1.Definition of a Company and Its Charecteriostics

7/31/2019 1.Definition of a Company and Its Charecteriostics

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The Companies Act, 1956

The Indian Companies Act, 1913 was repealed by the present Companies Act, (of

1956) which came into force on 1st April, 1956. The present Companies Act is

based largely on the recommendations of the Company Law Committee (BabaCommittee) which submitted its report in March, 1952. This Act is the largest

piece of legislation ever passed by our Parliament. It consists of 658 sections and

15 schedules. Moving the Bill in 1955 in the Parliament, Mr. C.D. Deshmukh, the

Finance Minister at that time said the following about the Bill:

It is that the joint stock companies must move with the times and advance in

times with prevailing ideas. The country is tolerant of the concentration of

economic power and disparity of wealth. We can ignore these trends only atour own peril.

The main features of the Companies Act, 1956 are:

i. Full and fair disclosure of various matters in prospectus.

ii. Detailed information of the financial affairs of a company to be disclosed in

its accounts.

iii. Provision for intervention and investigations by the Government into the

affairs of a company.

iv. Restrictions on the powers of managing agents and other managerial

Personnel.

v. Enforcement of proper performance of their duties by company

Management.

vi. Protection of minority shareholders.

Definition of a Company

A company can be defined as a group of persons associated together for the

purpose of attaining a common objective, social or economic.

According to Lord Justice Lindley a company is an association of many persons

who contribute money or moneys worth to a common stock and employs it in


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some trade or business and who share the profit and loss there from. 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 member is entitled is his share. The shares are always

transferable although the right to transfer is often more or less restricted.

Justice Marshall defines a company as an artificial being, invisible, intangible,

existing only in contemplation of the law. Being a mere creation of law, it

possesses only the properties, which the charter of its creation confers upon it,

either expressly or as incidental to its very existence.

According to Haney a company is an incorporated association which is an

artificial person created by law, having separate entity, with a perpetual successionand a common seal.

Section 2 (1) of the company Act (cap 486) provides that a company means a

company formed and registered under this Act or an existing company. Existing

company only means a company formed and registered under any of the repealed

ordinances. For the purposes of companies Act, the companies includes: -

a) A registered company under this Act.

b) An existing company.

c) An unregistered company covered under section 357-364.

d) A produce company covered under section 388.

e) A foreign company covered under section 365-381.

Characteristics of a company

The Certificate of Incorporation issued by the Registrar of the Companies brings

the company in to existence as a legal person. There are several advantages by the

Incorporation. At the same time, there are also some disadvantages too.

Advantages of Incorporation

1. INDEPENDENT CORPORATE EXISTENCE


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The company is a juristic person. It has separate legal entity. The company is an

association of persons formed for the purpose of some business or undertaking

carried on in the name of association. But at the same time it has its own

independent corporate existence which is called Corporate Personality. It is

also known as Rule of Salomon vs. Salomon. It is formed with the members

and at the same time it is independent of its members. It is corporate aggregate. It

functions like a corporate sole. The company is at law a different person altogether

from its members. This is also called as The Veil of Corporation. The theory of

corporate entity is indeed, the basic principle on which the whole law of

corporation is based. The theory which explains about the Corporate Personality is

known as Organic Theory.

In England legal personality of a company was recognized in 1867 in Oakes vs

Turquand. Importance or separate entity was firmly established by Salomon vs.

Salomon (1897) AC 22.

SALMON vs. SALMON & Co. LTD (1897 AC 22)

It is the leading case showing independent corporate existence

Brief facts: Salmon was a boot and shoe manufacturer and had a good reputation

and profitability too. He formed Salmon &Co. Ltd. With the share capital of

30,000/- pounds. His wife, one daughter and four sons and himself, totally 7

members, were the subscribers to the company. Each share was @ 1 pound.

Salmon paid his share amount. He also paid 10,000/- pounds towards debentures inthe company.

After some years the company was in a loss, and was wound up. At the time of

winding up, the company had left property worth 6,000/- pounds, and the liabilities

were 17,000/- pounds (10,000/- pounds towards debentures of Salmon and 7,000/-

pounds towards due to unsecured creditors= totally 17,000/- pounds). Unsecured

creditors claimed their importance over the property of 6,000/- pounds.

Salmon also claimed that he had charge over the company and he was secured

creditor, being he was the holder of debentures worth of 10,000/- pounds, whichcreated a charge over the company. The unsecured creditors contended that the

company created by Salmon and his family members and in fact Salomon and the

company were one and the same person and that the company was a mere agent for

Salomon, and therefore they should be paid in priority than salmon.


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Judgment: The House of Lords gave the judgment in favor of Salmon, treating his

debentures being secured debt, created a charge on the property of the company,

and also declared that the company was in the eyes of the law, a separate person

independent from Salmon. Salmon was not the agent or trustee of the company.

In the case Lord Machagater observed the company is at law quite different person

altogether from the subscribers of the memorandum and though it might be that

after incorporation the business is precisely the same as it was before and the same

persons are managers, and the same hands receive the profits, the company is not

in law the agent of the subscribers or trustee liable in any shape or form except to

the extent and in the manner provided by the Act.

