COMPANY LAW
Definition and Nature of Company
Q.1. Define Company. Discuss the essential elements of Company and describe the characteristics of Company. Also distinguish it from partnership.
Ans. Definition of Company.- The word ‘company’ is derived from the combination of two Latin words, namely Com and panis meaning together’ and ‘bread’. Thus initially company was referred to in an association of persons who took their meals together, and thus they utilised this occasion to discuss their business matters. Through their discussion they formed the opinion that, association would be very helpful in doing business activities resulting into profits.
Justice James defines company as “an association of persons united for common object”.
According to Lord Justice Lyndley “Company is an association of many persons who contribute money or money’s worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each members is entitled in his share (This particular definition is deleted with the newly emerged definition and concept of OPC ie. one person Company in Company Law).
In Halsbury’s Laws of England, the term company has been defined as a collection of many individuals united, into one body under a special domination having perpetual succession under an artificial form and vested by the policy of law with the capacity of acting in several respects as an individual, particularly of taking and granting property, of contracting obligations and of suing and being sued, of enjoying privileges and immunities in common and of exercising a variety of political rights, more or less extensive, according to the designs of its institution, or the power upon it, either at the time of its creation or at any subsequent period of its existence.
However, above definitions do not apply to one person Company”.
Heney has defined “joint stock company” as “a voluntary organisation formed with the object of earning profit whose capital is divisible into transferable shares and membership is necessary for its ownership”.
Chief Justice Marshall of the Supreme Court of the U.S.A in Dormouth Cottege v. Woodward, (4) Wheat (U.S.) 518, defined a “Joint Stock Company” as “an artificial person, invisible, intangible and existing only in the eyes of law. Being a mere creation of law, it possesses only those properties which the character of its creation confers upon it expressly as incidental to its very existence, among the most important are immortality and if the expression may be allowed individual properties by which a perpetual succession of many persons is considered as the same and may act as a single individual”.
Definition of “Company” under Companies Act, 2013.- Section 2(20) of the Companies Act, 2013 provides – “Company” means a company incorporated under this Act (fe. The Companies Act, 2013) or under any previous Company law”.
New Concept of Company
In modern times the new trend and concept is developing regarding the role of company in the society. The view has emerged that company should not be liable for its members only but it has obligations to fulfil towards the society as well as including labour, consumers, and other members of the society.
Hon’ble Justice P. N. Bhagwati, Chief Justice of the Supreme Court (as thus he was) of India in National Textile Worker’s Union v. P.R. Ramkrishnan, AIR 1983 SC 75, throwing light on the company’s new assumed role, observed:
“It is now accepted on all hands, even in predominantly Capitalist Countries that a company is not a property. The traditional view that the company is the property of its share-holders, is now an exploded myth. A company, according to the new socio-economic thinking, is a social institution having its duties and responsibilities toward the community in which it functions ——– it is now acknowledged even in highly developed countries like the U.S.A. and England that maximisation of social welfare should be the legitimate goal of a company. The company should be guided by considerations of national economy and progress.”
A duty is imposed on the company by the Water Pollution (Amendment) Act, 1978 to ensure that effluents and polluted water is channelised in such a way that it does not create danger to public life. Section 277 of Indian Penal Code also contains a provision to penalise the company which becomes a positive danger to the social security. This is quite a new look
Essential elements of Company
Whether it is a private company or public company, these are the essential elements ie. a company must have :
(a) capital, (b) business, (c) incorporation, (d) documents, viz Memorandum of Association and Articles of Association, (e) prospectus or statements in lieu of prospectus, (1) perpetual succession, (g) common seal, (h) management (e Board of Directors), (i) allotment of shares. (j) payment of dividends and debentures, (k) annual audit and return. (1) general meetings etc.
Characteristics of Company
There are following essential characteristices of a company.
(1) Incorporation. Company gets a personality after its incorporation although it is only a artificial person. It becomes a body corporate and distinct from its share-holders. Salomon v. Salomon Co. Ltd., (1897) AC 221 clarifies this factual position. In this case the family members formed a company which was held to be quite separate and distinct from the members.
(2) Limited liability. In case any loss occurs in the company, the share-holder’s liability is only to the extent of their share they hold Liability is not unlimited.
