what is Company Law?

Company Law

This article seeks to elucidate the concept of Company Law.

What is Company Law?

The set of laws, rules, regulations, and procedures that regulate the establishment and functioning of companies is known as company law. It is the body of legislation that governs the establishment of business-related legal entities. The laws have an impact on everyone who is involved in establishing, acquiring, running, and managing a company.

What is Company?

The term “company” does not have a purely technical or legal definition. It could be said to signify a community of people who share a common object. People may associate themselves with a wide range of goals, including both materialistic and immaterial ones. However, the term “company” is typically only used to refer to groups that have come together for profit-making goals.

When used in the aforementioned context, the term “company” can be loosely defined as a voluntary group of individuals who have got together for the purpose of conducting some activity and splitting the profits therefrom.

Indian law recognises two forms of organisations for such associations:

  1. Partnership.
  2. company.

Even though both are commonly referred to as “companies,” the statute distinguishes between companies and company law and partnerships and partnership law. The Partnership Act of 1932 and the Limited Liability Partnership Act of 2008 codify partnership law in India. Both of these laws are based on the law of agency, wherein each partner becomes the other’s agent. As a result, they provide an appropriate framework for an association of a small group of people who have trust and confidence in one another.

A more intricate type of association, with a vast and changeable membership, necessitates a more elaborate organisation, which ideally should confer corporate personality on the association, recognising that it is a distinct legal entity, subject to legal responsibilities and entitled to legal rights separate from those of its members. An association can quickly and affordably get this by registering as a company under the Act.

It should be emphasised that the Act even permits a company to be founded and registered for reasons other than profit-making, such as the promotion of business, art, science, sports, religion, or charity.

In this article, we will solely focus on companies that are registered under the Companies Act of 2013, or under any other earlier companies’ acts.

Definition of a company

A company is defined as one that has been incorporated under this Act or any prior company law in Section 2(20) of the Companies Act, 2013.

This term is ambiguous regarding what a company actually is. Let’s look at some authoritative definitions of a company to help us better comprehend what it means.

According to Justice James, “A company is an association of persons united for a common object.”

According to Prof. L.H. Haney, “Company is an artificial person created by law having separated entity with a perpetual succession and common seal”.

A company, in the words of Lord Lindley “an association of many persons who contribute money or money’s worth to common stock and utilise it for some common purpose. The common stock that was provided represents money and serves as the company’s capital. Members are those who provide it or to whom it belongs. Each partner is entitled to a certain amount of capital, which is called his share”.

Characteristics of a company

The “separate legal entity” of the company and, in most situations, the “limited liability” of its members are the two most significant characteristics of a company. The following section discusses these and other distinctive characteristics of a company: —

  1. Incorporated Association

According to the Companies Act, a company must be established or registered. A “public company” must have a minimum of seven members, whereas a “private company” must have no less than two members.

However, One Person Companies may also be formed under Section 3 of the 2013 Companies Act.

  • A separate legal entity from its members

The corporation is distinct from the individuals that make it up, unlike a partnership. As a result, it is capable of having rights and carrying out obligations that are distinct from those of its members.

Case Laws:

Kondoli Tea Co. Ltd., Re ILR [1886]

The first decision on the issue was Kondoli Tea Co. Ltd., Re ILR [1886], which was decided before the well-known Salomon case.

Case-Related Facts:

In this instance, certain individuals sold a tea estate to a company and sought exemption from ad valorem duty on the grounds that they were the company’s stockholders and that, as a result, the transfer was simply one from them to themselves under a different name.

Decision:

The Calcutta High Court rejected this, stating, “The Company was a separate person; a separate entity wholly from the stockholders, and the transfer was as much a conveyance, a transfer of property, as if the shareholders had been totally different individuals.”

Salomon v. Salomon & Co. Ltd. [1895-99]

Case-Related Facts:

Salomon v. Salomon & Co. Ltd., a well-known case, Salomon was a successful leather trader. He changed his company’s name to Salomon & Co. Ltd., a Limited Company. Salomon, his wife, and five of his children were all members of the newly created corporation. The firm of Salomon was acquired by the company for £39,000. The acquisition consideration was split between a £10,000 debenture with a charge over the company’s assets, a £20,000 fully paid share at $1 each, and the remaining sum in cash. The business encountered problems in less than a year, and liquidation procedures were initiated. Also, the company’s assets weren’t enough to pay out the debentures (held entirely by Salomon himself). and nothing was left for the unsecured creditors.

Decision:

The House of Lords unanimously ruled that the corporation was properly formed since the Act simply needed seven members to have at least one share apiece. It made no mention of their independence or the need for some sort of power balance in the company’s constitution. As a result, the corporation and not Salomon owned the business. Its agent was Salomon. The company wasn’t Salomon’s agency.

