1.
What is a company?
Company is a voluntary
association of persons formed for the purpose of doing business having a
distinct name and limited liability. It is a juristic person having a separate
legal entity distinct from the members who constitute it, capable of rights and
duties of its own and endowed with the potential of perpetual succession.
According to Prof.
Haney “A company is an artificial person created by law, having separate
entity, with a perpetual succession and common seal”
The Companies act, 1956
does not define a company in terms of its features. As per the provision of
Companies Act, 1956 definition of Company are as follows;
Section
3 (1) (i) "company" means a company formed and registered under this
Act or an existing company as defined in clause (ii):
(ii)
"existing company" means a company formed and registered under any of
the previous companies laws.
on the basis of above
definition of Companies Act, 1956 'company' includes company formed and
registered under the Act or an existing company i.e. a company formed or
registered under any of the previous company laws.
However, company is not
a citizen so as to claim fundamental rights granted to citizens. [Tata Locomotive
Engineering & Locomotive Co. Ltd. v State of Bihar]
On the basis of above
definitions a Company to which the Companies Act applies comes into existence
only when it is registered under the Act. On registration, a company becomes a
body corporate, i.e. it acquires a legal personality of its own, separate and
distinct from its members. A registered Company is therefore created by law and
law alone can regulate, modify of dissolve it.
A Government
company is also a company under the Act even if it is not registered under the
Act and had been incorporated under a foreign law relating to companies. [River Steam Navigation Co. Ltd.]
But an insurance company, which is a partnership company to which the Indian Partnership
Act applies, does not fall within the expression "company" which
under the Companies Act means only a company formed and registered under the
Act or an existing company. [All India Motor Transport Mutual Insurance Co.
Ltd. v Raphael George] Similarly a foreign company is registered
under sub-clause (b) of section 565, and cannot be construed to be a
company as defined in the Act. If the intention was to elevate the status of a
foreign company to a company as defined in the Act, the definition would have
provided for it. [Eskey Lab Ltd. v
Registrar of
Companies]
An incorporate
company is a body corporate but many bodies corporate are not incorporate
companies. [Madras Central Urban Bank Ltd. v Corporation of Madras]
Characteristics
of a Company
A company registered under the
Companies Act has the following features: —
(i)
separate legal entity;
(ii)
incorporated body;
(iii)
artificial legal person;
(iv)
perpetual succession;
(v)
limited liability;
(vi)
common seal;
(vii)
right to own property;
(viii)
right to sue;
(ix)
right to enter into contracts;
(x)
flexibility of investment;
(xi)
separation of control from the ownership.
1.
Company is a separate legal entity
After the
registration under the Companies Act, 1956 a company shall have a separate
legal entity and distinct from its shareholders and directors of the Company. Limited
company is a separate legal entity distinct from its shareholder. Merely
because there is only one shareholder, the entities, which are otherwise
distinct, one is a natural person and the other is an artificial juristic
person, it cannot be contended that the said entities merge and one can act for
and on behalf of other. [Floating Services Ltd. v MV 'San Fransceo
Dipalola' (2004) 52 SCL 762 (Guj)]
A shareholder
has no right to intervene or object in suit pending against company in respect
of some of its assets independently of company. [Purna Investment Ltd. v
Bank of India Ltd.]
- Incorporated Body
After the
registration under the Companies Act, 1956 a company shall have a separate
legal entity and distinct from its shareholders and directors of the Company.
And after the registration under the
companies act, 1956, its become a Incorporated Body.
- Artificial Legal Person
An expression
'person' includes not merely a natural person but also other juridical persons.
A company being a juristic person would be represented before a Court of law or
any other place by a person competent to represent it. It is enough that the
person competent to represent a company presents the application on behalf of
the company.
- Company
has a perpetual succession
Once formed, a
corporation will continue until such time as it is wound up. The fact that a
member, even one holding 90 per cent of the shares in the company, dies has no
effect on the legal existence of the company. A company once brought into
existence by incorporation cannot be brought to an end except by winding-up,
even if the incorporation was an abuse of, or fraud upon, the Act of the
legislature.
- Limited Liability
The liability of
the company's members can be limited to the extent they have agreed to
contribute towards the capital of the company with reference to the number of
shares and/or the amount of guarantee respectively undertaken by them.
- Common Seal
Every company
has to have a common seal. As per the clarification issued by the department of
company affairs common seal of the company should be in metal.
- Right to Own Property
The company
being a juristic person, distinct from the members constituting it, can
acquire, own, enjoy and alienate property in its own name. As such the property
would be that of the company and no member can make any claim upon it so long
as the company is a going concern.
