Literally the word company means a group of persons associated for any common object such as business, charity, sports, and research, etc. Almost every partnership firm having two or more partners may, therefore, style itself a ‘company’ e.g., ‘Rameshwar Dass Jamuna Dass & Company’. But this company is not a company in the legal sense of the word. The word “& Company” here simply indicates that there are other persons in their association besides Rameshwar Dass and Jamuna Dass.
We shall be using the word company in our text strictly in legal sense, i.e., accompany incorporated or registered under the Companies Act, usually having the world ‘Limited’ as part of its name e.g., ‘The Kohinoor Mill Co. Ltd., Bombay’, ‘Kelvinator of India Ltd., Delhi’,’ The Alkali & Chemicals Corporation of India Ltd., Calcutta’, etc. It must, however, be noted that although a company can be registered for any object, trading as well as non-trading, this book deals mainly with secretarial practice relating to companies or corporations formed for purposes of trade or commerce.
An examination of the above definitions reveals the following essential characteristics of a company:
1. Incorporated association :
A company must necessarily be incorporated or registered under the prevalent Companies Act. Registration creates a joint stock company and it is compulsory3 for all associations or partnerships, having a membership of more than ten in banking and more than twenty in any other trading activity, formed for carrying on a business with the object of earning profits.
2. Artificial legal person :
A company is an artificial legal person in .he sense that on the one hand, it is created by a process other than natural birth and does not possess the physical attributes of a natural person, and on the other hand, it is clothed with many of the rights of a natural person. It is invisible, intangible immortal (law alone can dissolve it) and exists only in the eyes or law. It has no body, no soul, no conscience, neither it is subject to the imbecilities of the body. It is because of these physical disabilities that a company is called an artificial person. But it cannot be treated as a fictitious entity because it really exists.
As a rule, a company may acquire and dispose of property, it may enter into contracts through the agency of natural persons, may be fined for the contravention of the provisions of the Companies Act. Thus, for most legal purposes a company is a. legal person just like a natural person, who has rights and duties at law. In short, it may be said, therefore, that a company being an artificial legal person can do every thing like a natural person, except of course that, it cannot take oath, cannot appears in its own person in the court (must be represented by counsel), cannot be sent to jail, cannot practice a learned profession like law or medicine, nor can it marry or divorce.
3. Independent legal entity :
A company is a legal person having a juristic personality entirely distinct from and independent of the individual persons who are for the time being its members (Kathiawar Industries Ltd. vs. C.G of Evacuee Property). It has the right to own and transfer the title to property in any way it likes. No member can either individually or jointly claim any ownership rights in the assets of the company during its existence or in its winding up (Mrs B.F. Gaidar vs. The Commissioner of Income-Tax). It can sue and be sued in its own name by its members as well as outsiders. Creditors of the company are creditors of the company alone and they cannot directly proceed against the members personally.
A company is not merely the sum total of its component members, but it is something superadded to them. In mathematical language it may be defined as n + 1th person, where n stands for the total number of members and the 1th person for the company itself. Even if a shareholder owns virtually the whole of its shares, the company is a separate legal entity in the eyes of law as distinguished from such a shareholder. This principle was judicially recognized by the House of Lords in the famous case of Salomon vs. Salomon & Co. Ltd.
In this case, Mr. Salomon, who carried on a prosperous business as a leather merchant, sold his business for the sum of £30,000 to ‘Salomon & Co. Ltd. which consisted of Salomon himself, his wife and daughter and his four sons. The purchase consideration was paid by the company by allotment of 20,000 fully paid £1 shares and £10,000 in debentures conferring a floating a charge over all the company’s assets, to Mr. Salomon. One share of £1 each was subscribed for in cash by the remaining six members of his family.
Salomon was the managing director of the company and as he held virtually the whole of its stock, he had absolute control over the company. Only a year later, the company became insolvent and winding up commenced. On winding up the statement of affairs visa roughly like this: Assets: £6,000; Liabilities: Salomon as debenture-holder—£10,000 and unsecured creditors £7,000. Thus, its assets were running short of its liabilities by £11,000. The unsecured creditors claimed priority over the debenture-holder (Mr. Salomon) on the ground that a person cannot owe to himself and that Salomon and the company were one and the same person.
