COMPANY

LAW
• INTRODUCTION
• Industrial has revolution led to the emergence of large scale
business organizations. These organization require big investments
and the risk involved is very high. Limited resources and unlimited
liability of partners are two important limitations of partnerships in
undertaking big business. Joint Stock Company form of business
organization has become extremely popular as it provides a
solution to

• overcome the limitations of partnership business. The Multinational

companies like Coca-Cola and, General Motors have their investors
and customers spread throughout the world. The giant Indian
Companies may include the names like Reliance, Talco Bajaj Auto,
Infosys Technologies, Hindustan Lever Ltd., Ranbaxy Laboratories
Ltd., and Larsen and Tubro etc.
 MEANING OF COMPANY

• Section 3 (1) (i) of the Companies Act, 2013 defines a company as

“a company formed and registered under this Act or an existing
company”. Section 3(1) (ii) Of the act states that “an existing
company means a company formed and registered under any of the
previous companies laws”. This definition does not reveal the
distinctive characteristics of a company . According to Chief Justice
Marshall of USA, “A company is a person, artificial, invisible,
intangible, and existing only in the contemplation of the law. Being
a mere creature of law, it possesses only those properties which the
character of its creation of its creation confers upon it either
expressly or as incidental to its very existence”.
• Another comprehensive and clear definition of a company is given
by Lord Justice Lindley, “A company is meant an association of many
persons who contribute money or money’s worth to a common
stock and employ it in some trade or business, and who share the
profit and loss (as the case may be) arising there from. The common
stock contributed is denoted in money and is the capital of the
company.
 According to Haney, “Joint Stock Company is a voluntary
association of individuals for profit, having a capital divided into
transferable shares. The ownership of which is the condition of
membership”.
From the above definitions, it can be concluded that a
company is 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.

CHARACTERISTICS OF A COMPANY

• The main characteristics of a company are :

 Incorporated association. A company is created when it is registered under
the Companies Act. It comes into being from the date mentioned in the certificate
of incorporation. It may be noted in this connection that Section 11 provides that an
association of more than ten persons carrying on business in banking or an association
or more than twenty persons carrying on any other type of business must be
registered under the Companies Act and is deemed to be an illegal association, if it is
not so registered.
For forming a public company at least seven persons and for a private
company at least two persons are persons are required. These persons will subscribe
their names to the Memorandum of association and also comply with other legal
requirements of the Act in respect of registration to form and incorporate a company,
with or without limited liability [Sec 12 ]

Artificial legal person. A company is an artificial person.

Negatively speaking, it is not a natural person. It exists in the eyes of
the law and cannot act on its own. It has to act through a board of
directors elected by shareholders. It was rightly pointed out in Bates V
Standard Land Co. that : “The board of directors are the brains and the
only brains of the company, which is the body and the company can
and does act only through them”.
 But for many purposes, a company is a legal person like a natural
person. It has the right to acquire and dispose of the property, to enter into
contract with third parties in its own name, and can sue and be sued in its
own name.
However, it is not a citizen as it cannot enjoy the rights under the Constitution
of India or Citizenship Act.
In State Trading Corporation of India v C.T.O (1963 SCJ 705), it was
held that neither the provisions of the Constitution nor the Citizenship Act
apply to it. It should be noted that though a company does not possess
fundamental rights, yet it is person in the eyes of law. It can enter into
contracts with its Directors, its members, and outsiders. Justice Hidayatullah
once remarked that if all the members are citizens of India, the company does
not become a citizen of India.
Separate Legal Entity : A company has a legal distinct entity
and is independent of its members. The creditors of the company can
recover their money only from the company and the property of the
company. They cannot sue individual members. Similarly, the company
is not in any way liable for the individual debts of its members. The
property of the company is to be used for the benefit of the company
and nor for
the personal benefit of the shareholders. On the same grounds, a member
cannot claim any ownership rights in the assets of the company either
individually or jointly during the existence of the company or in its winding up. At
the same time the members of the company can enter into contracts with the
company in the same manner as any other individual can. Separate legal entity of
the company is also recognized by the Income Tax Act. Where a company is
required to pay Income-tax on its profits and when these profits are distributed
to shareholders in the form of dividend, the shareholders have to pay income-tax
on their dividend of income. This proves that a company that a company and its
shareholders are two separate entities.
The principal of separate of legal entity was explained and emphasized
in the famous case of Salomon v Salomon & Co. Ltd.

The facts of the case are as follows :

