Company Law - Notes - LLB PDF

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LESSON : 1 MEANING, CHARACTERISTICS AND TYPES OF A COMPANY STRUCTURE 1.0

Objective

1.1

Introduction

1.2

Meaning of Company

1.3

Characteristics of a Company

1.4

Distinction between Company and Partnership

1.5

Types of Company

1.6

Summary

1.7

Keywords

1.8

Self Assessment Questions

1.9

Suggested Readings

1.0

OBJECTIVE

After reading this lesson, you should be able to: (a)

Define a company and explain its features.

(b)

Make a distribution between company and partnership firm.

(c)

Explain the various types of companies.

1.1

INTRODUCTION Industrial has revolution led to the emergence of large scale business

organizations. These organization require big investments and the risk involved is very high. Limited resources and unlimited liability of partners are two important limitations of partnerships of partnerships in undertaking big business. Joint Stock Company form of business organization has become extremely popular as it provides a solution to (1)

overcome the limitations of partnership business. The Multinational companies l e Coca-Cola and, General Motors have their investors and customers spread thro the world. The giant Indian Companies may include the names like Reli Bajaj Auto, Infosys Technologies, Hindustan Lever Ltd., Ranbaxy La and Larsen and Tubro etc. 1.2

MEANING OF COMPANY Section 3 (1) (i) of the Companies Act, 1956 d

formed and registered under this Act or an exist

ny Of the

act states that “an existing company means

ed under any

of the previous companies laws”. T

al the distinctive

characteristics of a company . Ac

l of USA, “A company

is a person, artificial, invis

nly in the contemplation of

the law. Being a mer

only those properties which the

character of its c

pon it either expressly or as incidental

to its very e clear definition of a company is given by Lord J

meant an association of many persons who contribute o a common stock and employ it in some trade or business, fit and loss (as the case may be) arising there from. The common d is denoted in money and is the capital of the company. The persons bute it, or to whom it belongs, are members. The proportion of capital to each member is entitled is his share. Shares are always transferable although the ght to transfer them is often more or less restricted”. (2)

According to Haney, “Joint Stock Company is a voluntary association f individuals for profit, having a capital divided into transferable shares. The o of which is the condition of membership”. From the above definitions, it can be concluded that a com association which is an artificial legal person, having an indep a perpetual succession, a common seal for its signatures, of transferable shares and carrying limited liability 1.3

CHARACTERISTICS OF A COMP The main characteristics of a co

1.

it is registered under

Incorporated associatio

the Companies Act. It come

tioned in the certificate

of incorporation. It ma

hat Section 11 provides that an

association of mo

business in banking or an association

or more than

y other type of business must be registered

under t

med to be an illegal association, if it is not so

reg company at least seven persons and for a private company persons are required. These persons will subscribe their names um of association and also comply with other legal requirements of spect of registration to form and incorporate a company, with or without liability [Sec 12 (1)]

(3)

Artificial legal person. A company is an artificial person. Negatively speak

2.

,

it is not a natural person. It exists in the eyes of the law and cannot act on its ow to act through a board of directors elected by shareholders. It was right in Bates V Standard Land Co. that : “The board of directors are the brains of the company, which is the body and the company can a them”. But for many purposes, a company is a legal the right to acquire and dispose of the property

has d parties

in its own name, and can sue and be sued However, it is not a citizen a

er the Constitution

of India or Citizenship Act. In

ndia v C.T.O (1963 SCJ

705), it was held that nei

titution nor the Citizenship

Act apply to it. It sho

pany does not possess fundamental

rights, yet it is

n enter into contracts with its Directors,

its memb marked that if all the members are citizens of India, a citizen of India. ntity : A company has a legal distinct entity and is independent creditors of the company can recover their money only from the the property of the company. They cannot sue individual members. the company is not in any way liable for the individual debts of its members. property of the company is to be used for the benefit of the company and nor for

(4)

the personal benefit of the shareholders. On the same grounds, a member cannot cl m any ownership rights in the assets of the company either individually or joint the existence of the company or in its winding up. At the same time th the company can enter into contracts with the company in the sa other individual can. Separate legal entity of the company i Income Tax Act. Where a company is required to pay when these profits are distributed to sharehold shareholders have to pay income-tax on their

the ves that a

company that a company and its shareho The principal of separate of

emphasized in the

famous case of Salomon v Sal The facts of the ca Mr. Saloman

us shoe business, sold his business

for the sum of $

d. which consisted of Saloman himself,

his wife, h

The purchase consideration was paid by the

com

shares and $ 10,000 debentures and the balance in bentures carried a floating charge on the assets of the 1 each was subscribed by the remaining six members of his d his two sons became the directors of this company. Saloman was Director. ter a short duration, the company went into liquidation. At that time the ment of affairs’ was like this: Assets :$ 6000, liabilities; Saloman as debenture

(5)

holder $ 10,000 and unsecured creditors $ 7,000. Thus its assets were running shor f its liabilities b $11,000 The unsecured creditors claimed a priority over the debenture ground that company and Saloman were one and the same person Lords held that the existence of a company is quite independ members and that the assets of the company must b debentures first in priority to unsecured creditors. Saloman’s case established beyond dou entity distinct from its members, even if

any is an the company.