3. Advantages of
a company over other forms of business organisation
(i) A
company is a legal entity, distinct and independent of those persons who from
time to time are its members.
(ii) The
liability of the company's members can be limited to the extent they have
agreed to contribute towards the capital of the company with reference to the
number of shares and/or the amount of guarantee respectively undertaken by
them.
(iii) As
the company is having an independent personality of its own, its members are
not personally liable for any act or omission on the part of the company,
unless the law expressly provides otherwise.
(iv) The
company being a juristic person, distinct from the members constituting it, can
acquire, own, enjoy and alienate property in its own name. As such the property
would be that of the company and no member can make any claim upon it so long
as the company is a going concern.
(v) The
company being a legal entity can sue and also be sued in its own name.
(vi) The
continuity of the company and its functioning is not affected by the death,
disability or retirement of any of its members. The company continues to exist,
irrespective of change in its membership. It is commonly referred to as
"perpetual succession".
(vii)
Transfer of member's interest in the company can be readily attained without in
any way adversely affecting its property, business, or existence.
(viii)
Transferability of the company's shares provides an element of liquidity to the
investors in respect of their investment in the shares of the company and thus
facilitates increased investment in the company's funds without, in any way,
adversely affecting its economic stability.
(ix) The
members of the company equitably share the profit by way of dividend and the
company's assets in the event of its winding up in proportion of its capital
respectively contributed by them.
(x)
Shares of small denomination afford an opportunity to the small investors to
invest according to their capacity.
(xi)
Increased investment in the company's funds is further ensured by permitting
large number of persons to subscribe to the company's shares. Incorporation of
a company affords better opportunity for strengthening capital resources,
growth and development of the enterprise.
(xii) The
corporate form of business organisation affords opportunity for
professionalisation of its management and entrusting the administration of its
affairs to persons of professional competence and standing.
(xiii)
Arrangements between the company and its members are comparatively similar to
those of other forms of organisation. For example, a company may make a valid
and effective contract with one of its member. It is also possible for a person
to be in control of a company and at the same time, to be in its employment as
an employee, subject to the provisions of the Act.
(xiv)
Incorporation of company provides better borrowing facilities as the company
can raise large amount, on comparatively easier terms, by issue of debentures,
especially those secured by a floating charge or by accepting deposits from the
public. Even banking and financial institutions prefer to render financial
assistance to incorporated companies.
(xv) In
certain cases, an incorporated company comparatively stands in a better
position from the point of view of taxation on its income.
(xvi)
Once the company is brought into existence on its incorporation, it can only be
dissolved with the provisions of the law.
4. Disadvantages
of a company form of organisation
(i)
Unlimited liability: It is pertinent to note that while the members' liability
is limited, the company itself is fully liable for its debts and thus has
unlimited liability.
(ii)
Personal liability of directors and members arises in following cases:
(a) when
the number of members of a private company is reduced below two and in case of
a public company reduced below seven and the company continues to carry on
business for more than 6 months, every person who is a member of the company
and is cognizant of the fact, shall be severally liable for the debts
contracted during that time;
(b) when
in any act or contract, the name of the company has been mis-described, those
who have actually done the act or made the contract, shall be personally liable
for it;
(c) when
in the course of winding up of a company, any business of the company has been carried
out to defraud the creditors, persons who are knowingly parties to such conduct
shall be personally liable for the debts of the company;
(d)
holding and subsidiary companies are generally viewed as independent entities.
However, this independence is reduced to a certain extent when such companies
are required to present accounts and financial position of the group as a whole
to its creditors, shareholders and public. Besides, this independence is lost
when the subsidiary is deemed as a branch of the holding company.
(iii)
Formalities and expenses: Many formalities like obtaining Directors
Identification Number (DIN), Digital Signature Certificate (DSC), expenses
incurred at the time of incorporation, payment of registration fee on increase
in the authorized share capital and day-to-day management and compliances by
the company, such as holding meetings of the Board of directors and general meetings,
preparation of accounts and auditing, passing of resolutions, preparation of
statutory register and records, filing of on-line documents with the Registrar,
etc.
(iv) Divorce
of control from ownership: The control of the affairs of the company vests with
the Board of Directors, which is obviously different from the shareholders.
This disadvantage is mitigated to some extent in case of a private company.
(v)
Detailed winding up procedure: As compared to a partnership firm, winding up of
a company is very complicated, time-consuming and also a costly process.
(vi) Company is not a citizen.
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