(3) Corporate economy. Company can raise maximum capital in minimum possible time by public subscription. Even the public financial institutions willingly lend to loan companies.
(4) Perpetual succession. According to Section 9 of Companies Act. 2013 it means the death, insolvency or transfer of share does not in any way affect its corporate existence. It retains the same entity with the same privileges and immunities. “Members may come and members may go, but the company can go forever-Gopalpur Tea Co. Ltd. v. Penhoc Tea Co. Ltd., (1982) 52 Comp. Cas. 238.
(5) Right of a person/individual-Company can sue and can be sued in its own name.
(6) Separate property.Company’s property is separate property. although the share-holders have some right in it. But ownership and possession of the property of the company is deemed to be of the company and not of share-holders. This principle was laid down in Hyderabad Sind Electric Supply Co. v. Union of India, AIR 1959 Punj. 199.
(7) Trausferability of shares. Share-holders can sell their share in open market as share are deemed as movable property, Section 56 of the Companies Act 2013. specifically provides that the share or other interest of any member in a Company shall be a movable property, transferable in the manner provided in Articles of Association of the Company. On transfer of shares the transferee steps into the shoes of the transferor and is vested with the rights and liabilities thereof, but transfer of share does not affect the existence of the company.
(8) Common seal. – After incorporation company is entitled to have a common seal to be used in its own name. By the Companies (Amendment) Act, 2015 Section 9 of the Companies Act, 2013 has been amended and now a “common seal of the company shall not be used by the members of the company from the date of the incorporation.
(9) Centralised Management. The share-holders do not manage the affairs of company but Board of Directors consisting of experienced, skilled and well-versed professional hands manage the property of company to the best advantaged position. The directors carry on the business independently
(10) Company is not a citizen. Though a company is juristic person, it is not a citizen under the Constitutional Law of India or the Citizenship Act, 1955.
The question whether a corporation is a citizen was decided by the Supreme Court in State Trading Corp. of India v. Commercial Tax Officer, AIR 1963 SC 1811, wherein the Apex Court refused to recognise the corporation as a citizen.
In Tata Engineering Company v. State of Bihar, AIR 1965 SC 40, it was held that since the legal personality of a company is altogether different from that of its members and share-holders, it can not claim protection of fundamental right although all its members are Indian citizens. But where any right of company is affected by an order passed by the executive or the legislature or by a legislation and it also has adverse effect on the share- holders of the company then protection under Article 19 can not be denied to the company on the ground that a company not being a citizen, is not entitled for such protection [R.C Cooper v. U.O.I. AIR 1970 SC 564]. Thus a company acquires a standing by impleading a share-holder with itself in an action for enforcement of fundamental rights (Godhra Electricity Company v. State of Gujarat, (1975) 1 SCC 199).
(11) Head Office of the company. Company may be situated anywhere, but it has got every right to have a registered Head Office else where in accordance with its convenience. It may have several branch offices 100.
Distinction between Company and Partnership Firm
Following are the main points of distinction between a company and partnership firm :
Company
(1) The term “company” is defined under Section 2(20) of the Companies Act, 2013.
(2) A company is a creature of law.
(3) A company possesses a distinct legal personality from its members.
(4) In case of a company the property belongs to the company and not to the members.
(5) Members of company are not its agent.
(6) A member of a company can not dispose of the property of the company and incur liabilities.
(7) A member of a company can contract with a company of which he is a share-holder.
(8) In a public company there must not be less than seven members and in case of private company the minimum numbers is two. There is no restriction as to maximum number of members in case of a public company but a private company can not have more than two hundred members excluding past and present employees.
(9) In case of a company the right of management vests in few members known as the Directors and the rest of the members do not take any active part in the management of the company nor do they necessarily know each other.
(10) The liability of share- holder of a company is limited either by share or by guarantee.
(11) The shares of company can ordinarily be transferred without the consent of other share-holders.
(12) Restrictions on the powers of a particular member as contained in the Article of Association of a company are effective against the public because Articles of Association of a company being a public document one can find out what is contained in them.
(13) A company has perpetual succession, ie, the death or insolvency of share-holder or all of them does not affect the life of the company.
