Written By- Sarthak Dwivedi
Vikramajit Singh Sanatan Dharma College Kanpur
CSJM University Kanpur
Synopsis:
Company Law governs the formation, operation, and dissolution of companies. Companies are legal entities that are distinct from their owners, providing limited liability to shareholders and facilitating business activities. Understanding the nature and kinds of companies under company law is essential for entrepreneurs, investors, and legal professionals.
A company is a legal person created by law. It has its own identity separate from its shareholders, which means it can own property, enter into contracts, and sue or be sued in its own name. This concept of limited liability is one of the key features of companies. Shareholders are typically only liable for the amount they have invested in the company, protecting their personal assets from business-related liabilities.
A holding company owns the majority of shares in one or more subsidiary companies.
Each subsidiary operates independently but is controlled by the holding company.
Often used for diversification or tax optimization.
In summary, company law recognizes various types of companies, each designed to cater to different business needs and objectives. These legal structures offer entrepreneurs and investors flexibility in choosing the form that best suits their business goals, risk tolerance, and regulatory compliance capacity. Understanding the nature and kinds of companies under company law is crucial for making informed decisions when establishing or investing in a business entity.
Introduction:
The Companies Act, 2013 received the assent of the President on 29th August and was notified on 30th August, 2013. It has 470 sections and VII schedules, whereas the Companies Act 1956 had 658 sections and XV schedules. This Act provides detailed rules regarding formation, management and administration and winding up of companies by Tribunals. It has made changes in provisions relating to memorandum, definition of prospectus, appointment of auditors, and accounting standards and financial statements and investigations etc. In this Unit you will study the meaning and definition of a company, the main features of a company form of business organisation, and the various types of companies that can be formed in India.
NATURE OF A COMPANY:
A company is a business entity registered under the Companies Act. It is a legal entity with a separate identity from those who are its members or operate it. Therefore it can be considered as an artificial person created by the law.In terms of the Companies Act, 2013 (Act No. 18 of 2013) a “company” means a company incorporated under the Act [i.e Companies Act, 2013] or under any previous company law [Section 2(20)].
According to Chief Justice Marshall of USA, “A company is a person, artificial, invisible, intangible, and existing only in the contemplation of the law. Being a mere creature of law, it possesses only those properties which the character of its creation confers upon it either expressly or as incidental to its very existence”.
Another comprehensive and clear definition of a company is given by Lord Justice Lindley, “A company is meant as an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business, and who share the profit and loss (as the case may be) arising there from. The common stock contributed is denoted in money and is the capital of the company. The persons who contribute it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his share. Shares are always transferable although the right to transfer them is often more or less restricted”.
According to Haney, “Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares. The ownership of which is the condition of membership”
The advantages of incorporating a company (i.e registering a company under the Companies Act) are as under:
A company is perceived to be a distinct legal entity. Once incorporated under the Act, the company is vested with a corporate personality which does not depend on its members. The money credited by the creditors of the company can be recovered only from the company and the properties owned by the company. Individual members cannot be sued. Similarly, the company in any way is not liable for the individual debts of the members.
The company bears its own name, acts under its own 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. A shareholder cannot be held liable for the acts of the company even if he holds virtually the entire share capital. The shareholders are not the agents of the company and so they cannot bind it by their acts. The company does not hold its property as an agent or trustee for its members and they cannot sue to enforce its rights, nor can they be sued in respect of its liabilities. Thus, ‘incorporation’ is the act of forming a legal corporation as a juristic person. A juristic person is in law also conferred with rights and obligations and is dealt with in accordance with law. In other words, the entity acts like a natural person but only through a designated person, whose acts are processed within the ambit of law [Shiromani Gurdwara Prabandhak Committee v.ShriSam Nath Dass AIR 2000 SCW 139].
The principal of separate of legal entity was explained and emphasized in the famous case of Solomon v Solomon & Co. Ltd.
The facts of the case are as follows :
Mr. Soloman, the owner of a very prosperous shoe business, sold his business for the sum of $ 39,000 to Soloman and Co. Ltd. which consisted of Soloman himself,his wife, his daughter and his four sons. The purchase consideration was paid by the company by allotment of & 20,000 shares and $ 10,000 debentures and the balance in cash to Mr. Soloman. The debentures carried a floating charge on the assets of the company. One share of $ 1 each was subscribed by the remaining six members of his family. Soloman and his two sons became the directors of this company. Soloman was the managing director. After a short duration, the company went into liquidation. At that time the statement of affairs’ was like this: Assets: $ 6000, liabilities: Soloman 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 a priority over the debenture holder on the ground that company and Soloman were one and the same person. But the House of Lords held that the existence of a company is quite independent and distinct from its members and that the assets of the company must be utilized in payment of the debentures first in priority to unsecured creditors. Soloman’s case established beyond doubt that in law a registered company is an entity distinct from its members, even if the person holds all the shares in the company.
