Preface

In view of increasing emphasis on adherence to norms of good corporate governance, Company Law assumes an added importance in the corporate legislative milieu, as it deals with the structure, management, administration and conduct of affairs of Companies.

This textbook is published to aid the students in preparing the paper on Company Law for Executive Programme. It is part of the educational kit and takes the students step by step through each phase of preparation emphasizing key concepts, principles, pointers and procedures. Company Secretaryship being a professional course, the examination standards are set very high, with a focus on knowledge of concepts, their application, procedures and case laws, for which sole reliance on the contents of this study material may not be enough. This study material may, therefore, be regarded as the basic material and must be read along with the Bare Acts, Rules, Regulations, and Case Law.

INTRODUCTION

Company – Definition – Characteristics – Lifting the Corporate Veil – Advantages of Incorporation – Administration through Various Types of Machinery of the Companies Act.

1.1 INTRODUCTION

A company is a legal entity that is separated and distinct from its members and shareholders. A company is enforced by certain rules and regulations of laws for achieving the targeted goal. Without guidelines or laws, it is directionless and becomes a chaotic condition. At first in France, the word "company" was used for the body of soldiers. After 1500 years, the word company became famous in the business. At that time group of businessmen was called a company. A company can buy property, make contracts, employ people or be used. According to the law, anything that is capable of rights and duties is a person and thus has a personality. According to the law, there are two types of the person such as- natural and artificial person. Human beings are known as natural persons and corporations or companies are known as artificial persons. When a company registered itself by the company act, it can able to achieve the status of a person who can buy, lend money, defend suit and file, sell goods and also can hold property. We can explain the meaning of a company like this-when two people want to do business and are not interested to make a partnership because of its liabilities then they can go to the registered office of companies and fill out the company creation form to pay the fees. And then the registrar will register their company with an independent identity. The first Indian Act, regarding companies, was the Joint Stock Companies Act of 1850. This was based upon the English Act of 1844. In this act, the principle of limited liabilities was introduced in India.

Description:

The term company is used to describe an association of several persons, formed for some common purpose and registered according to the law relating to companies. Section 3(1)(i) of the Companies Act, 1994 states that a company means," a company formed and registered under this Act or an existing company."

Lord Justice Lindley defines a company as follows: "By a company is meant an association of many persons who contribute money or money’s worth to a common stock so contributed is denoted in money and its capital of the company. The persons who contribute to it or to whom it belongs are members. The proportion of capital to which each member is entitled is in his share."

The Companies Act 2013 of India defines a company as-

A registered association is an artificial legal person, having an independent legal, entity with perpetual succession, a common seal for its signatures, a common capital comprised of transferable shares and carrying limited liability.

1. According to Justice James, "A company is an association of persons united for a common object."

2. According to Lord Lindley, "By a ‘company’ is meant an association of many persons who contribute money or money’s worth to common stock and employ it for some common purpose. 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 belongs are members. The proportion of capital to which each partner is entitled is his share."

3. According to Kimball and Kimball, "A corporation is by nature an artificial person created or authorized by the legal stature for some specific purpose."

4. According to Prof. Haney, "A company is an artificial person created by law having a separate entity with a perpetual succession and a common seal."

5. According to James Stephenson, "A company is an association of many persons who contribute money or money’s worth to a common stock and employs it in some trade or business, and who share the profit and loss (as the case may be) arising therefrom."

6. According to Section 3 (1) (i) of the Indian Companies Act, 1956. "Company means a company formed and registered under this act or an existing company. ‘Existing Company’ means a company formed and registered under any of the previous Company Laws."

Few points that should be noted in this definition:

Legal Person: A legal person could be a human or a non-human entity which is recognized by law as having legal rights and is subject to obligations.

A person or a group of persons: It is no more required to be an association of persons to form a company. A company can also be started as a single-person company (one-person company).

Definition of Company

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 (Act No. 18 of 2013) a "company" means a company incorporated under this Act or any previous company law [Section 2(20)].