Other case laws in support of separate legal personality are the Lee vs Lee Air

Farming Ltd and the Maccaura vs. Northern Assurance Company Limited 1952Act 6119.

2. LIMITED LIABILITY

It means the liability of the member is limited to the extent of his share only. In a

partnership firm, the partner is liable to the complete extent, even personal liability

also. In a partnership firm, A and B partners invest `. 1, 00,000 towards the capital

of the firm, each @ `.50, 000/-. The firm brings `.1, 00,000/- loan and becomes

insolvent. B also becomes insolvent. A is solvent. The creditors sue A for therecovery of one lakh rupees. A is liable to pay entire amount, being the partner of

the firm. He is personally also liable. In the partnership firms, the principle of

principal and agency is applied. A partnership firm does not contain separate legal

existence. It is not a juristic person. But a company incorporated protects the

members of it in way of limited liability. In a company, the principle of principal

and agency does not apply. The share holder is liable to the extent of his share

amount only, not exceeding that. This is the main distinction between partnership

firm and company.

3. PERPETUAL SUCCESSION

A man dies. But an incorporated company never dies. It is an entity with perpetual

succession.

Blackstone explains: Perpetual succession, therefore, means that the membership

of a company may keep changing from time to time, but that does not affect the


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companys continuity, in the like manner as the river Thames is still the same

river, though the parts which compose it are changing every instant.

4. SEPARATE PROPERTY

The company is a juristic person. It has its own legal entity. It has its own property.

It is liable for its own debts. It is independent to the members. The members

liability is limited to the extent of their shares only.

5. TRANSFRRABLE SHARES

The shares of a public company can easily be transferrable. The transferee and

transferor shall have to sign on Form No. 7-c and other necessary forms under

Sec.108 and shall submit them along with the original share certificate to the

Registrar of Companies and register the name of the transferee. The name of thetransferee shall also be entered in the Register of Members of the concerned

company, and the name of the transferor shall be struck out.

6. CAPACITY TO SUE AND BE SUED

The company comes into existence from the date on which the Certificate of

Incorporation is granted. This Certificate brings the company into existence as a

legal person. It can sue be sued in its own name.

7. ACCUMULATION OF LARGE CAPITAL

A large capital can be accumulated by way of incorporation. Such large amount

cannot be procured by a proprietorship or partnership firm. All multi- national

companies have accumulated huge capital. The budget of some of the multi-

national corporation exceeds several folds than Indias annual budget. The budget

of Microsoft, a multi- national corporation of Bill Gate of America is several times

greater than our countrys budget.

Lifting the Corporate Veil

Since a company is a legal person distinct from its members there is assumed to be

a curtain, a veil or a shield between the company and its members. The principle of

separate legal entity was established in the case of Salomon vs Salomon and


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Company Ltd. Thus once a company is formed there is a veil between the company

and its members. Based on this principle it is not easy to go behind the curtain and

see who are the real persons composing the company.

There are however cases when the corporate veil has to be lifted to look at theindividual members who are in fact the real beneficial owners of all corporate

property. Thus lifting corporate veil means identification of a company with its

members and when the corporate veil is lifted the individual members may be held

liable for its acts or entitled to its property.

Some of the instances when the corporate veil may be lifted include where it is for

the benefit of revenue, where it is essential to secure justice and where it is in

public interests. The corporate veil may be lifted by: -a) The courts

b) The statute

a) Lifting by the courts

1. Determination of the character of the company.

A company may be declared an enemy character when its directors are residents

of an enemy country. Therefore courts may lift the veil to ascertain the nationality

of persons controlling the company.

In Daimler Company Ltd vs. Continental Tyres and Rubber Company Ltd (1916

AC 307) Daimler company was sued by continental tyre company for recovery of

a debt of Tyres supplied. Continental tyres was incorporated in England for

purpose of selling in England tyres made in Germany. The shareholders of

continental tyres were Germany except one and all directors were from Germany.

During the First World War continental tyres commenced an action to recover a

debt from Daimler. Daimler contested arguing that a continental tyre was an

enemy company. It was held that a continental tyre was an alien company and the

payment of debt would amount to trading with an enemy.


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2. Prevention of fraud or improper conduct.

The veil may also be lifted if a company is formed for a fraudulent purpose or to

avoid legal obligations.

Professor Leower says that the veil of a corporate body will be lifted where the

corporate personality is being blatantly used as a clock for fraud or improper

conduct.

3. Where a company is a Sham.

This refers to a situation where a company is formed and used for some illegal or

improper purpose.

4. Where the company is acting as the agent of the shareholders.

When a company is acting as an agent of its shareholders or of another company, it

will be liable for its acts. There may be express agreement to the effect or an

agreement (of agency) may be implied from the circumstances of each particular

case.

Case law relating to this is the F.G Film Ltd in Re (1953) I ALL E.R 615.