(14) The creditors of a company can proceed only against the company and against its members.
(15) A company is legally bound to have its accounts audited annually by Chartered Accountant.
(16) A company, being a creature of law can only be dissolved as laid down by law.
(17) In the case of a company, the right of management vests in few members called the Directors, and the rest of the members do not take any active part in the management of the company.
Partnership firm
(1) The term “partnership” and “firm” are defined under Section 4 of the Partnership Act, 1932.
(2) A partnership firm is the result of an agreement between the partners.
(3) A partnership firm is not distinct from the person who form it
(4) In a partnership, the property of the firm is the property of the individual members who are collectively entitled to it.
(5) Partners are agents of the firm.
(6) A partner can dispose of the property and incur liabilites so long as he acts in the course of firm’s business.
(7) A partner can not contract with his firm of which he is a partner.
(8) A partnership firm can not be formed, with more than ten members in the case of banking business and twenty members in case of any other business.
(9) In the absence of any agreement to the contrary, every partner has an equal right in the conduct of the firm’s business.
(10) A partner’s liability is always unlimited.
(11) A partner can not transfer his shares and make the transfer to member of the firm without the consent of other partners.
(12) Restrictions on the power of a particular partner contained in the partnership agreement shall not avail against out-siders.
(13) A partnership is dissolved on death or insolvency of a partner – unless otherwise provided.
(14) The creditors of a partnership firm are creditors of individual partners and a decree against the firm can be executed against the partners jointly and severally.
(15) Account of partnership firm are audited at the discretion of partners.
(16) A partnership firm is the result of an agreement between the partners and so it can be dissolved any time by agreement.
(17) In the absence of any agreement to the contrary, every partner has an equal right in the conduct of the firm’s business.
Classification of Companies
Q. 2. Explain the classification of Companies.
Or
What are the various types of companies? Discuss.
Ans: Grounds of classification
There are various kinds of companies which are classified on the several grounds. The main grounds of classification are as follows :
(1) Incorporation
(2) Strength or the number of members
(3) Liability of the members.
(4) Registration.
(1) Classification on the basis of Incorporation
(a) Companies incorporated by Royal Charter.-These companies were formed under the Royal Charter issued by the British Crown during British Rule in India. These companies have lost their significance in the present time.
(b) Statutory Companies. These are framed under an Act of Parliament or State Legislatures. The main object of such companies is to carry on the national business.
(c) Registered Companies. These are registered under the Companies Act. 2013, and carry on business in accordance with the provisions of the Act.
(2) Classification on the basis of strength or the number of members
(a) Private Company. According to Section 2 (68) of the Companies Act, 2013, (“Private Company” means a company having paid- up share capital which by its articles:-
(i) restricts the right to transfer its shares.
(ii) except in case of One Person Company, limits the number of its members to two hundred. Provided that where two or more persons hold one or more shares in a company jointly, they shall for the purposes of this clause be treated as a single member:
Provided further that:
(a) persons who are in the employment of the company, and
(b) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased,
shall not be included in the number of members, and
(iii) prohibits any invitation to the public to subscribe for any securities of the company.
Section 149 (a) of the Companies Act, 2013 provides that the Private Company may have two minimum number of directors.
(b) Public Company Section 2(71) of the Companies Act, 2013, defines it as-
(a) a company which is not a private company:
(b) has a minimum paid-up share capital.
Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company, even where such subsidiary company continues to be a private company in its articles.
There shall not be less than seven members in the public company.
(3) Classification on the basis of liabilities of members
(a) Company limited by shares [Section 2 (22) of the Companies Act, 2013]. According to Section 2(22) of the Companies Act, 2013. “company limited by shares” means a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them”. Such companies are bound to have “limited” words in their names, so as to show that the liability of the share- holders is limited to their shares only and is proportionate thereto. Share capital is condition precedent of such companies.
(b) Company limited by guarantee [Section 2(21) of the Companies Act, 2013]. A company limited by guarantee is also known as “Guarantee Company”. In such kind of company the liability of its members extends to the amount undertaken to be contributed by each of them towards the assets of the company in the event its being wound-up as stated in the Memorandum of Association of the Company. Such liability will arise only in the event of company being wound-up and not otherwise. The aim of such companies is not to earn profit but to achieve the aims related to arts, gifts, religion and science etc.
