MEANING OF A COMPANY

The word company is derived from a Latin word (Com means with or together, Panis
meaning bread) and it originally referred to an association of persons who took their meals
together. In the leisurely past, merchants took advantage of festive gatherings, to discuss
business matters. Nowadays, the company form of organization has assumed great
importance. In popular parlance, a company denotes an association of likeminded persons
formed for the purpose of carrying on some business or undertaking. A company is a
corporate body and a legal person having status and personality distinct and separate from the
members constituting it.

It is called a body corporate because the persons composing it are made into one body by
incorporating it according to the law and clothing it with legal personality. The word
‘corporation’ is derived from the Latin term ‘corpus’ which means ‘body’. Accordingly,
‘corporation’ is a legal person created by a process other than natural birth. It is, for this
reason, sometimes called artificial legal person. As a legal person, a corporate is capable of
enjoying many rights and incurring many liabilities of a natural person.

In the legal sense, a company is an association of both natural and artificial persons and is
incorporated under the existing law of a country.

In terms of the Companies Act, 2013 a “company” means a company incorporated under this
Act or under any previous company law [Section 2(20)].

In common law, a company is a “legal person” or “legal entity” separate from, and capable of
surviving beyond the lives of its members. A company is rather a legal device for the
attainment of social and economic end. It is, therefore, a combined political, social, economic
and legal institution. Thus, the term company has been described in many ways. “It is a
means of cooperation and organisation in the conduct of an enterprise”. It is “an intricate,
centralised, economic and administrative structure run by professional managers who hire
capital from the investor(s)”.

Lord Justice Lindley has defined a company as “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 arising therefrom. The common stock so
contributed is denoted in money and is the capital of the company. The persons who
contributed in it or form 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 them may be restricted.”

NATURE AND CHARACTERISTICS OF A COMPANY

Since a corporate body (i.e. a company) is the creation of law, it is not a human being, it is an
artificial juridical person (i.e. created by law) and it is clothed with many rights, obligations,
powers and duties prescribed by law.

1. Corporate personality

A company incorporated under the Act is vested with a corporate personality so it redundant
bears its own name, acts under name, has a seal of its own and its assets are separate and
distinct from those of its members. It is a different ‘person’ from the members who compose
it. Therefore, it is capable of owning property, incurring debts, borrowing money, having a
bank account, employing people, entering into contracts and suing or being sued in the same
manner as an individual. Its members are its owners however they can be its creditors
simultaneously. A shareholder cannot be held liable for the acts of the company even if he
holds virtually the entire share capital.

The shareholders are not the agents of the company and so they cannot bind it by their acts.
The company does not hold its property as an agent or trustee for its members and they
cannot sue to enforce its rights, nor can they be sued in respect of its liabilities. Thus,
‘incorporation’ is the act of forming a legal corporation as a juristic person. A juristic person
is in law also conferred with rights and obligations and is dealt with in accordance with law.

The case of Salomon v. Salomon and Co. Ltd., (1897)

The above case has clearly established the principle that once a company has been validly
constituted under the Companies Act, it becomes a legal person distinct from its members and
for this purpose it is immaterial whether any member holds a large or small proportion of the
shares, and whether he holds those shares as beneficially or as a mere trustee.

In the case, Salomon had, for some years, carried on a prosperous business as a leather
merchant and boot manufacturer. He formed a limited company consisting of himself, his
wife, his daughter and his four sons as the shareholders, all of whom subscribed to 1 share
each so that the actual cash paid as capital was £7. Salomon sold his business (which was
perfectly solvent at that time), to the Company formed by him for the sum of £38,782. The
company’s nominal capital was £40,000 in £1 shares. In part payment of the purchase money
for the business sold to the company, debentures of the amount of £10,000 secured by a
floating charge on the company’s assets were issued to Salomon, who also applied for and
received an allotment of 20,000 £ 1 fully paid shares. The remaining amount of £8,782 was
paid to Salomon in cash. Salomon was the managing director and two of his sons were other
directors.

