Nature of Comapany `
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Transcript of Nature of Comapany `
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NATURE OF COMPANYDefinition and meaning of a company
Sec. 3(1) of the
Companies
Act, 1956
company
[Sec.3(1)(i)]
It means a company formed and registered under thisAct, or
- An existing company. existing company[Sec.3(1)(ii)]
It means a company formed and registered under any ofprevious companies laws.
Justice
Marshall
A company is an artificial person. It has no physical existence. It is invisible and intangible. It exists only in contemplation of law.
Justice James A company is an association of persons united for a common object.
Professor
Haney
A company is an artificial person created by law having
Separate identity Perpetual succession Common seal.
JusticeLindley
A company is an association of persons These persons contribute money or moneys worth to a common stock. The common stock so contributed is denoted in money and is called as capital
of the company. The persons who contribute the capital are called as members of the company. The capital is employed in some trade or business. The members share the profits and losses arising from such business. The proportion of capital to which each member is entitled is called as his
share. The shares are always transferable although the right to transfer is often more
or less restricted.
Characteristics of features of a Company1.
Incorporated
association
A company is formed and registered (i.e. incorporated) by complying with theprescribed formalities prescribed under the Act.
2. Artificial
person
A company is an artificial legal person, i.e., a juristic person. But it is not a fictitiousperson.
3. Separate
legal entity
A company is a legal person in the eyes of law distinct from its members. Case References- Salomon v Solomon & Co. Ltd., Lee v Lees Air Farming
Ltd.
4. Perpetual
Succession
Death, insolvency, insanity etc. of any member does not affect the continuity ofthe company. Thus, the life of the company does not depend upon the life of its
members. Any change in membership of the company (byway of transfer or transmission
of share) does not anyway affect the status of the company. Therefore, a company has perpetual succession, i.e., it shall continue forever
(until it is wound up and dissolved) irrespective of the continuity of itsmembers and directors.
It is generally said that members may come and go, but the company goes onforever. Thus, a company never dies. The continued existence of the company
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is not affected by the continuous change in its membership.
5. Limited
Liability
The members of a company cannot be held liable for the debts incurred by thecompany.
In case of a limited company, the liability of members is limited. The membersare liable to pay only such amount as is due from them to the company (as per
the provisions of the Act and memorandum), which is explained below:Nature of company Extent of liability of members
Company limited by
shares
Amount unpaid on the shares held by everymember.
Company limited by
guarantee
Amount guaranteed by every member.
Company limited by
guarantee and having
share capital
Aggregate of amount unpaid on the shares held
by a member and the amount guaranteed byhim.
Unlimited company Liable to contribute to the assets of the companyuntil all the debts of the company are paid in
full.
6. Common
seal
Common seal is the official signature of the company. Any document on whichcommon seal is affixed, is deemed to be signed by the company.
7.
Transferabilit
y of shares
Shares are movable property transferable in the manner provided in articles(Sec.82).
However, in a public company, shares are freely transferable.8. Separation
of ownership
from
management
The members do not participate in day-to-day affairs of the company. The management of company lies in the hands of elected representatives of
members, commonly called as Board of directors or directors or simply theBoard.
The directors are appointed as well as removed by the members. Thus, the acthas ensured the ultimate control of members over the company.
9. Separate
property
A company can own and enjoy property in its own name. No member is the owner or co-owner of the companys property during its
lifetime or even on its winding up. Assets of the company are not the assets of the members. As a result, a member
has no insurable interest in the property of the company.Macaura v Northern Assurance Co. Ltd.
M owned all the shares except one in a company. The timber belonging to the company was insured in the name of M. The timber was destroyed by fire. The insurance claim was rejected by the insurance company for want of
insurable interest. In other words, since the company was the owner of timber, only the company
had insurable interest in timber. Therefore, any insurance taken by a personhaving no insurable interest did not result in a valid contract of insurance.
10. Capacity to
sue and be
sued in its own
name
A company is a legal person. A company acts in its own name, and not as anagent of its members. It has its own rights and obligations. Consequently, a
company can sue others and be sued in its own name. The creditors can make their claims only against the company and cannot
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proceed against the shareholders.