1.1.1 EVOLUTION OF COMPANY LAW IN INDIA

India has received several enactments from England. Company law is one such enactment which was embraced by England. In 1850 the first Company enactment was presented in India for the registration of a joint company which was based on the English Company Act 1844. The idea of limited liability was presented in the English Company Act of 1856 which was later presented in India in the year 1857. The Companies Act was altered a few times between 1850 and 1852 and the Act in 1852 repealed all other Acts and stayed till 1912. The Indian Companies Act of 1913 was based on the British Companies Act of 1908. This Act experienced a few amendments. After independence it was discovered that the Companies Act must be changed to fit into the Indian situation, subsequently Companies Act 1956 was passed. This Act is currently replaced by the Companies Act 2013 which got the assent from the President on 29 August 2013.

1.2 NATURE/ FEATURES/ CHARACTERISTICS

1. An Artificial Person Created by Law:

A company is a creation of law, and is, sometimes called an artificial person. It does not take birth like a natural person but comes into existence through law. But a company enjoys all the rights of a natural person. It has the right to enter into contracts and own property. It can sue others and can be sued. But it is an artificial person, so it cannot take the oath, cannot be presented in court and cannot be divorced or married.

2. Separate Legal Entity:

A company is an artificial person and has a legal entity quite distinct from its members. Being a separate legal entity, it bears its name and acts under a corporate name; it has a seal of its own; its assets are separate and distinct from those of its members.

Its members are its owners but they can be its creditors simultaneously as it has a separate legal entity. 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 agents of the company and so they cannot bind it by their acts.

3. Perpetual Succession:

The life of a company is not related to the life of members. Law creates the company and dissolves it. The death, insolvency or transfer of shares of members does not, in any way, affect the existence of a company.

According to Tennyson-

"For men may come, men may go,

But I go on forever."

In the case of a company, it may be said that members may come and members may go but the company goes on. It is a legal person having come into being by law and only law can bring its end and none else.

4. Common Seal:

On incorporation, a company becomes a legal entity with perpetual succession and a common seal. The common seal of the company is of great importance. It acts as the official signature of the company. As the company has no physical form, it cannot sign its name on a contract. The name of the company must be engraved on the common seal. A document not bearing the common seal of the company is not authentic and has no legal importance.

5. Limited Liability:

Limited liability is another important feature of the company. If anything goes wrong with the company his risk is only to the extent of the number of his shares and nothing more. If some amount is uncalled upon a share, he is liable to pay it and not beyond that.

The creditors of a company cannot get their claims satisfied beyond the assets of the company. The liability of members of a company ‘limited by guarantee is limited to the amount of guarantee.

6. Transferability of Shares:

A shareholder can transfer his shares to any person without the consent of other members. Under Articles of Association, a company can put certain restrictions on the transfer of shares but it cannot altogether stop it. A private company can put more restrictions on the transferability of shares.

7. Limitation of Work:

The field of work of a company is fixed by its charter. The Memorandum of Association. A company cannot do anything beyond the powers defined in it.

Its action is, therefore, limited. To do the work beyond the memorandum of association, there is a need for its alteration.

8. Voluntary Association for Profits:

A company is a voluntary association of persons to earn profits. It is formed for the accomplishment of some public good and whatsoever profit is divided among its shareholders. A company cannot be formed to carry on activity against public policy and has no profit motive.

9. Representative Management:

The shareholders of the company are widely scattered. All the shareholders can’t take part in the management. They leave their task to the representatives of the Board of Directors and the company is managed by the Board of Directors.

10. Termination of Existence:

A company is created by law, carries on its affairs according to law and ultimately is affected by the law. Generally, the existence of a company is terminated using winding up.

1.3 CORPORATE VEIL THEORY

The word company is derived from the Latin word Com meaning with or together and pains meaning bread, and it originally referred to an association of persons who took their meals together. Today business matters have become more complicated and the word "Company" has assumed greater importance. A company is thus a voluntary association of people who come together to for carrying on some business and share profits therein. Members contribute capital and the profits are distributed among various stakeholders. Thus, a company denotes an association of like-minded persons formed to carry on some business or undertaking. It can be for profit or it can be for a charitable purpose. A company is a body and a legal person having status and personality distinct and separate from that of the members constituting it.

A Company is not a ‘person’ in the layman’s language. It is an organization created by a group of individuals who come together for the purpose of business. It is thus the personification of a group or series of individuals making it a legal person. By the provision of law, a corporation is clothed with a distinct personality. A company being an artificial person, does not have a mind of its own and thus cannot act on its own, it can only act through natural persons or the people who are members of it. The business is carried on by a real person, and for the benefit of, some individuals, i.e., some human beings are the real beneficiaries of the corporate advantages.