The company soon ran into difficulties and the debentureholders appointed a receiver and the
company went into liquidation. The total assets of the company amounted to £6050, its
liabilities were £10,000 secured by debentures, £8,000 owing to unsecured trade creditors,
who claimed the whole of the company’s assets, viz., £6,050, on the ground that, as the
company was a mere ‘alias’ or agent for Salomon, they were entitled to payment of their
debts in priority to debentures. They further pleaded that Salomon, as a principal beneficiary,
was ultimately responsible for the debts incurred by his agent or trustee on his behalf.

Their Lordships of the House of Lords observed:

“…the company is a different person altogether from the subscribers of the memorandum;
and though it may be that after incorporation the business is precisely the same as before, the
same persons are managers, and the same hands receive the profits, the company is not, in
law, their agent or trustee.

The case of Lee v. Lee’s Air Farming Ltd. (1961)

The above case illustrates the application of the principles established in Salomon’s case
(supra). In this case, a company was formed for the purpose of aerial top-dressing. Lee, a
qualified pilot, held all but one of the shares in the company. He voted himself the managing
director and got himself appointed by the articles as chief pilot at a salary. He was killed in an
air crash while working for the company. His widow claimed compensation for the death of
her husband in the course of his employment. The company opposed the claim on the ground
that Lee was not a worker as the same person could not be the employer and the employee.
The Privy Council held that Lee and his company were distinct legal persons which had
entered into contractual relationships under which he became the chief pilot, a servant of the
company. In his capacity of managing director he could, on behalf of the company, give
himself orders in his other capacity of pilot, and the relationship between himself, as pilot and
the company, was that of servant and master. Lee was a separate person from the company he
formed and his widow was held entitled to get the compensation. In effect the magic of
corporate personality enabled him (Lee) to be the master and servant at the same time and
enjoy the advantages of both.

The decision of the Calcutta High Court in Re. Kondoli Tea Co. Ltd., (1886) ILR 13 Cal. 43,
recognised the principle of separate legal entity even much earlier than the decision in
Salomon v. Salomon & Co. Ltd. case. Certain persons transferred a Tea Estate to a company
and claimed exemptions from ad valorem duty on the ground that since they themselves were
also the shareholders in the company, it was nothing but a transfer from them in one name to
themselves under another name. While rejecting this Calcutta High Court observed: “The
company was a separate person, a separate body altogether from the shareholders and the
transfer was as much a conveyance, a transfer of the property, as if the shareholders had been
totally different persons.

2. Company as an artificial person

A Company is an artificial person created by law. It is not a human being but it acts through
human beings. It is considered as a legal person which can enter into contracts, possess
properties in its own name, sue and can be sued by others etc. It is called an artificial person
since it is invisible, intangible, existing only in the contemplation of law. It is capable of
enjoying rights and being subject to duties.

Union Bank of India v. Khader International Construction and Other (2001)

In this case, the question which arose before the Court was whether a company is entitled to
sue as an indigent (poor) person under Order 33, Rule 1 of the Civil Procedure Code, 1908.
The aforesaid Order permits persons to file suits under the Code as pauper/indigent persons if
they are unable to bear the cost of litigation. The appellant in this case had objected to the
contention of the company which had sought permission to sue as an indigent person. The
point of contention was that, the appellant being a public limited company, it was not a
‘person’ within the purview of Order 33, Rule 1 of the Code and the ‘person’ referred to only
a natural person and not to other juristic persons. The Supreme Court held that the word
‘person’ mentioned in Order 33, Rule 1 of the Civil Procedure Code, 1908, included any
company as association or body of individuals, whether incorporated or not. The Court
observed that the word ‘person’ had to be given its meaning in the context in which it was
used and being a benevolent provision, it was to be given an extended meaning. Thus a
company may also file a suit as an indigent person.
 3. Company is not a citizen

The company, though a legal person, is not a citizen under the Citizenship Act, 1955 or the
Constitution of India.