2.Limited liability:
Limited liability means the company’s debts are its own and members are protected from personal liability unless they are negligent or gave personal guarantees. A company may be limited by shares or by guarantee. In a company limited by shares, the liability of members is limited to the unpaid value of the shares. If the shares are fully paid i.e if the amount has already been fully paid to the company, then the member need not contribute any more towards the company’s debts. If the amount has not been fully paid, then the member’s liability is limited to the unpaid amount. For example, if X holds shares of the total nominal value of Rs.10,000 and has already paid Rs.5000/- (or 50% of the value) as part payment at the time of allotment, he cannot be called upon to pay more than Rs.5000/-, the amount remaining unpaid on his shares. If he holds fully-paid shares, he has no further liability to pay even if the company is declared insolvent.
In the case of a company limited by guarantee, the liability of members is limited to a specified amount of the guarantee mentioned in the memorandum.
3.Perpetual Existence:
Perpetual succession means that the membership of a company may keep changing from time to time, but that shall not affect its continuity. 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. Professor L.C.B. Gower rightly mentions, “Members may come and go, but the company can go on forever. 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”.
4. Separate Property:
As a company is a legal person distinct from its members, it is capable of owning, enjoying and disposing of property in its own name. Although its capital and assets are contributed by its shareholders, they are not the private and joint owners of its property. The company is the juristic person in which all its property is vested and by which it is controlled, managed and disposed of.
5. Shares:
In a public company, the shares are freely transferable. The right to transfer shares is a statutory right and it cannot be taken away by a provision in the articles. However, the articles shall prescribe the manner in which such transfer of shares shall be made and it may also contain bona fide and reasonable restrictions on the right of members to transfer their shares. But absolute restrictions on the rights of members to transfer their shares shall beultravires. However, the law allows, in the case of a private company to have such articles which restrict the right of member to transfer his shares in company.
6.Capacity to Sue and Be Sued:
A company being a body corporate can sue and be sued in its own name. All legal proceedings against the company are to be instituted in its name. Similarly, the company may bring an action against anyone in its own name. A company’s right to sue arises when some loss is caused to the company, i.e. to the property or the personality of the company. Hence, 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)]. A company, as a person distinct from its members, may even sue one of its own members.
7. Common Seal :
A company cannot sign documents by itself. It acts through natural persons who are called its directors. A common seal is used with the name of the company engraved on it as a substitute of its signature. To be legally binding on the company, a document has to carry the company seal on it.
Private Limited Company
A private limited company is a separated legal entity and can be formed by a minimum of 2 and a maximum of 200 members.
It restricts the transferability of shares and does not allow public subscription of its shares.
The liability of members is limited to the amount unpaid on their shares.
The word “Private Limited” must be added at the end of the company’s name.
Public Limited Company:
A public limited company can be formed by a minimum of 7 members(there is no maximum limit).
It can raise capital from the public by issuing shares and debentures, and its shares are freely transferable.
The liability of members is limited to the amount unpaid on there shares.
The word “Limited” must be added at the end of the company’s name.
Additionally, there is a concept of a One Person Company (OPC) introduced to support single enterpreneurs. In an OPC, there is only one member, and it combines the benefits of a sole proprietorship and a company.
Companies in India are governed by the Companies Act, 2013, and they must adhere to the regulatory requirements and compliance procedures outlined in this law. The specific nature and kind of company a person chooses to from depend on their business objectives, capital requirements, and other factors.
Conclusion:
Legislation being the part of the government and companies being the most important part of economy to earn revenue for the country, they are taking initiative to make the company law simpler. But, being a responsible citizen of India, one should be aware of the post-registration compliance which is equally important for a corporation because in any case, penal action will be taken by the authorities for the non-compliance. Therefore, the promoters should be well aware of the next steps to be taken for the company. It is always recommended to ask the help of professionals for reducing chances of being non-compliant.
This article has tried to consolidate all the basic knowledge and the documents required to incorporate a company under the Companies Act, 2013. The advantages and disadvantages have also been highlighted. Since every coin has two sides, therefore incorporation also has both pros and cons. The legislature of india have been very effective in bringing out changes that are required in the said Act. The only change required for the incorporation is that in the technological world, the procedure of incorporation should be made online so that the complexity is reduced and time is saved of the members involved.
