Company

Sk. Samiul Haque ( 21 Law 016 – BSMRSTU )

The word ‘company’ is derived from the Latin word (Com=with or together; panis
=bread), and it originally referred to an association of persons who took their meals
together.
Section 2(1)(c) of the Companies Act, 1994 provides- "company" means a company
formed and registered under this Act or an existing company;
According to Chief Justice Marshal- "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 in either
expressly or as incidental to its very existence."
Haney observes that "a company is an incorporated association, which is an artificial
person created by law, having separate entity, with a perpetual succession and a
common seal."
Lord Justice Lindley defines company as follows- "A company is a contribution of
money or moneys worth to a common stock and employ it in some trade or business
and that share the profit and loss arising thereof."
Y. K. Bushan defines it- "A company may be defined as an artificial person (being an
association of natural persons) recognized by law, with a distinctive name, a common
seal, a common capital comprising transferable shares of fixed value carrying limited
liability and having a perpetual (continuous, uninterrupted) successions."
T.E. Cain points out some important characteristics of a company & thus defines
company as follows-
(i) A company is regarded by the law as a person;
(ii) The company's money and property belong to the company and not to the share
holders;
(iii) A company must have some members.
Salomon v. A. Salomon & Co. Ltd. [1897] AC 22 (House of Lords) case established
the doctrine of corporate personality, meaning a company has its own legal identity
separate from the individuals who control or own it.
  Nature of Company:
The most striking characteristics of a company are discussed below:
1) Artificial Legal Person:
Company is in the definition of person under section 11 of the Penal Code, 1860 and
section 3(39) of the General Clauses Act, 1897 A company incorporated under the
Act is vested with a artificial 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.
 Salomon v. Salomon & Co. Ltd. (1897) AC 22:
This is the foundational case for the doctrine of corporate personality. In this case,
Mr. Aron Salomon incorporated a business and became a shareholder. When the
company faced financial issues, creditors sought to make Mr. Salomon personally
liable for the company's debts. The House of Lords held that the company was a
separate legal person, and Salomon was not personally liable beyond his investment
in the company. This case established the principle that a company has a distinct
personality separate from its shareholders.
 Lee v. Lee’s Air Farming Ltd. (1961) AC 12:
In this case, Mr. Lee was the majority shareholder and managing director of Lee’s Air
Farming Ltd. He also worked as a pilot for the company and was killed in an accident.
His widow claimed compensation as his "employer." The Privy Council ruled that the
company was a separate legal entity from Mr. Lee, even though he was the sole
controller, and therefore, he could be considered an employee of the company. This
case reaffirmed the principle of a company's distinct personality.
 Foss v Harbottle (1843) 67 ER 189 (UK)
Shareholders of a company brought a case against the company's directors,
alleging that they had mismanaged the company’s assets. The court held that only
the company itself (and not the individual shareholders) could sue for wrongs
 done to the company. If the company is wronged, the proper claimant is the
company, not its members.
 Union Bank of India v. Khader International Construction and Other [(2001)
42 CLA 296 SC]
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 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.
 Macura v. Northern Assurance Co. Ltd. (1925): This case demonstrated that
company assets belong to the company itself, not to its shareholders.

 In Gilford Motor Co. v. Horne (1933), the court held that a company is a
separate legal entity and can only be treated as such unless the corporate veil
is lifted due to fraud or improper conduct.

 In Gilford Kandoli Tea Company Ltd. v. R. C. Basak (1886), the court held that
the company was a separate legal entity from its shareholders, allowing it to
sue and be sued in its own name.
Delaware General Corporation Law (DGCL): The DGCL provides that a
corporation, upon incorporation, has all the powers of a natural person to carry
out its business.
However, being a legal person, it cannot act personally. Rather it has to act through
the board of directors. It has been observed rightly in the case of Bates vs Standard
Land Co.' that- "The board of directors is the brains and the only brains of the
company, which is the body and the company can and does act only through them."
2) Company is not a citizen: The compan, though a legal person, is not a citizen
under the Citizenship Act, 1955 or the Constitution of Bangladesh. 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. Section 2(f) of Citizenship Act,
1955 expressly excludes a company or association or body of individuals from
citizenship.
3) Limited Liability: Except an unlimited company, the liability of the members of all
other remaining companies is limited. The liability of the members, however, may
be either limited by shares or by guarantee as provided by memorandum of the
company.
Buckley, J. in Re. London and Globe Finance Corporation, (1903) 1 Ch.D. 728 at 731,
has observed: ‘The statutes relating to limited liability have probably done more than
any legislation of the last fifty years to further the commercial prosperity of the
country.
4) Separate Property: A company is considered to be a person in the eye of law. So,
it obviously has the right to hold and dispose of property as per its necessity. A
member does not have insurable interest in the property of the company. So,
when a company is incorporated, it belongs to separate property. Their Lordships
of the Madras High Court in R.F. Perumal v. H. John Deavin, A.I.R. 1960 Mad. 43
held that “no member can claim himself to be the owner of the company’s
property during its existence or in its winding-up”.
5) Perpetual Succession: A company is said to have perpetual succession. And its
perpetually is not affected in any way by the death, insolvency or exit of any
shareholder. The members of a company may be died but the company does not.
Even a hydrogen bomb cannot destroy it."
6) Transferable Shares: Another important advantage of a public company is that its
shares are easily transferable. The right to transfer of share is statutory right and
so, cannot be taken away. However, the transfer of shares of a Private Company is
closely restricted."
7) Common Seal: As said earlier that a company is an artificial person, therefore it
only acts through the directors. But whenever it performs any act, a common
distinguished mark with the seal is necessary. Without bearing the common seal
witnessed by at least two directors of the company, no document issued by the
directors shall be binding upon it.
8) Capacity to Sue & be Sued: The company being a body corporate, can sue & be
sued." Any form of legal action may arise for and against an incorporated
company. The company is entitled to sue for damages in libel or slander as the
case may be [Floating Services Ltd. v. MV San Fransceco Dipaloa (2004) 52 SCL
762 (Guj).
9) Number of Shareholders: The number of membership is also determined by the
provision of law. Under the section 05 of the Companies Act,1994, the minimum
number of shareholders is two in case of private company (though recently, an
amendment is going to take place- share holder can be one only) and seven in
case of public company. On the same way, the maximum number of shareholder
is fifty and in case of private company and unlimited number for public company.