In State Trading Corporation of India Ltd. v. C.T.O., A.I.R. 1963 S.C. 1811, the Supreme
Court held that the State Trading Corporation though a legal person, was not a citizen and can
act only through natural persons. Nevertheless, it is to be noted that certain fundamental
rights enshrined in the Constitution for protection of “person”, e.g., right to equality (Article
14) etc. are also available to company.

Section 2(f) of Citizenship Act, 1955 expressly excludes a company or association or body of
individuals from citizenship.

In R.C. Cooper v. Union of India, AIR 1970 SC 564

In this case, the Supreme Court held that where the legislative measures directly touch the
company of which the petitioner is a shareholder, he can petition on behalf of the company, if
by the impugned action, his rights are also infringed. In that case, the court entertained the
petition under Article 32 of the Constitution at the instance of a director as shareholder of a
company and granted relief. It is, therefore, to be noted that an individual’s right is not lost by
reason of the fact that he is a shareholder of the company.

Bennet Coleman Co. v. Union of India, AIR 1973 SC 106

In this case, the Supreme Court stated that: “It is now clear that the Fundamental Rights of
shareholders as citizens are not lost when they associate to form a company. When their
Fundamental Rights as shareholders are impaired by State action, their rights as shareholders
are protected. The reason is that the shareholders’ rights are equally and necessarily affected
if the rights of the company are affected.”

4. Company has Nationality and Residence

Though it is established through judicial decisions that a company cannot be a citizen, yet it
has nationality, domicile and residence. In Gasque v. Inland Revenue Commissioners, (1940)
2 K.B. 88, Macnaghten. J. held that a limited company is capable of having a domicile and its
domicile is the place of its registration and that domicile clings to it throughout its existence.
He observed in this case: “It was suggested that a body corporate has no domicile. It is quite
true that a body corporate cannot have a domicile in the same sense as an individual. But by
analogy with a natural person the attributes of residence, domicile and nationality can be
given to a body corporate.”

5. Limited Liability

“The privilege of limited liability for business debts is one of the principal advantages of
doing business under the corporate form of organisation.” The company, being a separate
person, is the owner of its assets and bound by its liabilities. The liability of a member as
shareholder, extends to the contribution to the capital of the company up to the nominal value
of the shares held and not paid by him. Members, even as a whole, are neither the owners of
the company’s undertakings, nor liable for its debts. In other words, a shareholder is liable to
pay the balance, if any, due on the shares held by him, when called upon to pay and nothing
more, even if the liabilities of the company far exceed its assets. This means that the liability
of a member is limited. For example, if A holds shares of the total nominal value of `1,000
and has already paid `500/- (or 50% of the value) as part payment at the time of allotment, he
cannot be called upon to pay more than ` 500/-, the amount remaining unpaid on his shares. If
he holds fully-paid shares, he has no further liability to pay even if the company is declared
insolvent. In the case of a company limited by guarantee, the liability of members is limited
to a specified amount of the guarantee mentioned in the memorandum.

Exceptions to the principle of limited liability

• Where a company has been got incorporated by furnishing any false or incorrect
information or representation or by suppressing any material fact or information in any of the
documents or declaration filed or made for incorporating such company or by any fraudulent
action, the Tribunal may, on an application made to it, on being satisfied that the situation so
warrants, direct that liability of the members of such company shall be unlimited.

• Further under section 339(1), where in the course of winding up it appears that any business
of the company has been carried on with an intent to defraud creditors of the company or any
other persons or for any fraudulent purpose, the Tribunal may declare the persons who were
knowingly parties to the carrying on of the business in the manner aforesaid as personally
liable, without limitation of liability, for all or any of the debts/liabilities of the company.

