lifting the Corporate Veil:
The chief advantage of incorporation from which all others follow is, of course, the separate legal entity of a Company. However, it may happen that the corporate personality of the Company is used to commit frauds or improper or illegal acts. Since an artificial person is not capable or doing anything illegal or fraudulent, the facade of the corporate personality might have to be removed to identify the persons who are really guilty. This is known as lifting the corporate veil.
Case: Cotton Corporation of India Ltd. v. G.C. Odusumathd
Held: The Karnataka HC held that the lifting of the corporate veil of a Company as a rule is not permissible in law unless otherwise provided by clear words of the statute or by very compelling reasons such as where fraud is needed to be prevented or trading with enemy Company is sought to be defeated.
5. Advantages of Incorporation:
i. Independent legal entity
ii. Limited liability
iii. Perpetual succession
iv. Transferability of shares
v. Infinite membership
vi. Mobilisation of huge resources
vii. Separate property
viii. Ease in control and management
6. Disadvantages of Incorporation:
i. Formality and expense
ii. Loss of privacy
iii. Divorce of control from ownership
iv. Detailed winding up procedure
v. Control by few
vi. Greater public accountability
vii. Possibility of frauds
7. Is Company a Citizen?
Case: Heavy Engineering Mazdoor Union v. State of Bihar
Held: Although a Company is regarded as a legal person (though artificial), it is not a citizen either under the constitutional law or under the Citizenship Act, 1955.
Case: Narasaraopeta Electric Corporation Ltd. v. State of Madras
Held: The HC observed that a Company incorporated under the Indian Companies Act does not satisfy the requirements of the definition of citizen in Article 5 of the Constitution of India and therefore, is not a citizen.
Submitted by Pallav Tarnekar