Notes – Business Law BM351 ( By- Mr Saurabh Bajpai)

UNIT 2- Company Law

MEANING OF COMPANY
Section 3 (1) (i) of the Companies Act, 1956 defines a company as “a company formed and
registered under this Act or an existing company”. Section 3(1) (ii) Of the act states that “an
existing company means a company formed and registered under any of the previous
companies laws”. This definition does not reveal the distinctive characteristics of a company .
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 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 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”.
From the above definitions, it can be concluded that a company is registered association
which is an artificial legal person, having an independent legal, entity with a perpetual
succession, a common seal for its signatures, a common capital comprised of transferable
shares and carrying limited liability
CHARACTERISTICS OF A COMPANY The main characteristics of a company are
1. Incorporated association.
A company is created when it is registered under the Companies Act. It comes into being
from the date mentioned in the certificate of incorporation. It may be noted in this
connection that Section 11 provides that an association of more than ten persons carrying
on business in banking or an association or more than twenty persons carrying on any
other type of business must be registered under the Companies Act and is deemed to be
an illegal association, if it is not so registered.

2. Artificial legal person.

A company is an artificial person. Negatively speaking, it is not a natural person. It exists in
the eyes of the law and cannot act on its own. It has to act through a board of directors elected
by shareholders. It was rightly pointed out in Bates V Standard Land Co. that : “The board of
directors are the brains and the only brains of the company, which is the body and the
company can and does act only through them”. But for many purposes, a company is a legal
person like a natural person. It has the right to acquire and dispose of the property, to enter
into contract with third parties in its own name, and can sue and be sued in its own name.

2. Separate Legal Entity :

A company has a legal distinct entity and is independent of its members. The creditors of the
company can recover their money only from the company and the property of the company.
They cannot sue individual members. Similarly, the company is not in any way liable for the
individual debts of its members. The property of the company is to be used for the benefit of
the company and nor for (5) the personal benefit of the shareholders. On the same grounds, a
member cannot claim any ownership rights in the assets of the company either individually or
jointly during the existence of the company or in its winding up. At the same time the
members of the company can enter into contracts with the company in the same manner as
any other individual can. Separate legal entity of the company is also recognized by the
Income Tax Act. Where a company is required to pay Income-tax on its profits and when
these profits are distributed to shareholders in the form of dividend, the shareholders have to
pay income-tax on their dividend of income. This proves that a company that a company and
its shareholders are two separate entities

3. Perpetual Existence.
A company is a stable form of business organization. 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 member 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 i”. 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.

4. 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 person
who are called its directors. But having a legal personality, (8) it can be bound by only those
documents which bear its signature. Therefore, the law has provided for the use of common
seal, with the name of the company engraved on it, as a substitute for its signature. Any
document bearing the common seal of the company will be legally binding on the company.

5. Limited Liability :
A company may be company limited by shares or a company limited by guarantee. In
company limited by shares, the liability of members is limited to the unpaid value of the
shares. For example, if the face value of a share in a company is Rs. 10 and a member has
already paid Rs. 7 per share, he can be called upon to pay not more than Rs. 3 per share
during the lifetime of the company. In a company limited by guarantee the liability of
members is limited to such amount as the member may undertake to contribute to the assets
of the company in the event of its being wound up.

6. Transferable 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 (9) in the articles. However, the
articles shall prescribe the manner in which such transfer of shares will be made and it may
also contain bona fide and reasonable restrictions on the right of members to transfer their
shares.

7. 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
real person in which all its property is vested and by which it is controlled, managed and
disposed of.

8. Delegated Management :
A joint stock company is an autonomous, selfgoverning and self-controlling organization.
Since it has a large number of members, all of them cannot take part in the management of
the affairs of the company. Actual control and management is, therefore, delegated by the
shareholders to their elected representatives, know as directors. They look after the day-to-
day working of the company.

Classification of Companies
Registered or incorporated companies. These are formed under the Companies Act, 1956 or
under the Companies Act passed earlier to this. Such companies come into existence only
when they are registered under the Act and a certificate of incorporation has been issued by
the Registrar of Companies. This is the most popular mode of incorporating a company.

1- Private Company
According to Sec. 3(1) (iii) of the Indian Companies Act, 1956, a private company is that
company which by its articles of association :
i) limits the number of its members to fifty, excluding employees who are members or ex-
employees who were and continue to be members;
ii) restricts the right of transfer of shares, if any;
iii) Prohibits any invitation to the public to subscribe for any shares or debentures of the
company. Where two or more persons hold share jointly, they are treated as a single
member. According to Sec 12 of the Companies Act, the minimum number of members
to form a private company is two. A private company must use the word “Pvt” after its
name.

2- Public company
According to Section 3 (1) (iv) of Indian Companies Act. 1956 “A public company which is
not a Private Company”, If we explain the definition of Indian Companies Act. 1956 in
regard to the public company, we note the following :
i) The articles do not restrict the transfer of shares of the company
ii) It imposes no restriction no restriction on the maximum number of the members
on the company.
iii) It invites the general public to purchase the shares and debentures of the
companies (Differences between a Public Company and a Private company)
 1. Minimum number : The minimum number of persons required to form a public
company is 7. It is 2 in case of a private company.

2. Maximum number : There is no restriction on maximum number of members in a

public company, whereas the maximum number cannot exceed 50 in a private company.
(17)
3. Number of directors. A public company must have at least 3 directors whereas a
private company must have at least 2 directors (Sec. 252)
4. Name of the Company : In a private company, the words “Private Limited” shall be
added at the end of its name
3- Government Companies. A Company of which not less than 51% of the paid up capital is
held by the Central Government of by State Government or Government singly or jointly is
known as a Government Company. It includes a company subsidiary to a government
company. The share capital of a government company may be wholly or partly owned by the
government, but it would not make it the agent of the government . The auditors of the
government company are appointed by the government on the advice of the Comptroller and
Auditor General of India. The Annual Report along with the auditor’s report are placed
before both the House of the parliament. Some of the examples of government companies are
- Mahanagar Telephone Corporation Ltd., National Thermal Power Corporation Ltd., State
Trading Corporation Ltd. Hydroelectric Power Corporation Ltd. Bharat Heavy Electricals
Ltd. Hindustan Machine Tools Ltd. etc. b).
4-Foreign Companies : It means any company incorporated outside India which has an
established place of business in India [Sec. 591 (I)]. A company has an (26) established place
of business in India if it has a specified place at which it carries on business such as an office,
store house or other premises with some visible indication premises. Section 592 to 602 of
Companies Act, 1956 contain provisions applicable to foreign companies functioning in India
5-Holding Company [Sec. 4(4)]. A company is known as the holding company of another
company if it has control over the other company. According to Sec 4(4) a company is
deemed to be the holding company of another if, but only if that other is its subsidiary. A
company may become a holding company of another company in either of the following
three ways :- a) by holding more than fifty per cent of the normal value of issued equity
capital of the company; or b) By holding more than fifty per cent of its voting rights; or c) by
securing to itself the right to appoint, the majority of the directors of the other company ,
directly or indirectly
6-Subsidiary Company. [Sec. 4 (I)]. A company is know as a subsidiary of another
company when its control is exercised by the latter (called holding company) over the (25)
former called a subsidiary company. Where a company (company S) is subsidiary of another
company (say Company H), the former (Company S) becomes the subsidiary of the
controlling company (company H).