• When the company is incorporated as an Unlimited Company under Section 3(2)(c) of the
Act
• Under Section 35(3), where it is proved that a prospectus has been issued with intent to
defraud the applicants for the securities of a company or any other person or for any
fraudulent purpose, every person who was a director at the time of issue of the prospectus or
has been named as a director in the prospectus or every person who has authorised the issue
of prospectus or every promoter or a person referred to as an expert in the prospectus shall be
personally responsible, without any limitation of liability, for all or any of the losses or
damages that may have been incurred by any person who subscribed to the securities on the
basis of such prospectus.

• As per section 75(1), where a company fails to repay the deposit or part thereof or any
interest thereon referred to in section 74 within the time specified or such further time as may
be allowed by the Tribunal and it is proved that the deposits had been accepted with intent to
defraud the depositors or for any fraudulent purpose, every officer of the company who was
responsible for the acceptance of such deposit shall, without prejudice to other liabilities, also
be personally responsible, without any limitation of liability, for all or any of the losses or
damages that may have been incurred by the depositors.

• Section 224(5) states that where the report made by an inspector states that fraud has taken
place in a company and due to such fraud any director, key managerial personnel, other
officer of the company or any other person or entity, has taken undue advantage or benefit,
whether in the form of any asset, property or cash or in any other manner, the Central
Government may file an application before the Tribunal for appropriate orders with regard to
disgorgement of such asset, property, or cash, and also for holding such director, key
managerial personnel, officer or other person liable personally without any limitation of
liability.

6. Perpetual Succession

An incorporated company never dies, except when it is wound up as per law. A company,
being a separate legal person is unaffected by death or departure of any member and it
remains the same entity, despite total change in the membership. Perpetual succession, means
that the membership of a company may keep changing from time to time, but that shall not
affect its continuity.

The membership of an incorporated company may change either because one shareholder has
sold/transferred his shares to another or his shares devolve on his legal representatives on his
death or he ceases to be a member under some other provisions of the Companies Act. Thus,
perpetual succession denotes the ability of a company to maintain its existence by the
succession of new individuals who step into the shoes of those who cease to be members of
the company. Professor L.C.B. Gower rightly mentions, “Members may come and go, but the
company can go on forever. During the war all the members of one private company, while in
general meeting, were killed by a bomb, but the company survived — not even a hydrogen
bomb could have destroyed it”.

7. Separate Property

A company being a legal person and entirely distinct from its members, is capable of owning,
enjoying and disposing of property in its own name. The company is the real person in which
all its property is vested, and by which it is controlled, managed and disposed off.

Their Lordships of the Madras High Court in R.F. Perumal v. H. John Deavin, A.I.R. 1960
Mad. held that “no member can claim himself to be the owner of the company’s property
during its existence or in its winding-up”. A member does not even have an insurable interest
in the property of the company.

Mrs. Bacha F. Guzdar v. The Commissioner of Income Tax, Bombay, A.I.R. 1955

The Supreme Court in this case held that, though the income of a tea company is entitled to
be exempted from Income-tax up to 60% being partly agricultural, the same income when
received by a shareholder in the form of dividend cannot be regarded as agricultural income
for the assessment of income-tax. It was also observed by the Supreme Court that a
shareholder does not, as is erroneously believed by some people, become the part owner of
the company or its property; he is only given certain rights by law, e.g., to receive notice of or
to attend or vote at the meetings of the shareholders. The court refused to identify the
shareholders with the company and reiterated the distinct personality of the company.

8. Transferability of Shares

The capital of a company is divided into parts, called shares. The shares are said to be
movable property and, subject to certain conditions, freely transferable, so that no
shareholder is permanently or necessarily wedded to a company. When the joint stock
companies were established, the object was that their shares should be capable of being easily
transferred, [In Re. Balia and San Francisco Rly., (1968) L.R. 3 Q.B. 588].
Section 44 of the Companies Act, 2013 enunciates the principle by providing that the shares
held by the members are movable property and can be transferred from one person to another
in the manner provided by the articles. If the articles do not provide anything for the transfer
of shares and the Regulations contained in Table “F” in Schedule I to the Companies Act,
2013, are also expressly excluded, the transfer of shares will be governed by the general law
relating to transfer of movable property.

