CA.B.A.

SHANKAR, ACA, ACMA NATURE OF COMPANY

Definition and meaning of a company
Sec. 3(1) of the Companies Act, 1956 company [Sec.3(1)(i)] existing company [Sec.3(1)(ii)] Justice Marshall Justice James Professor Haney It means a company formed and registered under this Act, or - An existing company. It means a company formed and registered under any of previous companies laws.

Justice Lindley

A company is an artificial person. It has no physical existence. It is invisible and intangible. It exists only in contemplation of law. A company is an association of persons united for a common object. A company is an artificial person created by law having Separate identity Perpetual succession Common seal. 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 Company

1. Incorporated association 2. Artificial person 3. Separate legal entity 4. Perpetual Succession A company is formed and registered (i.e. incorporated) by complying with the prescribed formalities prescribed under the Act. A company is an artificial legal person, i.e., a juristic person. But it is not a fictitious person. 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. Death, insolvency, insanity etc. of any member does not affect the continuity of the 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 its members and directors. It is generally said that members may come and go, but the company goes on forever. Thus, a company never dies. The continued existence of the company

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5. Limited Liability is not affected by the continuous change in its membership. The members of a company cannot be held liable for the debts incurred by the company. In case of a limited company, the liability of members is limited. The members are 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 Amount unpaid on the shares held by every Company limited by member. shares Amount guaranteed by every member. Company limited by guarantee Aggregate of amount unpaid on the shares held Company limited by by a member and the amount guaranteed by guarantee and having him. share capital Liable to contribute to the assets of the company Unlimited company until all the debts of the company are paid in full. Common seal is the official signature of the company. Any document on which common seal is affixed, is deemed to be signed by the company. Shares are movable property transferable in the manner provided in articles (Sec.82). However, in a public company, shares are freely transferable.

6. Common seal 7. Transferabilit y of shares 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 the Board. The directors are appointed as well as removed by the members. Thus, the act has ensured the ultimate control of members over the company. A company can own and enjoy property in its own name. 9. Separate No member is the owner or co-owner of the companys property during its property 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 person having no insurable interest did not result in a valid contract of insurance. A company is a legal person. A company acts in its own name, and not as an 10. Capacity to agent of its members. It has its own rights and obligations. Consequently, a sue and be company can sue others and be sued in its own name. sued in its own The creditors can make their claims only against the company and cannot name Shankar.iyer82@gmail.com Page 2

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proceed against the shareholders.

Principle of separate legal entity

Meaning A company is a legal entity separate from its owners (i.e., members). It is a person 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. Transfer of sole proprietorship business to company. Mr. Salomon was carrying on the business of boot manufacturing as a sole proprietor. He incorporated 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 the family of Mr. Salomon were issued one share each. Salomon & Co. was a one man company. Since Salomon was the leading shareholder 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 managing director of Salomon & Co. Ltd. Inability to pay debts by the company in liquidation. In the course of business, the company borrowed from creditors to the extent of Rs. 7,000. Due to trade depression, the company ran into financial difficulties and eventually went into liquidation. The assets realised only Rs. 6,000. Contention of unsecured creditorsone man cannot owe money to himself. The unsecured creditors contended that Salomon was carrying on business in the name of Salomon & Cp. Ltd. Thus, Salomon co. ltd. was mere agent for S. Decision of the court. It was held that Salomon & Co. was a real company fulfilling 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 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 under the 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 widow was entitled to compensation. A shareholder received dividend income from a company carrying on

Salomon v Solomon & co. ltd.

Lee v Lees Air Farming Ltd.

Bacha F.

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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 the shareholders was not the same income as earned by the company. There can be a transfer of property from a member to the company and vice versa. A person can be a member, director, employee and creditor of the company at the same time. A member can enter into a contract with the company in the same manner as any other person can. Thus, a company has the rights and duties of its own, which are different from the rights and duties of its members. A company shall have a separate legal identity even if virtually entire capital of the company is held by one person.

Implications of the Rule of separate legal entity

IS COMPANY IS CITISEN?
A company is not a citizen No rights of citizens Citizenship under the Citizenship Act is available only to an individual. Therefore, no company can be a citizen of India. The constitution of India grants certain fundamental rights to citizens. Since a company is not a citizen, the fundamental rights which are available only to a citizen, are not available to a company. 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.

A company has other fundamental rights

USE OF WORDS LIMITED OR PRIVATE LIMITED

Requirements of Sec.13 Every public limited company shall use the word limited at the end of its name. Similarly, every private limited company shall use the words private limited at the end of its name No person shall use the word limited or private limited at the end of the name or title under which he carries on business unless the following conditions are satisfied: a) The association is a company as defined u/s 3(1)(i). b) Such company is a company limited by shares or guarantee.

Prohibition of improper use of word limited or private limited (Sec. 631)

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