An American company financed the production of a film in India in the name of a

British company. The president of the British company, the board of trade of Great

Britain refused to register the film as a British film. The decision was held as a

valid in view of the fact that British company acted merely as the agent or nominee

of the American company.

5. Protection of Revenue.

This is especially the case when a company is formed to assist shareholders evade

taxes. In such case the shareholders may be held liable to pay income tax.

6. Protecting public policy.

Courts lift the corporate veil to protect the public policy and prevent transactions

contrary to public policy. Where there is a conflict between the separate entity


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principled and public policy the courts ignore form and take into account the

substance.

Lifting by statute.

1. When members fall below statutory minimum, as per section 33 of the Act, a

business is not allowed to carry on business for more than six months if

membership falls below seven in case of a public company and below two in case

of a private company. Anyone aware of the fall of membership and continues to

carry on business will be held liable for all debts of the company contracted after

six months.

2. Misdescription of the company.Sec 109 of the Act states that the name of the company must be fully and properly

mentioned on all documents issued by it. Where an officer of a company signs, on

behalf of the company, a bill of exchange, promissory note, Cheque, order for

money or goods in which the companys name is not mentioned the officer is

personally liable to the holder of the bill of exchange.

3. Holding and subsidiary companies.

Although both holding and subsidiary companies are separate entities there are

instances where a subsidiary may loose its separate identity to a certain extent.

a) Where at the end of the financial year a company has subsidiaries, it may lay

before the members in a general meeting not only its own account but also a

set of group accounts showing the profits and loss earned by the company

and its subsidiaries and their collective state of affairs at the sixth schedules.

b) Section 167 empowers the inspector appointed by the court to regard the

subsidiary and the holding company as one entity for the purpose of

investigation.


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4. Investigation of company membership.

Section 173 (s) empowers the Registrar to appoint one or more competent

inspectors to investigate and report on the membership of any company for thepurpose of determing the true persons who are or have been financially interested

in the success or failure of the company or able to control or to influence the policy

of the company, to investigate whether the corporate veil is lifted, or to ascertain

the real persons controlling it.

5. Take over Bids.

Section 210 provides that where scheme or contract inviting the transfer of shares

or class of shares in the company to another company has been approved by theholders of not less than nine tenths in the value of shares whose transfer is involved

the transferee company may at any time within two months after the making of the

offer by the transferor company, give notice in the prescribed manner to any

dissenting shareholder that it deserves to acquire his shares.

6. Fraudulent conduct of Business.

Section 323 of companys Act in the course of winding up of a company it appears

that any business of the company has been carried on with intention to defraud

creditors, the court may declare that any person who were knowingly, parties to the

carrying on such business are to be personally liable for the debts and other

liabilities of the company.

7. Prosecution of delinquent officers and members of company.

Section 325 of Act, if in the course of winding up of a company it appears that any

past or present officer or any member of the company has been guilty of any

offence in relation to the company then the court may declare such a person liable

for his offence.

Advantages of Incorporation.

1. Limited liability.


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Limited companies are off springs of preview necessity, that is, men should be

entitled to engage in a commercial pursuit without involving the whole of their

fortune in that particular pursuit in which they are engaged.

2. Transferability of shares.Shares in a company can be transferred (subject to restrictions in the articles of

associations) from one person to another without the consent of other members.

3. Separate Legal entity.

A company is not affected by the death, insanity or bankruptcy of a member.

4. Control

Control can be gained by acquisition of majority shares, which carry voting power.

5. Permanent existence.

A companys life is permanent.

6. Separation of ownership and management.

Shareholders are owners of the company. Shareholders elect their representatives

to the board of directors, which manages the affairs of the company.

7. Expert management.

Companies run large-scale business and have adequate financial resources and as

such can afford the services of specialists. Thus companies are run professionally.

8. Public confidence.

Formation and running of a company is regulated by the provisions of the

companies Act and various other acts. Provisions regarding the appointment and

remuneration of directors, compulsory audit and publication of accounts protection

of minority shareholders have created greater public confidence.

9. Social Advantages

A company helps to gather savings from the public and invests them in sound

industrial and commercial ventures. Companies provide employment opportunity


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to many and since they operate in large scale they ensure economic use of national

resources and provisions of goods and services to the public at lower prices.

Disadvantages of incorporation

1. Formation of companies is a complicated procedure and is costly. Documents

required like the memorandum of Association, the articles, the prospectus or

statement in lieu of prospectus are usually drawn by legal experts who charge high

fees for their preparation.

2. There is no secrecy regarding the affairs of a company. Wide publicity of thecompany affairs may lead to economic sabotage by its rivals.

3. It is very expensive to administer a company. This relates to requirements

pertaining the holding of general and statutory meetings and returns of annual

accounts. The accounts and audit reports require expenses.

4. Doctrine of ultra vires. A company can only trade on the business specified in

its object clause of the memorandum of association.

5. Taxation. A company must pay taxes as a legal person while this is not a

requirement for partnerships.

6. There are many formalities before a business starts trading.

7. The winding up of a company is widely published thus exposing the

property of the company to an insecure position.