Lord Justice Lindley has defined a company as “an association of many persons who contribute money or money’s worth to common stock and employ it in some trade or business and who share the profit and loss arising therefrom. The common stock so contributed is denoted in money and is the capital of the company.”
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The term company comes from the Latin word “com,” which means “with” or “together,” and “panis,” which means “bread.” It was initially used to describe a group of people who ate their meals together. Merchants used to take advantage of holiday events to discuss business matters in the leisurely past. It is referred to as a body corporate since the individuals that make up the organisation are merged into one body and granted legal personality. As a consequence, a ‘corporation’ is a legal entity established by a process other than natural birth. As a consequence, it is often referred to as an artificial legal individual. A company, as a legal body, can have many of the same privileges as a natural individual and can also have many of the same liabilities. A company, according to Section 2(20) of the Companies Act, 2013, is any group of persons registered under the current or previous companies act. It is referred to as a “body corporate” since the people that make up the organisation are incorporated into one body and granted legal personality.
The Companies Act 2013 of India defines a company as “A registered association which is an artificial legal person, having an independent legal, entity with a perpetual succession, a common seal for its signatures, a common capital comprised of transferable shares and carrying limited liability.”
Different types of Companies in India
There are various types of business entities in India. They are:
- Private limited company
- Unlimited company
- Public limited company
- Sole proprietorship
- Joint Hindu family business
- Limited liability partnerships
Features of a Company
Artificial Legal Person
A company is a legal person created by statute. It exists as a human despite the fact that it lacks a body and a conscience. It can enter into contracts in its own name and sue and be sued in its own name, just like a human.
Separate Legal Entity
The most defining feature of a company is its independent corporate life. A company is a person in the eyes of the law. It is viewed like it is a separate entity from its members. When a company is incorporated under the Act, it is given a legal status that is distinct from the members that make it up. As a result, even though the members of a company shift from time to time, the corporation will continue to exist.
Salomon v Salomon (1897) AC 22 established that a company has a distinct corporate identity from its members or subscribers. When a single shareholder owns almost all of a company’s stock, the company retains its name. It was determined that the company, not a single shareholder or a group of shareholders, controlled the business and that none of them were responsible for the company’s debts.
In Tata Engineering & Locomotive Co. Ltd. v State of Bihar, the Supreme Court confirmed that a company’s legal status before the law is “An incorporated association,” which is equal to a natural person and has its own legal identity. It has its own seal, and its properties are considered distinct from those of its members. It also has the moral right to sue and be sued purely for its own gain.
In R.F. Perumal v. H. John Deavin, A.I.R. 1960 Mad. 43, the Madras High Court held that “no member can claim himself to be the owner of the company’s property during its existence or in its winding-up.” A member does not have an insurable interest in the company’s properties.
Creditors will be unable to demand relief from the properties of the company’s owners because the liability of the company’s shareholders and members is limited to the sum invested in the company; similarly, creditors have no claim to the company’s assets. A company’s status has remained stable since the Salomon decision. Regardless of the individual shareholders’ intentions, plans, tactics, or actions, the statute recognises the company’s existence.
A company’s existence is unaffected by the death, insanity, insolvency, or resignation of its members or directors, unlike a partnership. This is due to the fact that the organisation has a distinct legal existence from its owners. It is formed by statute and dissolved by law.
Professor L.C.B. Gower correctly mentions,
“Members may come and go, but the company can go on forever. During the war, all the members of one private company, while in general meeting, were killed by a bomb, but the company survived — not even a hydrogen bomb could have destroyed it”.
The company is an inanimate person created by law that exists regardless of the number of members or even its life. Only the statute can dissolve a company. And the death or insanity of any of the company’s member shareholders has no effect on the company’s life. Seeing as it’s a perpetual succession entity, an incorporated company never dies.
The Allahabad High Court held in the case of Punjab National Bank v Lakshmi Industrial & Trading co ltd. that perpetual succession means that a company’s membership may change from time to time, but this does not affect the company’s continuity. A organisation has an everlasting life, meaning it has no soul to save or a body to kick.
Since a corporation does not have a physical presence, it must operate by its agents, and all contracts entered into by its agents should be sealed by the company by the common seal.
The company is unable to sign papers because it is an artificial human. As a consequence, it uses a common seal with its name engraved on it. The use of the common seal on documents relating to a company’s transactions makes them legally binding.
By perpetual succession and the use of a common seal, a company becomes a legal entity. A company’s common seal is, in fact, a sign of its incorporation. It is known as a company’s official signature. A company may now have a common seal or not, due to a 2015 amendment to the Companies Act.
As per section 21 of Companies Act, authentication of documents, proceedings and contracts on behalf of a company, signed by any key managerial personnel or an officer of the company duly authorised by the board in this behalf.
According to section 22, a company can, under its common seal, authorise any person to act as an attorney to execute other deeds on behalf of the company in general or in respect of any specified matters, and such deeds may be executed in or outside India. The corporation is bound by such signed deeds by its attorney on behalf of the company. If a company does not have its common seal, as prescribed by the 2015 amendment, the authorisation must be signed by two directors or by a director and the company secretary.