(c) Unlimited Companies [Section 2 (92) of the Companies Act, 2013]. “Unlimited company” means company not having any limited on the liability of its members.
(d) Government Company [Section 2 (45) of the Companies Act. 2013]. A Government company is a company in which not less than 51% of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary company of such a Government company.
(e) Holding Company (Section 2 (46) of the Companies Act. 2013]. When a bigger company holds and controls another small company, the first one is called holding company and the second one as subsidiary company. Th term “holding company is defined in Section 2(46) of the Act as follows:
“The holding company in relation to one or more other companies. means a company of which such companies are subsidiary companies”
For the purpose of this clause the expression “Company includes any body corporate. [Inserted by the Companies (Amendment) Act, 2017]
(f) One Person Company (Section 2 (62) of the Companies Act.2013). “One Person Company” means a company which has only one person as a member.
(4) Classification on the basis of registration
(a) Foreign Company [Section 2 (42) of the Companies Act. 2013]. “Foreign company” means any company or body corporate incorporated outside India which-(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and (b) conducts any business activity in India in any other manner
(b) Listed Company [Section 2 (52) of the Companies Act,2013]. It means a company which has any of its securities listed on any recognized stock-exchange.
Fera Companies. Companies operating in India under the Foreign Exchange Regulation Act, 1973 are technically called the Fera companies.
Banking and Insurance Companies. They are regulated by Special Acts.
Finance companies [Section 2 (39) of the Companies Act, 2013] (also called Financial Institutions). Finance Companies mean such companies which are defined or notified as financial institutions under the Reserve Bank of India Act, 1934. Some of the public financial institutions are-
(i) The Unit Trust of India.
(ii) Industrial Development Bank of India.
(iii) Infrastructure Development Finance Company Limited.
(iv) Industrial Credit and Investment Corporation of India.
(v) Industrial Finance Corporation of India.
Private and Public Company
Q. 3. Define private company. What are the advantages and disadvantages of private company?
Or
“Not only does the legislation recognise the private company it may be said to bestow its benediction upon it.” Comment.
Ans. Definition of Private Company
A Private Company is defined under Section 2 (68) of the Companies Act, 2013 Section 2 (68) of the Act provides as follows:
“private company” means a company having a minimum paid-up share capital as may be prescribed, and which by its articles.-
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member.
Provided further that-
(A) persons who are in the employment of the company, and
(B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased.
shall not be included in the number of members, and
(iii) prohibits any invitation to the public to subscribe for any securities of the company.”
Advantages (privileges and exemptions) of a private company
The Companies Act, 2013 confers certain privileges on private companies. Such private companies are also exempted from complying with some of the provisions of the Act. The privileges and exemptions available to a private company are its advantages over a public company. The reason for providing these advantages is that private companies being restrained from inviting capital from public, not much public interest is involved in these companies.
The privileges and exemptions available to a private company under the Act are as follows:
(1) Only two members are sufficient to form a company. (Section 3(1) (b)
(2) It is free to issue any kind of shares. (Section 149)
(3) Even one or two members may demand a poll. (Section 109)
(4) It may have two directors only. That is sufficient. (Section 149)
(5) There is no maximum limit for managerial remuneration. It may be to any extent.
(6) It is not required to hold statutory meeting before the commence ment of the business.
(7) The rule of minimum subscription as provided under Section 39 does not apply to private company. It is free, therefore, to commence allotment of shares irrespective of the number of shares prescribed (Section 11]
(8) There is no restrictions on the appointment or re-appointment of managing director. [Section 196]
(9) Voting rights is not necessarily proportionate to the shares held. It may or even allow disproportionate voting right.
(10) The directors can freely vote on matters relating to contracts in which they have an interest. [Section 184]
(11) Private company is not required to file a prospectus or statement in lieu of prospectus, the reason is that it does not invite capital from the public.
(12) It can appoint directors till their life. They need not retire by rotation.