A member may sell his shares in the open market and realise the money invested by him. This
provides liquidity to a member (as he can freely sell his shares) and ensures stability to the
company (as the member is not withdrawing his money from the company). The Stock
Exchanges provide adequate facilities for the sale and purchase of shares. Further, as of now,
in most of the listed companies, the shares are also transferable through Electronic mode i.e.
through Depository Participants in dematerialised form instead of physical transfers.

9. Capacity to Sue and Be Sued

A company being a body corporate, can sue and be sued in its own name. To sue, means to
institute legal proceedings against (a person) or to bring a suit in a court of law. All legal
proceedings against the company are to be instituted in its name. Similarly, the company may
bring an action against anyone in its own name. A company’s right to sue arises when some
loss is caused to the company, i.e. to the property or the personality of the company. Hence,
the company is entitled to sue for damages in libel or slander. A company, as a person distinct
from its members, may even sue one of its own members.

A company has a right to seek damages where a defamatory material published about it,
affects its business. Where video cassettes were prepared by the workmen of a company
showing, their struggle against the company’s management, it was held to be not actionable
unless shown that the contents of the cassette would be defamatory. The court did not restrain
the exhibition of the cassette. [TVS Employees Federation v. TVS and Sons Ltd., (1996)
87 Com Cases 37]. The company is not liable for contempt committed by its officer. [Lalit
Surajmal Kanodia v. Office Tiger Database Systems India (P) Ltd., (2006) 129 Com
Cases 192 Mad].

10. Contractual Rights

A company, being a legal entity different from its members, can enter into contracts for the
conduct of the business in its own name. A shareholder cannot enforce a contract made by his
company; he is neither a party to the contract, nor be entitled to the benefit derived from of it,
as a company is not a trustee for its shareholders. Likewise, a shareholder cannot be sued on
contracts made by his company. The distinction between a company and its members is not
confined to the rules of privity but permeates the whole law of contract. Thus, if a director
fails to disclose a breach of his duties towards his company, and in consequence a shareholder
is induced to enter into a contract with the director on behalf of the company which he would
not have entered into had there been disclosure, the shareholder cannot rescind the contract.
Similarly, a member of a company cannot sue in respect of torts committed against the
company, nor can he be sued for torts committed by the company. [British Thomson-Houston
Company v. Sterling Accessories Ltd., (1924) 2 Ch. 33]. Therefore, the company as a legal
person can take action to enforce its legal rights or be sued for breach of its legal duties. Its
rights and duties are distinct from those of its constituent members.

11. Limitation of Action

A company cannot go beyond the power stated in its Memorandum of Association. The
Memorandum of Association of the company regulates the powers and fixes the objects of the
company and provides the edifice upon which the entire structure of the company rests. The
actions and objects of the company are limited within the scope of its Memorandum of
Association. In order to enable it to carry out its actions without such restrictions and
limitations in most cases, sufficient powers are granted in the Memorandum of Association.
But once the powers have been laid down, it cannot go beyond such powers unless the
Memorandum of Association, itself altered prior to doing so.

12. Separate Management

As already noted, the members may derive profits without being burdened with the
management of the company. They do not have effective and intimate control over its
working and they elect their representatives as Directors on the Board of Directors of the
company to conduct corporate functions through managerial personnel employed by them. In
other words, the company is administered and managed by its managerial personnel.

13. Voluntary Association for Profit

A company is a voluntary association for profit. It is formed for the accomplishment of some
stated goals and whatsoever profit is gained is divided among its shareholders or saved for
the future expansion of the company. Only a Section 8 company can be formed with no profit
motive.

14. Termination of Existence

A company, being an artificial juridical person, does not die a natural death. It is created by
law, carries on its affairs according to law throughout its life and ultimately is effaced by law.
Generally, the existence of a company is terminated by means of winding up. However, to
avoid winding up, sometimes companies adopt strategies like reorganisation, reconstruction
and amalgamation.