Company Law I

Features of Company Law I

Incorporated association

A company must be incorporated or registered under the Companies Act.

Minimum number of members required for this purpose is seven in the case of a
‘public company’ and two in the case of a ‘private company’.

Legal entity distinct from its members

Unlike partnership*, the company is distinct from the persons who constitute it.
Hence, it is capable of enjoying rights and of being subjected to duties which are
not the same as those enjoyed or borne by its members.
Case Law: Kondoli Tea Co. Ltd., Re ILR [1886]

Facts of the Case:

In this case certain persons transferred a tea estate to a company and claimed exemption
from ad valorem duty on the ground that they themselves were the shareholders in the
company and, therefore, it was nothing but a transfer from them in one to themselves under
another name.
Decision:
Rejecting this, 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.”
• The separate legal personality of the company is the bedrock of the Company Law
…… – S.A.E. (India) Ltd. v. E.I.D. Parry (India) Ltd. [1998] 18 SCL 481 (Mad.).

• Thus, a company can own property and deal with it the way it pleases. No member can
either individually or jointly claim any ownership rights in the assets of the company
during its existence or on its winding-up – B.F. Guzdar v. CIT, Bombay [1955] 25
Comp. Cas. 1 (SC).

• In Rajendra Nath Dutta v. Shibendra Nath Mukherjee [1982] 52 Comp. Cas. 293 (Cal.)
it was held that for any wrong done, the company must sue or be sued in its own name.
Case Law: Salomon v. Salomon & Co. Ltd. [1895-99] All ER 33 (HL)

Facts of the Case:

In the well known case of Salomon v. Salomon & Co. Ltd. [1895-99] All ER 33 (HL), Salomon was a prosperous
leather merchant. He converted his business into a Limited Company— Salomon & Co. Ltd. The company so
formed consisted of Salomon, his wife and five of his children as members. The company purchased the business
of Salomon for £39,000, the purchase consideration was paid in terms of £10,000 debenture conferring a charge
over the company’s assets, £20,000 in fully paid £1 share each and the balance in cash. The company in less than
one year ran into difficulties and liquidation proceedings commenced. The assets of the company were not even
sufficient to discharge the debentures (held entirely by Salomon himself). And nothing was left for the unsecured
creditors.
Decision:
The House of Lords unanimously held that the company had been validly constituted, since the Act only required
seven members holding at least one share each. It said nothing about their being independent, or that there should
be anything like a balance of power in the constitution of the company. Hence, the business belonged to the
company and not to Salomon. Salomon was its agent. The company was not the agent of Salomon.
Artificial person
The company, though a juristic person, does not possess the body of a natural being. It exists only in contemplation
of law. Being an artificial person, it has to depend upon natural persons, namely, the directors, officers,
shareholders etc., for getting its various works done. However, these individuals only represent the company and
accordingly whatever they do within the scope of the authority conferred upon them and in the name and on behalf
of the company, they bind the company and not themselves.

Limited liability
One of the principal advantages of trading through the medium of a limited company is that the members of the
company are only liable to contribute towards payment of its debts to a limited extent.
If the company is limited by shares, the shareholder’s liability to contribute is measured by the nominal value of
the shares he holds, so that once he or someone who held the shares previously has paid that nominal
value plus any premium agreed on when the shares were issued, he is no longer liable to contribute anything
further. However, companies may be formed with unlimited liability of members or members may guarantee a
particular amount. In such cases, liability of the members shall not be limited to the nominal or face value of their
shares and the premium, if any, unpaid thereon.
In the case of unlimited liability companies, members shall continue to be liable till each paisa has been paid off.
Separate property

Shareholders are not, in the eyes of the law, part owners of the undertaking. In India, this principle of separate
property was best laid down by the Supreme Court in Bacha F. Guzdar v. CIT, Bombay (1955). The Supreme
Court held that a shareholder is not the part owner of the company or its property, he is only given certain rights by
law, for example, to vote or attend meetings, or to receive dividends.

Transferability of shares

One particular reason for the popularity of joint stock companies has been that their shares are capable of being
easily transferred.

The Act in section 44 echoes this feature by declaring: “the shares, debentures or other interest of any member in a
company shall be movable property, transferable in the manner provided by the articles of the company”.
A shareholder can transfer his shares to any person without the consent of other members. Articles of
association, even of a public company can put certain restrictions on the transfer of shares but it cannot
altogether stop it.

The Companies Act, 2013 even upholds shareholders’ agreements providing for ‘Right of first offer’
and ‘Right of first refusal’ as valid even in case of a public company. What it means is that Articles of
a company, whether public or private, may contain a clause that in case a member wishes to sell his
shares, he will have to first offer the same to existing members. Only if they refuse to buy within the
stipulated period that they can be sold to the outsiders.

However, a private company is required to put certain restrictions on the transferability of its shares but the
right to transfer is not taken away absolutely even in case of a private company.
Perpetual succession

Company being an artificial person cannot be incapacitated by illness and it does not have an allotted span of
life. Being distinct from the members, the death, insolvency or retirement of its members leaves the company
unaffected. Members may come and go but the company can go for ever. It continues even if all its human
members are dead.

Even where during the war all the members of a private company, while in general meeting were killed by a
bomb, the company survived. Not even a hydrogen bomb could have destroyed it. [K/9 Meat Suppliers
(Guildford) Ltd., Re [1966] 1 W.L.R. 1112]. “King is dead, long live the King” very aptly applies to the company
form of organisation. [Here, the first ‘King’ is used to refer to the individual monarch and the second ‘King’
refers to the office of king, i.e., the institution of monarchy.] In the above circumstances, the legal heirs of the
deceased shareholders will become the members.
Common seal

A company being an artificial person is not bestowed with a body of a natural being. Therefore, it does not have a
mind or limbs of human being. It has to work through the agency of human beings, namely, the directors and other
officers and employees of the company.

As per section 22, as amended by the Companies (Amendment) Act, 2015, a company may, under its common seal,
if any, through general or special power of attorney empower any person to execute deeds on its behalf in any place
either in or outside India. It further provides that a deed signed by such an attorney on behalf of the company and
under his seal where sealing is required, shall bind the company.

In case a company does not have a common seal, the authorization shall be made by two directors or by a director
and the company secretary, wherever the company has appointed a company secretary.

Again, except where expressly otherwise provided in this Act, a document or proceeding requiring authentication by
a company may be signed by any key managerial personnel or an officer or employee of the company duly
authorized by the Board in this behalf, and need not be under its common seal [Section 21]
 Definition of a company

The Act does not define a company in terms of its features. Section 2(20) of the Companies Act, 2013 defines a
company to mean a company incorporated under this Act or under any previous company law.

Chief Justice Marshall – “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.”

Prof. Haney – “A company is an artificial person created by law, having separate entity, with a perpetual succession
and common seal.”
In G.V. Pratap Reddy Through G.P.A. TSR Research (P.) Ltd. v. K.V.V.S.N. Associates [2016] 70 taxmann.com
34 (SC), the Supreme Court of India held that where notice inviting tender (NIT) by State of Telangana required
that bidder must be an individual/company, word company in NIT could only mean a company as understood under
Companies Act and cannot be read to include a firm and, therefore, bid of respondent which was neither an
individual nor a company but a firm was rightly rejected by State.