(13) It need not offer preference shares to existing share-holders. [Section 62]
(14) The directors may be appointed in a single resolution in private company and they need not file their consent to act or take up qualification shares prior to their appointment. (Section 162]
(15) It may commence its business immediately after its incorporation. [Section 11]
(16) A special notice of 14 days as required by Section 160 of the Act, for the appointment of new directors is not necessary in case of private company provided it is not a subsidiary of a public company.
(17) According to Section 137 the copies of profit and loss account filed by a private company with the Registrar are not open to inspection by non-members.
Since these advantages of a private company are over the public company and thus they mark an effective distinction between the private and public company. A private company shall, however, lose the privileges and exemptions as soon as it ceases to be a private company by choice or by operation of law. But a private company which is or becomes the subsidiary of a public limited company, shall continue to avail of some of the privileges and concession, uninterrupted.
Disadvantages or Obligations of a Private Company
Despite the various privileges and exemptions availed of a private company, there are certain disadvantages of such a company.
Some of the disadvantages of a private company are as follows-
(1) According to Section 105, a member of a private company cannot appoint more than one proxy to attend and vote in the company’s meeting
(2) It cannot issue share warrants payable to bearer.
(3) It has to file annual list of its members with the Registrar [Section 92]
(4) It has to file a certificate to this effect that it has not invited public to subscribe to its shares or debentures. (Section 92]
(5) Since its last general meeting, nobody corporate has held 25% of more of its paid up share capital.
(6) It is required to send a certificate to the Registrar stating that its annual turnover in the preceding three-years never reached Rs. I crore or more, that it did not hold 25% or more of paid-up share capital of one of more public companies, and that since its last general meeting no body corporate has held 25% or more of its paid-up share capital.
If a company inserts changes in its Articles of Association, and thereby violates any restriction imposed upon it by the Act, the official company in default shall be liable to fine of Rs. 5000 per day till the fault continues.
Consequences of default in complying with conditions constituting a Private Company
A private company which violates any of the three compulsory provisions contained in Section 2(68) of the Act, relating to article shall cease to be a private company forthwith and would be treated as if it were not a private company for the purposes of the application of the Act.
Thus, where the articles of a company include the provisions which are required to be included in the articles of a company in order to constitute it a private company, but default is made in complying with any of those provisions, the company shall cease to be entitled to the privileges and exemptions conferred on private companies by or under this Act, and this Act shall apply to the company as if it were not a private company.
But the Central Government on being satisfied that the failure to comply with the conditions was accidental or due to inadvertence or to some other sufficient cause, or that on other grounds it is just and equitable to grant relief, may, on the application of the company or any other person interested and on such terms and conditions as seem to the Central Government just and expedient, order that the company be relieved fron such consequences as aforesaid.
Q. 4. What do you mean by public company? Distinguish between private and public company. How a private company can be converted into a public company?
Ans. Definition of Public Company.
Definition of public company is given under Section 2 (71) of the Companies Act, 2013.
According to Section 2 (71) of the Companies Act, 2013, a “public company” means a company which-
(a) is not a private company.
(b) has a minimum paid-up share capital as may be prescribed:
Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles.
Characteristics of Public Company
Main characteristic features of a public company are as follows:
(i) Public company can transfer its shares.
(ii) It has to have minimum prescribed paid-up share capital.
(iii) The minimum number of members of such company must be seven. However, no maximum number of members is prescribed under the Act.
(iv) It can invite the public at large to purchase its shares
Therefore, a public company may be said to be a association consisting of not less than seven members, which is registered under the Companies Act, 2013 and which is not a private company within the meaning of the Act. The shares and debentures of a public company may be listed on a Stock-Exchange and are offered to public for sale.
A co-operative housing society registered under the Bihar and Orissa Co-operative Societies Act, the paid-up capital of which is not subscribed to by Government and the membership of which exceeds fifty (now two hundred) is neither Government company nor a private company but a public company within the meaning of Section 2 (37) (Now Section 2 (71) of the Companies Act, 2013). (Shyam Nandan Prasad v. State of Bihar. (1993) 4 SCC 255 (263)]
If at any time the number of members of a Company is reduced in the case of Public Company below seven, in the case of a Private Company below two, and the Company carries on business for more than six months. while the number of members is so reduced, every person who is a member of the Company….shall be severally liable for the payments of the whole debts of the Company. (Section 3A) [Inserted by the Companies (Amendment) Act, 2017].