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 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 AccessoriesLtd., (1924) 2 Ch. 33].

11) Separate Legal Entity: A company has a separate legal entity as clearly distinct
from and dependent of its members. As a company has separate legal entity and s
own property, so the creditors can realize their money only from the company.
12) 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.
13) 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.
14) 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.
15) Registration: A company gets the legal status only after its registration.
However, in case of partnership firm, the registration is not necessary.
16) Voluntary Association: A company is an association of many persons on a
voluntary basis. So, a company is formed only with the consent of the members.
17) Capital: Capital is fundamental for carrying on business. So, a company must
have capital, otherwise it cannot function at all.
18) Statutory Obligations: For a company, some statutory obligations are to be
maintained compulsorily. It has to hold statutory & other meetings as provided by
the Companies Act. There are also other obligations, e.g., filing balance sheets,
maintaining proper account books and registers etc.
19) Residence: A company should have a residence (for taxation and other
purpose). A company does not possess any fundamental rights.
20) Autonomous body

 Separate Legal entity of company:

The concept of a "separate legal entity" refers to the legal principle that a company is
recognized as an independent entity, distinct from its shareholders, directors, and
employees. This doctrine allows a company to have its own legal identity, which
means it can own property, enter into contracts, sue and be sued, and be responsible
for its own debts and liabilities, separate from the individuals who own or manage it.
Following are the points for determining the legal entity of a company:
1. Company Comes into Existence After Registration : Section 23 of the Companies
Act, 1994 states that once a company is registered and incorporated, it becomes a
body corporate with perpetual succession and a common seal.
2. Ability to Enter into Contracts and Sue/Be Sued:The company being a body
corporate, can sue & be sued." Any form of legal action may arise for and against
an incorporated company. The company is entitled to sue for damages in libel or
slander as thecase may be [Floating Services Ltd. v. MV San Fransceco Dipaloa
(2004) 52 SCL 762 (Guj).
3. Common Seal: Every company must have a common seal, which is the company’s
official signature and is used to sign documents. The common seal symbolizes the
company’s identity and perpetuity.
4. Registered Office: A company must have a registered office to which all
communications and notices may be addressed under Section 77 of the
Companies Act, 1994. This ensures that the company has a permanent address
for legal and administrative purposes.
5. Perpetual Succession: A company enjoys perpetual succession, meaning its
existence is not affected by the death, insolvency, or incapacity of its shareholders
or directors. The company continues until it is legally wound up.
6. Separation of Ownership and Management
Shareholders elect directors to manage the company on their behalf. The
company’s management is vested in the hands of directors, who act as agents of
the company, rather than the shareholders directly participating in day-to-day
operations. Sections 90-98 of the Companies Act, 1994 deal with the
appointment and powers of directors, establishing that directors, not
shareholders, hold control of the company's operations.
7. Transferability of Shares and Statutory Duties: The shares of a company are
generally transferable unless restricted by the company’s articles of association.
Furthermore, companies have statutory duties such as filing annual returns and
maintaining statutory registers.
Section 38 of the Companies Act, 1994 allows the transferability of shares, and
section 181 lays out the statutory duties of companies, including filing of annual
returns and maintaining records.
8. No Fundamental Rights, But Can Sue for Infringement
While a company does not enjoy the same fundamental rights as a natural person
(like a citizen), it can sue to protect its legal rights. A company may take legal
action if its contractual or proprietary rights are violated.
9. Capacity to Own Property: A company, as a separate legal entity, can own,
acquire, and sell property in its own name.
10.Taxation: A company is taxed separately from its shareholders and must pay taxes
on its income, profits, and capital gains in its own name under Income Tax
Ordinance, 1984.