Lee v. Lee’s Air Farming Ltd. [1960]

Case-Related Facts:

L started a company with a three thousand pound share capital, of which L owned 2999 pounds. He served as the only governing director as well. ‘L’ had complete and unlimited influence over the company’s activities as the controlling shareholder. According to the company’s bylaws, “L,” who was also a licenced pilot, was named as its chief pilot and received compensation for the position. He was killed in an accident while flying the company’s aircraft. Workers have a right to compensation in the event of death or injury since the corporation insured its employees. Was it possible for “L” to work for the company and serve as the only controlling director at the same time?

Decision:

It was decided that a person’s status as a corporate director did not prevent him from signing a contract to work for the company. There was no cause to invalidate any contracts that had been made between the company and the dead if the company was a legitimate legal organisation. Because “L” represented the company in its negotiations, the contract could not be avoided. Accordingly, “L” was a member of the workforce and qualified to file a claim for compensation.

  • Artificial person

Despite being a legal person, the company does not have a physical body. It only exists while the legislation is being considered. Since it is an artificial person, it must rely on natural humans, such as directors, officers, stockholders, etc., to do all of its tasks. These people, however, only act on behalf of the company; as a result, everything they do within the bounds of the power granted to them and in the name and on behalf of the company binds the company and not the individual.

  • Limited liability

One of the main benefits of conducting business through a limited company is that its members are only partially responsible for the company’s financial obligations.

If the company is limited by shares, the shareholder’s obligation to contribute is determined by the nominal value of the shares he owns; once he or a previous owner of the shares has paid the nominal value plus any premium agreed upon when the shares were issued, the shareholder is no longer required to make any additional contributions. However, corporations can be established with members’ unlimited responsibility or with members’ specific sum guarantees.  In such cases, the liability of the members shall not be limited to the nominal or face value of their shares and the premium, if any, unpaid thereon.

In the case of unlimited liability companies, members shall continue to be liable till each paisa has been paid off.

In the case of companies limited by guarantee, the liability of each member shall be determined by the guarantee amount, i.e., he shall be liable to contribute up to the amount guaranteed by him.

If the guarantee company also has share capital, the liability of each member shall be determined in terms of not only the amount guaranteed but also the amount remaining unpaid on the shares held by a member.

  • A member of a limited liability company has unlimited liability.

The Companies (Amendment) Act of 2017 added Section 3A, which states that if a company’s membership is ever reduced—below seven for a public company and below two for a private company—and it continues to operate for more than six months while doing so, every member who was a part of the company during that time and was aware of the fact after those six months shall be deemed to have consented to the reduction and every member shall be severally liable.

  • Independent property

According to the legislation, shareholders are not an undertaking’s co-owners. The Supreme Court of India clearly defined this separate property notion in Bacha F. Guzdar v. CIT, Bombay (supra). According to the Supreme Court, a shareholder merely has legal rights, such as the ability to vote, participate in meetings, and earn dividends, and is not a part owner of the corporation or its assets.

case Law: 

Macaura v. Northern Assurance Company Ltd. [1925] AC 619

Case-Related Facts:

In this instance, Macaura owned all of the company’s shares—all save one. He had also given the business a significant advance. He personally insured the company’s wood. His claim was denied due to a lack of insurable interest over the destruction of timber by fire.

Decision:

No shareholder has any rights to any property owned by the corporation, the court said, because he has no legal or equitable stake in it.

  • Shares’ transferability

The ease with which shares in joint stock corporations can be transferred has contributed to their appeal. This characteristic is underlined in the Act’s section 44, which states:

“Any member’s shares, debentures, or other interests in a company should be moveable property, transferable in the manner stipulated by the company’s articles.”

Without the approval of other members, a shareholder may transfer his shares to anybody he chooses. Even for a public company, the articles of association might limit but not completely prohibit the transfer of shares.

  • Perpetual succession

Since the company is an artificial human, it cannot become sick and has no set life expectancy. The corporation is unaffected by the death, insolvency, or retirement of its members since it is separate from them. Members may join and leave, but a company may never cease to exist. Even if all of its human members are dead, it still functions. Even when a bomb during the war killed every employee of a private company while they were at a general meeting, the company survived. Even a thermonuclear bomb wouldn’t have been able to destroy it. In the aforementioned situation, the shareholders’ legitimate successors will take over as members.

  • Common seal

Since a company is an artificial person, it lacks a natural body. Because of this, it lacks a human mind and limbs. It must function through the participation of people, specifically the directors, other officers, and staff members of the company.

According to section 22, as modified by the Companies (Amendment) Act, 2015, a company may authorise anybody to execute deeds on its behalf in any location, inside or outside of India, using its common seal, if any, through a general or special power of attorney. Additionally, it states that a deed executed by such an attorney on behalf of the business and bearing his seal, when applicable, shall be binding upon the company.

If a business doesn’t have a common seal, two directors are required to provide their approval, or one director and the company secretary if there is one, depending on where the company has one.

Section 21 states that A document or action requiring authentication by a company may be signed by any key managerial personnel or an officer or employee of the company duly authorised by the Board in this regard, and need not be under its common seal, unless as specifically stated differently in this Act.

References

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