Distinction between Private and Public Company
There are some points of similarity between these two types of companies viz, members-share-holders, management through directors and managers, audit of account, dissolution etc. Inspite of these similarities. following are the main points of distinction between the two:
Private Company
(1) The private company may be formed with two members only.
(2) The proposed capital should not be less than one lakh rupees.
After Amendment of the Companies Act in 2015 now both kinds of companies should have a minimum prescribed paid-up share capital.
(3) The private company cannot (2 transfer its shares.
(4) Private company cannot invite ( the public to purchase its shares and debentures.
(5) It is not condition precedent to (2 convene the statutory meeting to commence the business.
(6) Winding-up order can be given ( by the Court only when the number of members fall below two.
(7) The maximum number of ( members may be 200 only.
(8) The private company is bound ( to have at least two directors.
(9) Private company can transfer ( its shares only after providing for it in its articles.
(10) It prohibits any invitation or acceptance of deposits from persons other than its members, directors, or their relatives.
(11) Even one or two members may demand a poll.
(12) Private company is bound to C add ‘Private limited’, with its name.
(13) Private company is not required to file a prospectus or statement prospectus. in lieu of
(14) It need not offer preference shares to the existing share- holders.
(15) Voting right may not be in proposition to the shares held. It may even be dispropor- tionate.
(16) Non-members can not make inspection of the copies of profit and loss account filed with the Registrar.
(17) There is no maximum limit for managerial remuneration.
Public company
(1) The minimum number of members to form a public company must be at least seven.
(2) Proposed paid-up capital should not be less than five lakh rupees.
(3) Such company can transfer its shares.
(4) Public company may invite the public to purchase its shares and debentures.
(5) The public company is bound to convene the statutory meeting before the commence- ment of the business.
(6) If the number of members fall below seven, the company may be wound-up by the Court.
(7) The maximum number of members is not prescribed. It may be any number.
(8) Public company is under obligation to have at least three directors.
(9) No such restriction is imposed on the public company.
(10) There is no such prohibition for acceptance or invitation on the public company. It is free to accept deposits from outside also.
(11) Demand for poll should be made by a considerable number of members.
(12) There is no such statutory obligation to mention “limited” at the end or with the name of company.
(13) Since a public company invites and is not restrained from inviting capital from public, public company has to file prospectus or statement in lieu of prospectus.
(14) It may offer preference shares to the existing members.
(15) Voting rights are proportionate to the shares held by the respective members. It is not disproportionate.
(16) Such file of profit and loss account is open to inspection even by the non-members. There is no such prohibition as it is with the private company.
(17) There is limit on such managerial remuneration.
Conversion of private company into a public company
A private company can get itself converted into a public company by amending its Articles of Association by a special resolution in such a way that all the restrictions on it as a private company come to an end. It shall also send information of such conversion along with a copy of the prospectus or statement in lieu of prospectus to the Registrar of Companies within a prescribed period.
Leading case:
Ram Parshotam Mittal and another v. M/s Hillcrest Realty and others. AIR 2009 SC 2859. In this case the question was whether a private company becomes a public company immediately after a resolution for conversion is passed or only after necessary alterations to this effect are recorded by the Registrar of Companies. The Apex Court in this case ruled that it is not the records of the Registrar which determines the status of a company because such records only reflect the status of the company as per the information received from the company in accordance of the provisions of the Act. A private company become a public company from the date it passes resolution to this effect.
Q. 5. Define the term ‘Company Liquidator?
Ans. According to Insolvency & Bankruptcy Code, 2016.- “Company Liquidator” means a person appointed by the Tribunal as the Company Liquidator in accordance with the provisions of Section 275 for the winding-up of a company under this Act. [Section 2 (23)].
Legal Personality of a Company
Q. 6. Company is a legal person created by law quite distinct from its members. Discuss with reference to Salomon v. Salomon case.
Or
Company is an artificial person, invisible, intangible, and existing only in the eyes of law. Explain.
Оr
The most important feature of an incorporated company is the distinct and independent legal personality with perpetual succession and common seal. “Explain”. In what cases do the Court ignore this principle?
