MEANING OF A COMPANY
The word ‘Company’ has been derived from the Latin words ‘Com’ which means ‘with or together’ and ‘panis’ which means ‘bread’. Thus, a company means an association of persons who took their food together. Generally, the word company can be defined as an association of persons formed for the purpose of carrying on some business or undertaking. According to Section 2(20) of the Companies Act, 2013, the term “Company” means a company incorporated under this Act or under any previous company law. This definition does not clearly reveal the meaning of a company. Chief Justice Marshall of the USA defined a company as- “A company is an artificial person, 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 confers upon it, either expressly or as incidental to its very existence”.
Another broad 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 employs it in some trade or business, and who share the profit and loss arising there from. The common stock 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 member is entitled is his share. Shares are always transferable, although the right to transfer them is often more or less restricted”.
According to Prof. Haney, “A company is an artificial person created by law having a separate entity with a perpetual succession and a common seal.”
Thus, it can be concluded that a company is an registered association which is an artificial legal person, having an independent legal entity with a perpetual succession, a common seal and a capital comprised of transferable shares and carrying limited liability.
CHARACTERISTICS OF A COMPANY
The main characteristics of a company are-
1. Incorporated Association: A company is created when a group or association of people get themselves registered under the Companies Act. It comes into existence from the date mentioned in the certificate of incorporation, even if, the date is wrong. A company has to fulfill all the requirements in terms of documents, shareholders, directors, and share capital. As per Section 464, if there are more than 50 persons in any business, then they must be compulsorily registered under the Companies Act, otherwise it is deemed to be an illegal association.
2. Artificial legal person: A company is an artificial person hence it is invisible, intangible and cannot be touched, cannot act on its own but exists in the eyes of the law. It has rights and liabilities like a natural person. It has to operate through a board of directors elected by shareholders. It was correctly mentioned in Bates v Standard Land Co. that: “The boards of directors are the brains and the only brains of the company, which is the body and the business can and does work only through them”.
But for various purposes, a company is a legal person and has the right to obtain and dispose of the property, to enter into contract with third parties in its own name, and be capable of sue in its own name. Such an intangible existence of a company is also known as “artificial juridical personality”.
3. Separate Legal Entity: A company has a legal separate entity and is independent of its members. The creditors of the company cannot sue individual members and can recover their money only from the company and the property of the company. Similarly, the company is not liable for the individual debts of its members, thus the property of the company is solely to be used for the benefit of the company and not for the individual benefit of the shareholders. On the same basis, a member cannot claim any ownership rights in the assets of the company, either individually or jointly during the life of the company or in its winding up. However, at the same time, they can enter into contracts with the company in the same way as any other individual can.
The concept of separate legal entity was explained and emphasized in the famous case of Salomon v Salomon & Co. Limited (1897). The facts of the case are:
Mr. Salomon was the owner of a shoe company. He created a company called Salomon and Co. Ltd. and sold his successful business to it for the sum of £39,000. The company consisted of himself, his wife, his daughter and his four sons. One share of £1 each was held by the remaining six members of his family, while all the other shares were held by Salomon himself. 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. Salomon. The debentures had a floating charge on the assets of the company. Saloman was the managing Director of the company as well, since he held majority shares.
After a year, the company went into liquidation. At that time the statement of affairs showed Assets worth £6000, debentures amounting to £10,000 and unsecured creditors equal to £7,000. Thus, its assets were running short of its liabilities equal to £11,000.
The unsecured creditors claimed a priority over the debenture holder on the view that company and Salomon was one and the same person. But the House of Lords held that the existence of a company is quite independent and separate from its members and that the assets of the company must be first are applied in payment of the debentures first in priority to unsecured creditors.
In Salomon’s case, it was established that a registered company is an entity different from its members, even if the person holds all the shares in the company. In this case, the company is a separate legal entity.
The principle established in Salomon’s case also been applied in the case of Lee v. Lee’s Air farming Ltd. (1960). Of the 3000 shares, Lee held 2999 shares in Lee’s Air Farming Ltd. He nominated himself the managing Director and also became Chief Pilot of the company on a salary. He passed away in an air crash while working for the company. His wife claimed compensation for the husband in the course of employment.
The company opposed the claim on the ground that the same person cannot be employer as well as the employee. The Privy Council applied Salomon’s case held that Lee was a separate entity from the company he created, and compensation was due to the widow. Thus, the law of corporate personality enabled Lee to be the master and servant at the same time.
4. Perpetual Existence. A company does not cease to exist unless it is specifically wound up or the task for which it was created has been completed. Company’s life does not depend upon the death, insolvency or retirement of any or all shareholder(s) or director (s). Law creates company and law only can dissolve it. Members may come and go but the company can continue its operation forever. The leading case in this regard is (Re.) Meat Suppliers (Guildford) limited (1996): the facts of the case- all the member of a private company, while in a general meeting, were killed by a hydrogen bomb. But the company survived not even a hydrogen bomb could have ruined it. The company may be compared with a flowing river where the water always keeps on changing continuously; still the identity of the river remains the same. Thus, a company has a perpetual succession, irrespective of changes in its membership.
5. Common Seal. A company being an artificial person has no body like to natural person and it cannot sign documents for itself. It acts through natural personality who is called its directors. But having a legal entity, it can be bound by only those documents which contain its signature. Therefore, the law has provided for the use of common seal, with the name of the company stamped on it, as a proxy for its signature. A company may have its own rules in its Articles of Association for the manner of affixing the common seal to a document.
The companies (Amendment) Act, 2015 has made the common seal optional by omitting the words “and a common seal” from Section 9 so as to provide an alternative mode of agreement for companies who choose not to have a common seal. Rationale for this amendment is that common seal is seen as a relic of medieval times. In the UK also, common seal has been made optional since 2006. This amendment provides that the documents which need to be authenticated by a common seal will be necessary to be so done, only if the company opts to have a common seal . In case a company does not have a common seal, the authorization shall be made through two directors or a director and the company Secretary, wherever the company has appointed a company Secretary.
6. Limited Liability: A company may be company with limited by shares, a company with limited by guarantee or company with unlimited liability. In case of company limited by shares, the liability of members is limited to the unpaid value of the shares. For instance, if the face value of a share in a company is Rs. 100 and a member has already paid Rs. 70 per share, he can be called upon to pay not more than Rs. 30 per share during the existence of the company. In a company limited by guarantee the liability of members is limited to the extent of such amount as the member may undertake to contribute to the assets of the company at the time of winding up. Sometimes the liability of a member of a limited liability company can be made unlimited if he agrees in writing to make his liability, the same.
7. Transferable Shares. A shares, debentures or other interest of any member in a company shall be movable property, transferable in the way provided for, by the articles of the company as per under section 44 of the Companies act 2013. In case of a public company, the shares are freely transferable. The right to transfer shares is a legal right and it cannot be taken away by any provision in the articles. However, the articles shall lay down 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 complete 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 limit the right of member to transfer their shares in companies with its statutory meaning.
8. Separate Property: As a company is a legal person separate from its members, it is capable of owning, enjoying and disposing of property in its own name. Even if its capital and assets are contributed by its shareholders, they are not the private and joint owners of its property. The company is the actual person in which all its property is vested and by which it is controlled, managed and disposed of.
Hence we can conclude that company is a voluntary association for profit with capital divisible into transferable shares with limited liability, having a separate business entity and a common seal with perpetual succession.
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