Principle of separate legal entityMeaning A company is a legal entity separate from its owners (i.e., members). It is aperson distinct from the persons who form it.
It is known by its own name, has rights and liabilities of its own. Thus, a company is a body corporate.
Salomon v
Solomon & co.
ltd.
Transfer of sole proprietorship business to company.Mr. Salomon wascarrying on the business of boot manufacturing as a sole proprietor. Heincorporated a company named Salomon & Co. Ltd. for the purpose of taking
over this business.
Payment of purchase consideration by the company.(a) total consideration Rs. 39,000
(b) cash paid Rs. 9,000
(c) fully paid shares of Rs. 1 each issued to salomon Rs. 20,000(d) secured debentures issued to salomon Rs. 10,000
Other members were family members of salomon.The 6 members of thefamily of Mr. Salomon were issued one share each.
Salomon & Co. was a one man company.Since Salomon was the leadingshareholder and all other shareholders were nominees of Salomon (i.e.,Salomon held virtually the entire share capital of the company), Salomon &Co. Ltd. is commonly called as one man company.
Salomon had control over management. Salomon was the managingdirector of Salomon & Co. Ltd.
Inability to pay debts by the company in liquidation. In the course ofbusiness, the company borrowed from creditors to the extent of Rs. 7,000.
Due to trade depression, the company ran into financial difficulties andeventually went into liquidation. The assets realised only Rs. 6,000.
Contention of unsecured creditorsone man cannot owe money tohimself. The unsecured creditors contended that Salomon was carrying on
business in the name of Salomon & Cp. Ltd. Thus, Salomon co. ltd. was mereagent for S.
Decision of the court. It was held that Salomon & Co. was a real companyfulfilling all legal requirements. It had an identity different from its members,and therefore the secured debentures even though held by Salomon, were to
be paid in priority to unsecured creditors.
Lee v Lees Air
Farming Ltd.
Lee was a qualified pilot. He virtually owned all the shares and he was the sole governing director. He was also receiving salary from the company for being a chief pilot underthe company. He was killed in an air accident while working for the company. It was held that Lee was a separate person from the company he had formed.
Therefore, he could be legitimately employed under the company.
As he was killed in the course of employment under the company, his widowwas entitled to compensation.
Bacha F. A shareholder received dividend income from a company carrying on
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Guzdar v
Commissioner
of Income Tax
agricultural business. The income from agriculture business was exempt from tax. The shareholder contended that her dividend income should be treated as
agricultural income and therefore exempt from tax. The Court held that the company was a separate person from its members,.
Having its own business, and its own income. The income received by theshareholders was not the same income as earned by the company.
Implications of
the Rule of
separate legal
entity
There can be a transfer of property from a member to the company and viceversa.
A person can be a member, director, employee and creditor of the company atthe same time.
A member can enter into a contract with the company in the same manner asany other person can.
Thus, a company has the rights and duties of its own, which are different fromthe rights and duties of its members.
A company shall have a separate legal identity even if virtually entire capitalof the company is held by one person.
IS COMPANY IS CITISEN?A company is not a
citizen
Citizenship under the Citizenship Act is available only to an individual.Therefore, no company can be a citizen of India.
No rights of citizens The constitution of India grants certain fundamental rights to citizens. Since acompany is not a citizen, the fundamental rights which are available only to acitizen, are not available to a company.
A company has
other fundamental
rights
The constitution of India grants certain fundamental rights to every person.Whether a citizen or not. Thus, a company registered in India can enjoy all the
fundamental rights which are available to all persons.
USE OF WORDS LIMITED OR PRIVATE LIMITEDRequirements of
Sec.13
Every public limited company shall use the word limited at the end ofits name.
Similarly, every private limited company shall use the words privatelimited at the end of its name
Prohibition of
improper use of
word limited or
private limited
(Sec. 631)
No person shall use the word limited or private limited at the end of the nameor title under which he carries on business unless the following conditions aresatisfied:
a) The association is a company as defined u/s 3(1)(i).b) Such company is a company limited by shares or guarantee.