What is Company?
- The word Company is derived from two Latin words Com which means with or together & Panis which means Bread & it originally referred to an association of persons who took their meals together.
- A Company under Law is a corporate body and legal person having status and personality distinct and separate from the members constituting it.
- An Incorporated company owes its existence either to a Special Act of Parliament or to Company Law. Public corporations like LIC, SBI etc. have been bought into existence through special Acts of Parliament, whereas companies like Tata Steel Ltd. etc. have been formed under Company Law.
- As per Section 2(20) of Companies Act, 2013, a company means a company incorporated under this Act or under any previous company law.
- In general sense, company is association of likeminded persons formed for the purpose of carrying on some business.
Nature And Characteristics Of a Company
Some of the Characteristics of company are:
- Corporate Personality: Companies incorporated under companies act are separate legal entity i.e., it is separate from its members. It is capable of owing property, borrow money, having bank account, entering contracts, sue & be sued in its own name. The shareholders are not the agents of the company and so they cannot bind it by their acts.
Case Law: Salomon vs Salomon and co ltd. (1897)
In 1897, a man named Solomon created a company called Salomon & Co. Ltd., which was incorporated as a limited liability company. When the company went bankrupt, it was argued that Solomon should be held personally liable for the company's debts, as he was the majority shareholder. However, the courts ruled that the company was a separate legal entity from its shareholders, and that Solomon was not personally liable. This case established the principle of separate legal personality, which is a cornerstone of modern corporate law.
- Artificial Person: A company is an artificial person created by law. It is not human being but it acts through human beings. It is considered as a legal person who can enter into contracts, possess properties in its own name, sue & can be sued by others in its own name. It is called artificial person since it is invisible, intangible, existing only in contemplation of law.
In Union Bank of India v. Khader International Construction, the concept of an artificial person is reflected in the legal status of a bank guarantee, which is recognized as a separate and independent contract with its own legal rights and obligations, independent of the underlying contract between the principal debtor and the beneficiary.
- Company is not a citizen: Although company is a legal person but it is not a citizen under Citizenship Act, 1955 or the Constitution of India.
In the RC Cooper v. Union of India case, the Supreme Court of India also dealt with the issue of whether a company can be considered a citizen under the Indian Constitution. The court held that a company cannot be considered a citizen under the Constitution, as it is an artificial person created by law and does not possess the characteristics of citizenship that are inherent in natural persons.
- Company has Nationality and Residence: It is true that company is not citizen but it has nationality, domicile and residence. Its domicile is the place of its registration.
Tulika vs Parry and Co is a case that dealt with the concept of company residence. In this case, the question was whether a company that has its registered office in one state, but carries on business operations in another state, can be sued in the courts of the state where it carries on business.
The court held that the residence of a company for the purpose of jurisdiction depends on the place where it carries on its business operations, and not on the place where its registered office is located. The court emphasized that the registered office is merely a statutory requirement and does not determine the jurisdiction of the courts.
The court further held that a company is deemed to carry on business in a state if it has a place of business, whether by way of a branch office, agent, or otherwise, in that state. This means that if a company carries on business operations in a state, it can be sued in the courts of that state, irrespective of where its registered office is located.
Therefore, the Tulika vs Parry and Co case established the principle that the residence of a company for the purpose of jurisdiction depends on the place where it carries on its business operations, and not on the location of its registered office. This principle recognizes that the location of a company's business operations is a more relevant factor in determining its jurisdictional residence.
- Limited Liability: Company being separate legal entity is capable of incurring liability in its own name & liability of members is limited to the extent of unpaid amount if any on shares held by him/her or amount of guarantee undertaken in case of company limited by guarantee. However, if company is formed with wrong intentions or false information then liability of members will be unlimited. It is to be noted that Company can be formed with unlimited liability too.
- Perpetual Succession: As company is artificial person, it cannot have death like natural person & it enjoys benefit of perpetual succession. Perpetual Succession means membership of company may change from time to time but it shall not affect its continuity.
- Transferability of Shares: Capital of company is divided into parts called Shares. These shares are movable property i.e., member can transfer it to another person subject to certain conditions. Member can sell its shares in open market & realize money invested by him thus providing liquidity to member & stability to company as he is not withdrawing from capital of company.
- Separate Management: In Sole Proprietorship & Partnership, Proprietor/Partners themselves manage affairs of business but in case of company, affairs of business are managed by professional people appointed on Board known as Board of Directors.
Case Law: Salomon vs Salomon and co ltd. (1897)
In 1897, a man named Solomon created a company called Salomon & Co. Ltd., which was incorporated as a limited liability company. When the company went bankrupt, it was argued that Solomon should be held personally liable for the company's debts, as he was the majority shareholder. However, the courts ruled that the company was a separate legal entity from its shareholders, and that Solomon was not personally liable. This case established the principle of separate legal personality, which is a cornerstone of modern corporate law.
In Union Bank of India v. Khader International Construction, the concept of an artificial person is reflected in the legal status of a bank guarantee, which is recognized as a separate and independent contract with its own legal rights and obligations, independent of the underlying contract between the principal debtor and the beneficiary.
In the RC Cooper v. Union of India case, the Supreme Court of India also dealt with the issue of whether a company can be considered a citizen under the Indian Constitution. The court held that a company cannot be considered a citizen under the Constitution, as it is an artificial person created by law and does not possess the characteristics of citizenship that are inherent in natural persons.
Tulika vs Parry and Co is a case that dealt with the concept of company residence. In this case, the question was whether a company that has its registered office in one state, but carries on business operations in another state, can be sued in the courts of the state where it carries on business.
The court held that the residence of a company for the purpose of jurisdiction depends on the place where it carries on its business operations, and not on the place where its registered office is located. The court emphasized that the registered office is merely a statutory requirement and does not determine the jurisdiction of the courts.
The court further held that a company is deemed to carry on business in a state if it has a place of business, whether by way of a branch office, agent, or otherwise, in that state. This means that if a company carries on business operations in a state, it can be sued in the courts of that state, irrespective of where its registered office is located.
Therefore, the Tulika vs Parry and Co case established the principle that the residence of a company for the purpose of jurisdiction depends on the place where it carries on its business operations, and not on the location of its registered office. This principle recognizes that the location of a company's business operations is a more relevant factor in determining its jurisdictional residence.
Lifting of Corporate Veil
Although company is separate legal entity but in following cases this concept can be ignored and members can be held personally liable:- Where Corporate Veil is used for fraudulent purpose.
- Where Corporate Entity is only an agency instrumentality
- Where conduct of corporate entity is against Public Policy
- Where corporate entity is regarded as having enemy character
- Where it is found that company is formed for evading taxes
- Where it is found that company is formed to use it as device to reduce the
amount to be paid towards workmen bonus
Important
Definitions under Companies Act, 2013:
Company: As per section 2(20), Company means
company incorporated under this act or previous company law.
Public Company: As per section 2(71), Public
Company means company:
- which
is not a private company.
- has
a minimum paid-up capital as may be prescribed.
Provided that a company which is subsidiary of public
company shall be deemed public company
Private Company: As per section 2(68), Private
Company means company having paid up share capital as may be prescribed and
which by its articles :
- restricts right to freely transfer its share
- except
in case of OPC, limits the number of its member to 200.
One Person Company: OPC is type of private company with only one person as its member.