The corporate body (i.e. a company) is the creation of law, and it is not a human being, it is an artificial juridical person (i.e. created by law) clothed with many rights, obligations, powers and duties prescribed under the Company Law. In other words, the nature of the company is that the company is an Artificial person, but, it holds some rights and obligations in law, like natural persons do.
An incorporated company owes its existence either to a Special Act of the Parliament, or to the Company Law. To understand the nature of company under Companies Act, 2013, let’s first understand what a company is as per law.
Definition of Company in Law
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 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 them may be restricted.”
US’ Chief Justice Marshall defines company as “ an artificial being, invisible, intangible, existing only in contemplation of the law. Being a mere creation of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence.”
Justice James states that “A company is an association of person’s united for a common object.”
In terms of the Companies Act, 2013 a “company” is defined as a company incorporated under this Act or under any previous of company law. This definition is provided under Section 2(20) of the Companies Act, 2013.
Thus, we can say that a Company means a voluntary organization of persons who are contributing their money in the common stock of the company and who agree to invest the same for a common purpose and to share profits and losses arising from them. Such persons are called shareholders or members and the common stock is called the share capital of the company.
It is pertinent to mention here that all the companies, whether listed or unlisted, are incorporated under the Companies Act, either under the 1956 Act or 2013 Act, as the case may be. The basic purpose of incorporating all the companies is for earning profits. But, there is an exception under Section 8, which deals with the companies with charitable objects. Such companies are known as Association not for profit i.e, the companies having in their objects for the promotion of commerce, art, sports, education, charity, etc.
Nature of Company under Companies Act
The basic nature of the Company under Companies Act is that itis a voluntary organization; it is a separate legal entity which is defined under section 9 of the Companies Act, 2013.
Corporate Personality – Separate Legal Entity
A company incorporated under the Act is vested with a corporate personality. So, it bears its own name, acts under name, may have 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 shareholders are its notional owners and do not own anything in it except ownership of shares issued and they can be its creditors simultaneously.
As per the provisions of the Companies Act 2013, a Company becomes separated from its members after incorporation. It means that a Company is distinct from its members. In common law, a company is a “legal person” or “legal entity” separate from, and capable of surviving beyond the lives of its members.
Case Laws on Company as Separate Legal Entity
Salomon v. Salomon and Co. Ltd., (1897)
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, and sold his business to the Company formed by him for a much higher sum. The company soon ran into difficulties and the debenture holders appointed a receiver and the company went into liquidation while creditors claimed that as the company was a mere ‘alias’ or agent for Salomon, they were entitled to payment of their debts in priority to debentures.
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 statute enacts nothing as to the extent or degree of interest, which may, be held by each of the seven or as to the proportion of interest, or influence possessed by one or majority of the shareholders over others. There is nothing in the Act requiring that the subscribers to the memorandum should be independent or unconnected, or that they or any of them should take a substantial interest in the undertakings, or that they should have a mind or will of their own, or that there should be anything like a balance of power in the constitution of company.”
Re. Kondoli Tea Co. Ltd. (1886)
The decision of the Calcutta High Court in, this case recognised the principle of separate legal entity much earlier than the decision in Salomon v. Salomon. 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 their stance, the 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.
Perpetual Succession
An incorporated Company never dies, except when it is wound up as per law. A company, being a separate person, is unaffected by death or departure of any member and it remains the same entity, despite total changes in membership. Perpetual succession means that the membership of the company and composition of the Board of Directors may keep changing from time to time, but that shall not affect the condition of the company.
The membership of an incorporated company may change either because one shareholder has sold/transferred his share to another, or his shares dissolve on his representatives on his death, or he ceases to be a member under some other provision of Companies Act, 2013. However, in case of merger, the transferor company is dissolved without winding up.
According to Section 9 of the Companies Act, 2013, from the date of incorporation mentioned in the Certificate of Incorporation, such subscribers to the memorandum and all other persons, as may, from time to time, become members of the company, shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company under this Act and having perpetual succession with power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name.
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”.
Gopalpur Tea Company Ltd. v. Peshok Tea Co. Ltd. and others (1982)
In this case, the whole Company was taken over by an Act which purportedly ceased the right to take action against the Company, the Court held that neither the company was extinguished, nor was anyone’s right to take action against it. Therefore, until and unless a Company is liquidated legally, a Company will have perpetual succession and its existence will not be affected by the financial status and lives of its shareholders.
Thus, we can say that Variation in members or their identity does not affect the legal existence and identity of a company. A company is a creation of law and can be dissolved only under law. Even if all the members of the company leave or die, then the company will not come to an end and will continue its existence.
Transferable Shares
Section 44 of the Act 2013, provides that ‘the shares or other interest of any member in a company shall be movable property, transferable in the manner provided by the Articles of Association.’
This encourages investment of funds in the shares, so that the members may encash them at any time. Thus, it provides liquidity to the investors as shares could be sold in the open market and in the stock market. It also provides stability to the company.
Capacity to Sue and to be Sued
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 as the case may be [Floating Services Ltd. v. MV San Francesco Dipaloa (2004) 52 SCL 762 (Guj)]. A company, as a person distinct from its members, may even sue one of its own members. As a juristic legal person, a company can sue in its name and be sued by others. The Managing Directors and the other director are not liable to be sued for dues against a company.
Rajendra Nath Dutta Vs. Shibendra Nath Mukherjee (1982)
In the above mentioned case, it was held that for any wrong done, the company must sue or be sued in its own name. It was observed that as the company is a distinct legal personality, distinct from its shareholders and/or directors, the company if aggrieved by some wrong done to it by any person, it must sue or contrarily be sued in the name of the company itself. In the referred case, a lease deed was executed by the director of the company without the seal of the company. Subsequently, a suit was filed by the directors and not the company to avoid lease on ground that a new term had been fraudulently included in the lease deed by the defendants. It was held that a director of the Board of Directors or a managing director could not file a suit, unless it was by the company, in order to avoid any deed which admittedly was executed by one of the directors and admittedly also the company received the rent. The case as made out in the pliant was not made by the company but some of the directors of the company and the company was not even a plaintiff. If the company was aggrieved, it was the company which was to file the suit and not the directors. Therefore, the suit was not maintainable in the eyes of the court.
Also check Types of Companies under 2013 Act
Company 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. in 1811, the Supreme Court held that the State Trading Corporation through 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 companies. Section 2(f) of Citizenship Act, 1955 expressly excludes a company or association or body of individuals from citizenship.
Limited Liability
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. For example, if A holds shares of the total nominal value of 1,000 and has already paid Rs.500/- (or 50% of the value) as part payment at the time of allotment, he cannot be called upon to pay more than Rs. 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.
The Companies Act 2013 provides that in the event of the company being wound up, the members shall have the liability to contribute to the assets of the company in accordance with the Act. In the case of a company limited by shares, no member is bound to contribute anything more than the nominal value of the shares held by him which remains unpaid. The privilege of limiting the liability is one of the principal advantages of doing business under the corporate form of organization.
Common Seal
The common seal of the company means the face identity of the company and considered as the official signature. Prior to 2015, this was mandatory, but after the 2015 amendment, the common seal of company is discretionary. Thus, Company may or may not have a common seal.
The various facets of “How to write a Legal Notice for Divorce” have been explained by Advocate Aakash Poddar, who is interning at Lawgical Shots and assisting the team to bring the most informational and valuable legal blogs for the legal fraternity.
