Company Characteristics Meaning Nature Features and Definitions Explained

Legal Nature Feature Characteristics Definitions and Meaning of a Company

Meaning of a Company

• The word ‘company’ ordinarily means a group of persons associated for some common Purpose may be for business, sports, research, charity, etc. But it is not considered company in legal sense.
• In legal sense, company means a company incorporated or registered under the Companies Act, usually having the word ‘Limited’ as part of its name, e.g., Tata Motors Limited, Infosys Limited, Reliance Industries Limited, etc.

Definitions of Company

Lord Justice Lindley - "an association of many persons who contribute money or money's worth to a common stock, and employs it in some common trade or business, and who share the profit or loss arising therefrom. The common stock so contributed is capital of the company, the persons who contribute it or to whom it belongs are members, and the proportion of capital to which each member is entitled is his share.”

Haney– “a company is an incorporated association, which is an artificial person created by law, having a separate entity, with a perpetual succession and a common seal.”

Section 2(20), Companies Act – a “company” means a company incorporated under this act or under any previous company law.

Nature/Feature/Characteristics of a Company

1. Body Corporate/Incorporated Body

• A company is a body corporate because the persons composing it are made into one body by incorporating it according to the law, and conferring upon it a legal personality distinct from their own.
• 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’ (Section 3). However, Section 3 of the Companies Act, 2013 allows formation of ‘One Person Company’
• Furthermore, as per Section 464 of the Companies Act, 2013, all association or partnership of more than 50 members are compulsorily required to register under the companies. However this restriction does not apply to associations governed by special acts or to Hindu Undivided Family.

2. Separate 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
• As Lord Macnaughten in Salomon’s case puts it, “the company is at law a different person altogether from the subscribers, and though it may be that after incorporation the business is precisely the same as it was before and the same persons are managers and the same hands receive the proceeds, the company is not in law, the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act.”

• The first case on the subject (even before the famous Solomon’s case) was that of Kondoli Tea Co. Ltd., Re [1886]. 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. Rejecting this contention, the 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.”
• In the famous case of Solomon v. Solomon & Co. Ltd. [1897], Court observed that “even where a single shareholder virtually holds the entire share capital, a company is to be differentiated from such a ”

Facts and Decision – Salomon sold his business to Salomon & Co. Ltd. which consisted of Salomon himself, his wife and daughter and his four sons. One share of £1 each was subscribed by his wife, daughter and four sons and the rest of the shares were held by Salomon himself. Salomon was the managing director of the company. After one year, the company became insolvent and winding up commenced. On winding up the assets were worth £ 6,000, and liabilities £ 17,000 of which £ 10,000 were due to Salomon himself on the debentures subscribed by him having a floating charge over all the assets of the company and £ 7,000 to unsecured creditors.

The House of Lords held that “a company is distinct from its members and the company’s assets must be applied in payment of the debentures first in priority to unsecured creditors. As soon as the company was duly incorporated, it became a separate legal entity, independent from Salomon and was not his agent. As the business belonged to the company and not to Salomon, he was not liable to indemnify the company for its debts.”

• In Lee v. Lee’s Air Farming Ltd. [1961], Lee formed a company (Lee’s Air Farming Ltd.). Out of 3,000 shares, Lee himself was holding ninety nine percentage shares and was the sole “governing director of the company. He was also appointed by the company as Chief Pilot of the company. The company insured against liability to pay compensation under the Workmen Compensation Act. Lee died during the course of his employment in an air crash. His widow claimed compensation under the Workmen Compensation Act. The Privy Council held that Lee and the company were not one and the same person. They were two distinct legal entities which had contractual relationship under which Lee became an employee of the company. The relationship between Lee, as Pilot, and the company was that of servant and master. Thus, in this case, “the effect of magic of corporate personality enabled Lee to be master and servant at the same time.”

• In Gramophone & Typewriters Ltd. v. Stanley (1908), it was held that even if a shareholder acquires all shares of a company, business of the company does not become his business.
• Chiranjilal Chaudhari v. Union of India [1951], In this case, the Supreme Court held that a company has a fundamental right to own property and in the event of any infringement of such a right it is the company itself which can bring an action and not the shareholders.
• In Bacha F. Guzdar v. The Commissioner of Income-tax, Bombay, Mrs. Guzdar received certain amounts as dividend in respect of shares held by her in a tea company. Under the Income-tax Act, agricultural income is exempt from payment of income-tax. Mrs. Guzdar claimed that the dividend income in her hands should be treated as agricultural income up and she should be exempted from payment of tax on the ground that the dividends received by shareholders represented the income of the company. The Supreme Court held that though the income in the hands of the company was partly agricultural yet the same income when received by Mrs. Guzdar as dividend could not be regarded as agricultural income as both are distinct persons in law.

3. 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.

4. 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 hold. Their liability is only to the extent of amount remaining unpaid on the shares held by them.
• In the case of unlimited liability companies, members shall continue to be liable till each penny has been paid off.

• In case of companies limited by guarantee, the liability of each member shall be determined by the guarantee amount, i.e., he shall be liable to contribute at the time of winding up to the amount guaranteed by him. If the guarantee company also has share capital, the liability of each member shall be determined in terms of not only the amount guaranteed but also the amount remaining unpaid on the shares held by a member.

5. Transferability of Shares

• Section 44 of the Companies Act, 2013 states that “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.
• However, a private company is required to put certain restrictions on transferability of its shares but the right to transfer is not taken away absolutely even in case of a private company.

6. Perpetual Succession

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 are killed by a bomb, the company still survives.

7. Common Seal

Common seal of a company is a symbol of its incorporation. The Common Seal acts as the official signature of a company. However, now, by virtue of the 2015 Amendment to the Companies Act, a company may or may not have a common seal. In case 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.

 

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