[Follow the cases mentioned in the nature/characteristics of company ( artificial

person)]
  Lifting Corporate veil:
Lifting of the corporate veil means disregarding the corporate personality and looking
behind the real person who are in the control of the company. The corporate veil is
lifted when in defence proceedings, such as for the evasion of tax, an entity relies on
its corporate personality as a shield to cover its wrong doings. [BSN (UK) Ltd. v.
Janardan Mohandas RajanPillai [1996] 86 Com Cases 371 (Bom).
In United States V. Milwaukee Refrigerator Co., the position was summed up as
follows:
“A corporation will be looked upon as a legal entity as a general rule……but when the
notion of legal entity is used to defeat public convenience, justify wrong, protect
fraud or defend crime, the law will regard the corporation as an association of
persons.”
The cases where the corporate veil is lifted may be divided into two-
(i) Under express statutory provisions &
(ii) Under judicial interpretation.

Under express statutory provisions:

a. Reduction of members below the statutory minimum: [sec. 222]
When the number of members is less than the required number as provided by law
and carried on business for a period of more than 6 months by continuing that
minimum members, then they shall be liable for all debts of the company contracted
after the period of 6 months.
b. Fraudulent trading: [sec. 259]
In the event of winding up, if it appears pears that the business had been carried on
fraudulently to defraud the official liquidator or any creditor, then the court may find
the real person controlling the business and may hold him liable.
c. Wrong description of the companies: [sec. 225]
Section 225 of the Companies Act provides for the authentication of documents. The
mandate of law is that in all the documents of the transaction, the name of the
company shall be mentioned specifically. If any director or any person enters into
contract with third party without referring the name of company shall be personally
liable. Thus, on the application of aggrieved person, the court may lift the corporate
veil.
d. For establishing relationship of holding and subsidiary company:
Between two companies, when one company holds the majority of shares of another
company and also holds the controlling power of that company, the company holding
the majority of shares & dominating position be called holding company and the later
be called the subsidiary company. However, in some cases, if the court finds any
smell of fraud, then it may, on lifting corporate veil, refuse to grant a subsidiary
company as an independent status and treat the subsidiary company as only a
branch of holding company.
e. In case of an investigation of the affairs of the company: [sec. 199]
Under section 199 of the Companies Act, 1994 an inspector appointed for the
purpose of investigating the affairs of a company shall have the power to investigate
the affairs of some other companies, if necessary. So, the corporate veil may be
lifted.
f. In case of an investigation of the ownership of a company: [sections-195, 197
and 199]
If the government satisfies, it may appoint one or more inspectors for the purpose of
(i) determining who are the real owners; (ii) who are financially interested in
company; (iii) Who holds the controlling power on the management of the company
etc. The inspector, for investigating the above matters, may look behind the
corporate veil.

(ii) Under judicial interpretation:

(a) For determining the character of the company:
When it is suspected whether a company is controlled and managed by the enemy
subject or not, the court may lift the corporate veil. But a company registered in
Bangladesh and carrying on business as an enemy country may not necessarily be an
enemy company.
(b) In case of fraud or misconduct:
The corporate veil shall be lifted by the court where it is found that the incorporation
of a company was for defrauding the creditors or for any other fraudulent purpose."
Besides, where it is found that the company has been formed for any unlawful
purpose or there is any grave misconduct in controlling and managing the company,
then the court may lift the corporate veil.
(c) For the benefit of revenue:
Tax is a public Demand. So, it is the duty of a company to pay taxes. But if it is found
that any company has been formed for the purpose of evading taxes, the court may
lift the corporate veil. In that case, the individual shareholder may be held liable to
pay taxes. However, the court shall not lift the corporate veil if it only causes the loss
of revenue of the government.

In Jones v. Lipman (1962) I.W.L.R. 832, the court held that the corporate veil could
be pierced when a company was used as a facade to conceal the true intentions of its
owners.
In Daimler Co. Ltd. v. Continental Tyre & Rubber Co., (1916) 2 A.C. 307, it was held
that a company will be regarded as having enemy character, if the persons having de
facto control of its affairs are resident in an enemy country or, wherever they may
be, are acting under instructions from or on behalf of the enemy.
In Connors Bros. v. Connors (1940) 4 All E.R. 179, the court emphasized the principle
of the corporate veil, indicating that it should not be lifted unless there are
exceptional circumstances, such as fraud or improper conduct.
In Kapila Hingorani v. State of Bihar (2003), The Court emphasized that when a
company is used as a facade to shield individuals from liability, the law will disregard
the separate legal personality of the corporation to hold the responsible individuals
accountable.
In Gilford Motor Co. Ltd. v. Horne (1933), the court held that the defendant, who
had set up a company to evade a non-compete clause in his employment contract,
could not hide behind the corporate veil to escape liability for his actions.