Meaning and Characteristics of Companies

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  • Last Updated on 29 November, 2021

Topics covered in this article are as follows:

  1. The Company and its Characteristics

    1. 1.1 Definition of a Company
    2. 1.2 Registration and the Effect of Registration
    3. 1.3 Characteristics of a Company
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1. The Company and its Characteristics

The Companies Act is the basic Statute providing for incorporation, management, administration, declaration, and payment of dividend etc. applicable to Company form of organisation.

1.1 Definition of a Company

According to Sec. 2(20) of the Companies Act, 2013, “Company” means a company incorporated under this Act or under any previous company law.

This definition does not throw any light on the characteristics of company form of organization. Therefore, reference is made to some popular definitions by renowned Judges and authors.

    • Lord Justice LindleyA company is an association of many persons who contribute money or monies worth to a common stock and employed 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 to it or to whom it pertains 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.Note: ‘An association of many persons’ part of the definition does not hold valid now with new concept of ‘One Person Company’ under the Companies Act, 2013. Rest of the definition holds valid though there may be companies limited by guarantee not having share capital.
    • Prof. Haney“A company is an artificial person created by law, having separate entity, with a perpetual succession and common seal.”Note: ‘Common Seal’ part of the above definition does not hold valid now as the common seal has been made optional by the Companies (Amendment) Act, 2015. Rest of the definition is perfectly valid till date.
    • According to Justice Marshall (Supreme Court of US in Trustees of Dartmouth College v. Woodward)“A corporation is 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.”The word ‘Company’ is derived from Latin words, com (i.e., with or together) and panis (i.e., bread). It referred to merchants or an association of persons discussing matters and having food together. Such association of persons on registration under the Companies Act becomes a separate legal entity. As pointed out by Prof. Haney company acquires separate entity and perpetual succession being creation of law. Justice Marshall emphasizes on the charter of its creation being supreme. While Justice Lindley emphasizes on the concept of shares and their transferability.

1.2 Registration and the Effect of Registration

Company comes into existence through registration under the Companies Act and becomes a separate legal entity. While elaborating the effect of registration, Sec. 9 explains that on registration the company, shall be body corporate by the name contained in the memorandum, capable of exercising all the functions of the 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 or to sue and to be sued, by the said name.

1.3 Characteristics of a Company

The basic characteristic of the company is Incorporation or Registration. As other Company features such as separate legal entity and perpetual succession emanate from it being registered under the Companies Act.

    1. Incorporation or Registration: The company comes into existence only after registration under the Companies Act, by following a legal process for registration. Registration is mandatory for company to come into existence. The process of registration has been simplified. With introduction of web-service SPICe plus (Simplified Proforma for Incorporating Companies Electronically +), registering a company is a matter of days.
    2. Separate Legal Entity: On registration the company acquires an entity different from the whole world. Reiterating Sec. 9 here, one may conclude that separate legal entity gets reflected in following factors:
      1. Company can sue and be sued in its own name;
      2. Company can hold and dispose of property, both movable and immovable, tangible, and intangible;
      3. Company can enter into contracts in its own name.The concept of separate legal entity got established and strengthened by certain landmark judgments also popularly known as Salomon’s case and Lee’s case.

      Case Laws:

      • Salomon vs. Salomon & Company Ltd. (1897)Salomon formed a company along with his family members. Company had to be wound up later. When secured creditors were being paid-up in priority to unsecured ones, it was contended that Salomon though a secured creditor should not be paid in priority to unsecured creditors as Salomon and Salomon & Company Ltd. are one and the same. Judge opined otherwise and held once the company is formed it attains an ‘entity of its own’ different from everybody else, therefore, irrespective of the fact that Salomon was a major shareholder, the company would be considered a separate entity and secured creditors be paid before other creditors.
      • Lee vs. Lee’s Air Farming Ltd. (1961)Lee was a pilot in a company formed by him along with his wife. He died during plane crash. His wife demanded compensation under the Workers’ Compensation Act. She alleged that the death was an accident arising out of and in the course of his employment by the company. She also claimed funeral expenses. The dispute arose that how can Lee be an employee and employer at the same time. It was held that though Lee owned all the shares of a company except one, yet company was different from him. Therefore, company was an employer and Lee was an employee and his wife was entitled to compensation for his death.In Abdul Haque v. Das Mai, where a suit was filed by an employee, whose salary was due for many months against the Managing Director of the company, it was held that “the remedy lies against the company and not against the directors or members of the company”. Rule of separate legal entity of the company again got reinforced here.Another case of Bacha F Guzdar v. CIT, Bombay, held that 60% of company’s income being agricultural income so exempted from tax shall not mean that dividend income from shares held in company in the hands of shareholder also be treated partly as agricultural income. Shareholder of course was not entitled to such exemption. As company’s entity is different from shareholder.It will not be out to place to mention here that on registration company attains many related characteristics (or Implications of Separate Entity Doctrine):
        1. Company’s money and property belongs to the company and not members. Members don’t have any insurable interest in the property of the company. Meaning, thereby, members cannot get the property of the company insured in their own name. The above fact got substantiated by Macura’s case. In Macura v. Northern Assurance Co. Ltd. (1925), M got the timber of the company insured in his own name. Timber got destroyed in fire. The insurance company rejected the claim. It was held that timber was the property of company and law required it to be insured in the name of the company only. As members do not have any insurable interest in the property of the company.
        2. Company’s debts and liabilities are company’s own. Members cannot be held liable for company’s debts and liability. This point is further elaborated under the heading of limited liability of members.
        3. Company comes into existence through legal process of incorporation and continues to exist so (further elaboration in point of perpetual succession).
    3. Perpetual Succession: Perpetual succession means continuous life. Company’s life is not in any manner affected by the death or insolvency of its members. Even a hydrogen bomb cannot bring end to the life of company (Re Meat Suppliers Ltd.). Even if all the members leave or die, company continues to exist unless brought to end through a legal process of Winding-up.
    4. Limited Liability: On the basis of liability companies can be classified into:
      1. “Company limited by shares” [Sec. 2 (2 2)]: Company limited by shares means a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them.
      2. “Company limited by guarantee” [Sec. 2(21)]: Company limited by guarantee means a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.
      3. “Unlimited company” [Sec. 2(92)]: Unlimited company means a company not having any limit on the liability of its members.It needs to be noted that the liability of company is always unlimited, and it is the liability of members which may be limited or unlimited depending on the type of company. As stated above the liability of members is limited to unpaid amount on shares in Company limited by shares and limited to amount guaranteed by a member to be contributed to assets of the company at the time of winding-up in company limited by guarantee.In case of ‘unlimited Company’ the liability of company as well as members is unlimited. However, this form of company is not popular one. Therefore, it is generally said that members have limited liability.
    5. Shares and their Transferability: Justice Lindley in his definition of company explains the concept of shares and their transferability. As per 44 the shares of any member in a company shall be movable property transferable in the manner provided by the articles of the company.The shares are freely transferable (without any restriction) in case of public companies while the right to transfer the shares is restricted (not prohibited) in case of private companies. Restrictions are usually in terms of transfer to whom or for what consideration and need to be prescribed by Articles of Association.
    6. Company is not a Citizen: Company is not a citizen but has a nationality. Its nationality depends on the place of its registration.
    7. Authentication by Company: Company is an artificial person. It acts through human agency. How does such human agency bring authentication to such documents as having been signed by the company? It can be done by:
      1. Use of Common Seal of the company if there is any: Common seal (i.e., rubber stamp on which name of the company is affixed) is the official signature of the company. Common seal has been made optional by the Companies (Amendment) Act, 2015. In case the company has a common seal, the authorization shall be affixing it by authorized person on the documents and also signed by authorized signatory.
      2. When Company opts not to have a common seal: The documents on behalf of the company shall be authenticated by two directors or by a director and a Company Secretary wherever the company has appointed a Company Secretary [inserted by the Companies (Amendment) Act, 2015].As per proviso to Sec. 22 (2), “In case a company does not have a common seal, the authorisation shall be made by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary”.Table 1.1 Difference Between Partnership and Company
        Basis Partnership Company
        1. Number of members Minimum – 2 Maximum – 50 One Person Company – 1

        Private Company:

        Minimum – 2

        Maximum – 200

        Public Company:

        Minimum – 7

        Maximum – No limit

        2. Governing Act The Partnership Act, 1932 The Companies Act, 2013
        3. Registration Registration is optional. Company comes into existence through registration.
        4. Separate legal entity Partnership Firm does not have separate legal entity. Company is separate legal entity.
        5. Perpetual

        succession

        Partnership Firm does not have perpetual succession. Company enjoys perpetual succession i.e., continuous life. Its life is not affected by death or insolvency of members.
        6. Liability Liability of Partner is unlimited. It is joint as well as individual. Liability of members is limited to unpaid amount on share in case of company limited by shares and to amount of guarantee given in case of company limited by guarantee.
        7. Legal compliance Lesser legal formalities as compared to companies. Plethora of legal formalities in case of company.
        8. Access to financial

        resources

        Fund raising capacity is less. Fund raising capacity is more as compared to partnership firm.
        9. Separation of ownership and management No separation is there. Partners own the firm, and they also manage the firm. Company is owned by members but managed by Board of Directors. So, there is separation of ownership and management.

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