They further contended that the company was a mere “alias” or agent for Salomon, the business was solely his, conducted solely for him and by him and the company was a mere sham, and fraud, hence Salomon was liable to indemnify the company against its trading debts. But the House of Lords held that the existence of a company is quite independent and distinct from its members and that the company’s assets must be applied in payment of the debentures first in-priority to unsecured creditors.
Lord Macnaghten observed in this case: “The company is at law a different person altogether from the subscribers to the Memorandum; 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 profits, 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 m the manner provided by the Act.”
Although a company is a legal person having nationality and a domicile, it is not a citizen (State Trading Corporation of India Ltd. vs. Commercial Tax Officer). A company cannot, therefore, claim the protection of those fundamental rights which are expressly guaranteed to citizens only, e.g., the right of franchise. But still they are sufficiently protected under the constitution. For instance, their freedom of trade or commerce cannot be curtailed, there can be no compulsory acquisition of their property, and no unjust discrimination in any matter whatsoever can be done against them. The company has the right to challenge a law if the law happens to violate fundamental rights of citizens (Prithivi Cotton Mills vs. Broach Borough Municipality).
4. Perpetual existence :
A company is a stable form of business organisation. Its life does not depend upon the death, insolvency or retirement of any or all shareholder(s) or director(s). Law creates it and law alone can dissolve it. Members may come and go but the company can go on for ever. “During the war all the members of one private company, while in general meeting, were killed by a bomb. But the company survived; not even a hydrogen bomb could have destroyed it.”9 The company may be compared with a flowing river where the water keeps on changing continuously, still the identity of the river remains the same, Thus, a company has a perpetual existence, irrespective of changes in its membership.
5. Common seal :
As was pointed out earlier, a company being an artificial person has no body similar to natural person and as such it cannot sign documents for itself. It acts through natural persons who are called its directors. But having a legal personality, it can be found by only those documents which bear its signature. Therefore, the law has provided for the use of a common seal, with the name of the company engraved on it, as a substitute for its signature. Any document bearing the gammon seal of the company will be legally-binding on the company.
A company may have its own regulations in its Articles of Association for the manner of affixing the common seal to a document. If the Articles are silent, the provisions of Table-A (the model set of articles appended to the Companies Act) will apply. As per regulation 84 of Table-A, the seal of the company shall not be affixed to any instrument except by the authority of a resolution of the Board or a Committee of the Board authorised by it in that behalf, and except, in the presence of at least two directors and of the secretary or such other person as the Board may appoint for the purpose, and those two directors and the secretary or other person aforesaid shall sign every instrument to which the seal of the company is so affixed in their presence. Under its common seal a company may, in writing, appoint any person as its attorney to execute deeds on its behalf.
6. Limited liability :
The liability of the members for the debts of the company is limited to the amount unpaid on their shares howsoever heavy losses the company might have suffered. For example, if a shareholder buys 100 shares of Rs 10 each and pays Rs 5 on each share, he has paid up Rs 500 and can be made to pay another Rs 500, but he cannot be made to pay more than Rs 1,000 in all. No shareholder can be called upon to pay more than the nominal or face value of shares held by him, in case of a company with limited liability. (Later we shall see that the Act also provides for the creation of a company limited by guarantee and a company with ‘unlimited liability’, but companies with ‘limited liability’ are most popular.) Thus, by virtue of this characteristic the personal property of the shareholder cannot be seized for the debts of the company, if he holds a fully paid-up share.
7. Transferability of shares :
The shares of a public company are freely transferable and members can dispose of their shares whenever they like without seeking any permission from the company or the other members. In a private company, however, some restriction on the right to transfer is essential in its articles as per Sec. 3 (1) (iii) of the Act. Although restriction un the right to transfer may also be placed in the case of a public company in certain cases, e.g., in case of partly paid shares, but absolute right of the members to transfer shares cannot be restricted and any provision in the articles to that effect shall be void.
It may, “however, be noted here that a company possesses the above mentioned characteristics by virtue of its incorporation or registration under the Companies Act. Although a partnership—the main alternative to the company as a form of business organisation, may also be registered under the Indian Partnership Act, 1932, yet it does not possess any of these characteristics.