Mr. Saloman, the owner of a very prosperous shoe business, sold his
business for the sum of $ 39,000 to Saloman and Co. Ltd. which consisted of
Saloman himself, his wife, his daughter and his four sons. The purchase
consideration was paid by the company by allotment of & 20,000 shares and $
10,000 debentures and the balance in cash to Mr. Saloman. The debentures carried
a floating charge on the assets of the company. One share of $ 1 each was
subscribed by the remaining six members of his family. Saloman and his two sons
became the directors of this company. Saloman was the managing Director.
 After a short duration, the company went into liquidation. At that time the
statement of affairs’ was like this: Assets :$ 6000, liabilities; Saloman as debenture holder
$ 10,000 and unsecured creditors $ 7,000. Thus its assets were running short of its
liabilities b $11,000, The unsecured creditors claimed a priority over the debenture holder
on the ground that company and Saloman were one and the same person. But the House
of Lords held that the existence of a company is quite independent and distinct from its
members and that the assets of the company must be utilized in payment of the
debentures first in priority to unsecured creditors.
Saloman’s case established beyond doubt that in law a registered company is an
entity distinct from its members, even if the person hold all the shares in the company.
There is no difference in principle between a company consisting of only two shareholders
and a company consisting of two hundred members. In each case the company is a
separate legal entity.
Note:A person having the debentures is called debenture holder whereas a person
holding the shares is called shareholder. ... Shares are the parts of share capital. On the
other hand, debenture-holders are the subscribers to debentures. Debentures are part of
loan. A debenture is a type of bond or other debt instrument that is unsecured by
collateral.
Listed below is a comprehensive picture of the major difference between
shareholders and debenture holders:
• A person having the debentures is called debenture holder whereas a person holding
the shares is called shareholder.
• A shareholder subscribes to the shares of a company. Shares are the parts of share
capital. On the other hand, debenture-holders are the subscribers to debentures.
Debentures are part of loan.
• A shareholder or member is the joint owner of a company; but a debenture holder is
only a creditor of the company.
• Shareholders are invited to attend the annual general meeting of the company.
Debenture holders are not invited, unless any decision affecting their interest is taken.
• Shareholders control the affairs of the company. It is managed by the Board of
Directors, the elected representatives of the shareholders. Debenture holders are not
concerned with the management and regulation of the company.
• Shareholders receive copies of the Annual Report containing the Balance Sheet, the
Profit &Loss Account and the Auditor’s Report.
• Interest on debentures is payable whether there are profits or not. But dividend on
shares is to be paid only when the company has earned profits. Interest on debentures
may be paid out of capital but dividend on shares can never be paid out of capital.
• Rate of dividend on equity shares is not assured, whereas rate of interest on
debentures is assured.
• Shares cannot be converted into debentures whereas debentures can be converted
into shares.
• Convertible debentures which can be converted into shares at the option of debenture
holder can be issued, while shares convertible into debentures cannot be issued.
• Debentures are generally secured and carry a charge on the assets of the company,
whereas shares have no such charge. The debenture holder, being a secured
creditor of the company, is paid-off prior to a shareholder in the event of winding
up of a company.
• Share capital is not returned except in case of redeemable preference shares.
Debentures being loan is repaid by the company.
• Debentures can be issued at a discount, whereas shares cannot be issued at a
discount.
• There can be mortgage debentures i.e. assets of the company can be mortgaged in
favor of debenture holders. But there can be no mortgage shares. Assets of the
company cannot be mortgaged in favor of shareholders.

The principle established in Saloman’s case also been applied in the following: Lee V.
Lee’s Airforming Ltd. (1961) A.C. 12 Of the 3000 shares in Lee’s Air Forming Ltd., Lee
held 2999 shares. He voted himself the managing Director and also became Chief Pilot
of the company on a salary. He died in an aircrash while working for the company. His
wife
was granted compensation for the husband in the course of employment. Court held
that Lee was a separate person from the company he formed, and compensation was
due to the widow. Thus, the rule of corporate personality enabled Lee to be the
master and servant at the same time.
4. Perpetual Existence. A company is a stable form of business organization. Its life
does not depend upon the death, insolvency or retirement of any or all shareholder
(s) or director (s). Law creates it and law alone can dissolve it. Members may come and
go but the company can go on for ever.
The company may be compared with a flowing river, where the water keeps
on changing continuously, still the identity of the river remains the same. Thus, a
company has a perpetual existence, irrespective of changes in its membership.
If a corporation has perpetual existence, the corporation will continue even
if the shareholders, directors, and officers come and go. This means the corporation is
a safer, more stable place for investors to put their money and raises the chances that
the investors will see a return on their money.

5. Common Seal. As was pointed out earlier, a company being an artificial person has
no body similar to natural person and as such it cannot sign documents for itself. It
acts through natural person who are called its directors. But having a legal personality,
it can be bound by only those documents which bear its signature. Therefore, the law
has provided for the use of 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.
6. Limited Liability : A company may be company limited by shares or a company limited
by guarantee. In company limited by shares, the liability of members is limited to the
unpaid value of the shares. For example, if the face value of a share in a company is Rs.
10 and a member has already paid Rs. 7 per share, he can be called upon to pay not
more than Rs. 3 per share during the lifetime of the company. In a company limited by
guarantee the liability of members is limited to such amount as the member may
undertake to contribute to the assets of the company in the event of its being wound up.

7.Transferable Shares. In a public company, the shares are freely transferable. The right
to transfer shares is a statutory right and it cannot be taken away by a provision in the
articles. However, the articles shall prescribe the manner in which such transfer of shares
will be made and it may also contain bona fide and reasonable restrictions on the right
of members to transfer their shares. But absolute restrictions on the rights of members
to transfer their shares shall be ultra vires. However, in the case of a private company,
the articles shall restrict the right of member to transfer their shares in companies with
its statutory definition.
In order to make the right to transfer shares more effective, the shareholder
can apply to the Central Government in case of refusal by the company to register a
transfer of shares.
8. Separate Property : As a company is a legal person distinct from its members, it is
capable of owning, enjoying and disposing of property in its own name. Although its
capital and assets are contributed by its shareholders, they are not the private and
joint owners of its property. The company is the real person in which all its property is
vested and by which it is controlled, managed and disposed of.

9. Delegated Management : A joint stock company is an autonomous, self- governing

and self-controlling organization. Since it has a large number of members, all of them
cannot take part in the management of the affairs of the company. Actual control and
management is, therefore, delegated by the shareholders to their elected
representatives, know as directors. They look after the day-to-day working of the
company. Moreover, since shareholders, by majority of votes, decide the general
policy of the company, the management of the company is carried on democratic
lines. Majority decision and centralized management compulsorily bring about unity
of action.