Limited Liability of Members
A company with its own legal entity holds its own properties and is accountable for its liabilities. Members do not own the company and are not responsible for its debts. A company’s obligations are to be paid by the company itself, not by its members. Members’ liability in a company limited by shares or a company limited by guarantee is limited or restricted to the nominal value of the shares they have taken or the amount guaranteed by them. Doing business as a company has a range of benefits. One of the most important is the limitation of liability.
Exceptions to the limited liability principle
Incorporation by false information: According to section 7(7), (b) of the Act, a tribunal may, upon receipt of an application in relation to any fraudulent or false information furnished by a company during its incorporation, order that the liability of the members of such company be unlimited.
Unlawful commercial practises: Under section 339(1), during the course of winding up a company if it appears that any business of a company is carried on with the intent to defraud creditors of the company or any other persons, the tribunal may on the application of the Official Liquidator or the Liquidator of the company or any other creditor on being satisfied declare that any person who is or has been a director, manager or officer of the company or any other person knowing part of aforesaid business shall be personally responsible, without any limitation of liability.
Unlimited company: When the company is established as an unlimited company under section 3(2)(c) of the Act. Then, as the name means, the liability of its members would be unlimited.
Misleading prospectus: According to section 35(3) of the Companies Act, if it is proved that a prospectus was published with the intent to defraud or deceive an applicant for securities of a company or any other individual for any fraudulent reason, then any person who was a director at the time of issuance of the prospectus or has been appointed as a director in the prospectus is personally liable without limitation.
Acceptance of deposit with a fraudulent intention: According to section 75(1), if a company fails to repay a deposit or a part of it, or any interest referred to under section 74, within a prescribed period and it is established that the deposit was accepted with the intent to defraud the depositors or for any fraudulent reason, any officer of the company who was responsible for accepting such deposits is liable for all or any losses or damages that may result.
Transferability of shares: Section 44 companies act of the Act, declares that “the shares or debentures or any other interest of any member in a company shall be a movable property that can be transferred in the manner provided in the article of the company.” Thus, incorporating a company enables its members to sell their shares on the open market and recover their investment without having to go through the hassle of withdrawing capital from the company. Since partners in a partnership firm cannot sell their shares in the open market until all partners agree, this unique feature of incorporation offers liquidity to the investor and stability to the business.
Capacity to sue and be sued: Since it is a body corporate, it has individual capacity to be sued and to prosecute others under its own name. A company’s right to sue occurs when the company suffers a loss, such as to its property or image. A company also has the right to sue if defamatory information is written about it that could damage its business. A company can file a criminal complaint, but it must be represented by a natural person. Although the complaint does not have to be represented by the same person throughout, the absence of such representation may result in the complaint being dismissed. Similarly, any default on the part of the company may be sued solely on the company’s behalf by the victim.
In the case of Floating Services Ltd. v. MV San Fransceco Dipaloa (2004) 52 SCL 762 (Guj),
it was held that a company’s right to sue is triggered when the company experiences a loss, such as to its property or its reputation. As a result, the corporation has the right to sue for libel or slander damages, depending on the situation.
Not a citizen, but a company: According to the Citizenship Act of 1955, only a natural person may be a citizen of India, not a juristic person, as the Supreme Court claimed in The State Trading Corporation Of India Ltd. vs The Commercial Tax Officer. Even if a company does not obtain citizenship in a country, it may still obtain residential status.
Voluntary Association with Profit making motive: An organisation is a profit-making voluntary association. It is created to achieve certain specified objectives, and any benefit received is split among the company’s shareholders or saved for potential expansion. Only a Section 8 company can be created with no profit motive.
Action Limitation: A company’s control is limited by its Memorandum of Association. The company’s Memorandum of Association establishes the company’s powers and goals, as well as the basis upon which the company’s entire structure is established. In most cases, sufficient powers are given in the Memorandum of Association to allow it to carry out its acts without any constraints and limitations. However, once the powers have been created, it cannot go beyond them unless the Memorandum of Association is amended first.
Number of Members: The minimum number for a public limited company is seven, and there is no upper limit. A private limited company, on the other hand, has a minimum of two members and a maximum of fifty.
Separation of Management and Ownership: The shareholders, or owners, who are dispersed across the country, grant the directors authority to handle the company’s affairs. The directors are the shareholders’ members. As a result, ownership and management are divided.
Termination of Existence : Since it is an artificial juridical person, a company does not die naturally. It is established by statute, conducts its business in compliance with law throughout its existence, and is eventually obliterated by law. In most cases, a company’s life is ended by winding up. Companies can use strategies such as reorganisation, restructuring, and amalgamation to avoid going bankrupt.
The idea of a business ‘company’ or ‘corporation’ is not new; it was discussed in the 4th century BC during the ‘Arthashastra’ period. Its form developed over time to meet the demands of changing market dynamics. It has a variety of distinct advantages over other company structures such as sole proprietorships, partnerships, and so on. Limited Liability, Perpetual Succession, and other features are included. Company issues have become more complex in recent years, and they cannot be addressed at social events. As a result, the company structure has become increasingly relevant. It refers to a joint-stock corporation in which many individuals contribute money. In common parlance, a corporation refers to a group of like-minded individuals who have come together for the purpose of carrying on a business or undertaking.