Ans. Legal personality of Company
All the companies after incorporation get legal personality and are called corporate bodies. Although they perform their all the works through human agency, even then they are treated as separate and distinct from their members, of whom they are composed. The law and judicial decisions are very clear on this point that company is artificial person, invisible. intangible and existing only in the eyes of law. It is a creation of law with a perpetual succession and common seal. It is aptly spoken and recognised that the most important feature of an incorporated company is its distinct and independent legal personality. This is legal position, and nature of company. It makes no difference whether company is private or public, limited or unlimited. A legal person is that one who is competent to exercise legal rights and perform the legal duties.
According to Grover, the main characteristic of the incorporated personality is its legal existence, which is quite distinct from its members Hence it is an artificial person and not a natural one.
Salmond’s view is that the person is that which the law thinks capable of exercising legal rights and performing legal duties. Any one, whether he is a man or not, if he is competent of those things, he is certainly a person Section 2 (7) defines corporation as “A body corporate or corporation includes a company incorporated outside India, but does not include corporation soles or cooperative society.”
Thus Corporation or Body Corporate is far wider than the word “Company” which is a legal person existing independent of its members With incorporation the entity of the company becomes institutionalised.
First of all it was in England that the judicial recognition to principle of independent corporate existence (legal entity or legal person) was given by the House of Lords in Salomon v. Salomon & Co., (1897) AC 22
Leading cases Salomon Salomon & Co.. (1897) AC 22- Salomon was a boot and shoe manufacturer, having sound business with substantial surplus of assets over liabilities. He formed a company named Salomon and Co. Ltd. for carrying on his business. Out of seven members. were Salomon himself, his wife, daughter and four sons. They were subscribers to the memorandum. The Board of Directors consisted of Salomon and his two sons. Company was formed in 1892. His wife, and five children held one share each and all the other remaining shares were held by Salomon himself. Business was transferred (sold) to the company for £ 40,000. By way of payment Salomon took 20,000 shares of f I each and debenture worth £ 10,000. These debentures created a charge on the assets of the company. There was loss of business due to the general trade depression. The company went into liquidation within a year and its assets amounting to £ 6000, were insufficient to pay the debentures in full and the ordinary creditors received nothing. The liquidator sought to have the debentures cancelled on the ground that the company was only an agent of Salomon. The creditors contended that company was not distinct from Salomon and Salomon & Co. had no independent existence. He was director, and his sons as directors were in his control. Salomon was sole person behind it. Thus, in effect company was one man’s show. It was not a real company in true sense of the term.
Rejecting these plea the House of Lords ruled that the Salomon and Saloman & Co., was a real company, complying with all the legal requirements of incorporation. It further observed:
“The company at law is a different person altogether from the subscribers to the memorandum. Company is not their agent or trustees. It is immaterial that after the incorporation, business is the same, the same persons are managers, and the same hand receives the profits.”
Their Lordships made it clear, and ruled that it was no where mentioned in the Act, that the subscribers to the memorandum must be unconnected members, and there should be balance in their rights in respect with the formation of the company. It was held that Salomon was entitled to priority in payment of the debts over other creditors.
M/s. Electronics Corporation of India Ltd. v Secretary. Revenue Deptt. Government of A. P.. AIR 1999 SC 1734-The Supreme Court inter alia, observed that a clear distinction must be drawn between a company and its share-holders, even though that share-holder may be only one te, the Central or State Government.
Company is a legal entity separate from its share-holders. Therefore, it cannot be said that share-holders and directors are the sole owners of all company’s property. A company is a body corporate, it can sue and be sued. It enjoys rights and duties. Company can have property, sell and purchase, and can enter into contracts in its own name, with third parties and even the members themselves can enter into contract with company. It has perpetual succession and common seal. It can be held liable.
Inspite of all these facts and decisions, the company cannot be put on the same footing as the natural person stands on for all practical purposes. The reason is that after all the company is artificial person and has no real existence. For example, company cannot be imprisoned. An incorporated company never dies. Right of citizenship is not available to the company as is ruled by the Supreme Court in State Trading Corporation of India v. Commercial Tax Officer, AIR 1963 SC 1811.