There is no difference in princip

sting of only two

shareholders and a company

mbers. In each case the

company is a separate leg The principle

also been applied in the following:

Lee V. L Forming L beca

A.C. 12 Of the 3000 shares in Lee’s Air voted himself the managing Director and also on a salary. He died in an aircrash while working granted compensation for the husband in the course of that Lee was a separate person from the company he formed, as due to the widow. Thus, the rule of corporate personality enabled

master and servant at the same time. e principle of separate legal entity of a company has been, in fact recognized h earlier than in Saloman’s case. In Re Kondoi Tea Co Ltd. (1886 ILR 13 Cal 43),

(6)

it was held by Calcutta High Court that a company was a separate person, a sepa

e

body altogether from its Shareholders. In Re. Sheffield etc. Society - 22 OBD has been held that a corporation is a legal person, just as much in individu physical existence. The characteristic of separate corporate personality emphasized by Chief Justice Marshall of USA when he de artificial, invisible, intangible and existing only in creation of law, it possesses only those prop confers upon it either expressly or as a

mere creation . [Trustees of

Darmouth College v woodward (18 Perpetual Existence. A

4.

usiness organization. Its

life does not depend upon

ment of any or all shareholder

(s) or director (s). L

n dissolve it. Members may come

and go but the private co surv

“During the war all the member of one ing, were killed by a bomb. But the company b could have destroyed i”. The company may be r where the water keeps on changing continuously, still mains the same. Thus, a company has a perpetual existence, ges in its membership.

on Seal. As was pointed out earlier, a company being an artificial person dy similar to natural person and as such it cannot sign documents for itself. It through natural person who are called its directors. But having a legal personality,

(7)

it can be bound by only those documents which bear its signature. Therefore, the w has provided for the use of common seal, with the name of the company engra as a substitute for its signature. Any document bearing the common seal o will be legally binding on the company. A company may have its ow Articles of Association for the manner of affixing the commo the Articles are silent, the provisions of Table-A (the mo the Companies Act) will apply. As per regulation 84 shall not be affixed to any instrument excep Board or a Committee of the Board auth

any on of the except in the

presence of at least two directors

other person as the

Board may appoint for the pur

nd the secretary or other

person aforesaid shall si

he seal of the company is so

affixed in their pres 6.

y be company limited by shares or a

Limite

company

ny limited by shares, the liability of members

is lim

shares. For example, if the face value of a share in mber has already paid Rs. 7 per share, he can be called an Rs. 3 per share during the lifetime of the company. In a guarantee the liability of members is limited to such amount as the ndertake to contribute to the assets of the company in the event of its nd up. 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 (8)

in the articles. However, the articles shall prescribe the manner in which such tran

r

of shares will be made and it may also contain bona fide and reasonable restri the right of members to transfer their shares. But absolute restrictions o members to transfer their shares shall be ultra vires. However, in t company, the articles shall restrict the right of member to companies with its statutory definition. In order to make the right to transfer shares m

can

apply to the Central Government in case of refu

a transfer

of shares. Separate Property : As a co

8.

t from its members,

it is capable of owning, enjoyi

its own name. Although

its capital and assets are

s, they are not the private and

joint owners of its p

l person in which all its property is

vested and by w 9.

De

gove

and disposed of. oint stock company is an autonomous, selfnization. Since it has a large number of members, the management of the affairs of the company. Actual is, therefore, delegated by the shareholders to their elected ow as directors. They look after the day-to-day working of the

eover, since shareholders, by majority of votes, decide the general policy mpany, the management of the company is carried on democratic lines. ority decision and centralized management compulsorily bring about unity of action.

(9)

1.4

DISTINCTION BETWEEN COMPANY AND PARTNERSHIP

The difference between a company and partnership is as follows:

1. Mode of creation

Company

Partnership

By Registration by

By Agree

Statute. 2. Legal Statute

Legal entity distinct from members, perpetual success

3. Liability

Limite

joint and

m

ral liability of partners

4. Authority

Right to share mana gement, common and t

ownership and

entative anagement

Management. Mutual agency Implied authority.

Public Co.-freely

Ordinarily no right of

transferable; transferee

transfer of share by a

gets all the rights of

partner-limited rights

the transferor

of transferee

(10)

6. Number of members

Private Co-Minimum 2

Minimum 2

and Maximum 50

Maximum 20.

public Co. Minimum7 and Maximum unlimited. 7. Resources

Large and unlimited

Perso

resources 8. General powers

Memorandum defines and confines the s

o

of the compa

he

alterati 9. Legal

St

gal formalities

formalities

Registration not compulsory. No audit, legal

no publication of accounts etc.

10.

cording to the ovisions of law-

Dissolution by agreement by

usually by an order of

notice, by court.

the court.

Death of a partner

Death of a share-

may mean dissolution

holder does not

of partnership

affect the existence of a company. (11)

1.5

TYPES OF COMPANY Joint stock company can be of various types. The following are the impor

of company: 1. Classification of Companies by Mode of Incorporation Depending on the mode of incorporation, there are thr companies. A. Chartered companies. These are incorpor monarch. The East India Company and T chartered incorporated in England. The

by a mples of of a chartered

company are defined by the charte

rtered company has

wide powers. It can deal wit

o any contracts that any

ordinary person can. In c

m its business as prescribed by

the charted, the Sov

close the company. Such companies

do not exist in anies are incorporated by a Special Act passed

B. Statu by t

eserve Bank of India, State Bank of India, Industrial ust of India, State Trading corporation and Life Insurance the examples of statutory companies. Such companies do not dum or articles of association. They derive their powers from the ing them and enjoy certain powers that companies incorporated under panies Act have. Alternations in the powers of such companies can be brought

ut by legislative amendments.

(12)

The provisions of the Companies Act shall apply to these companies also excep n so far as provisions of the Act are inconsistent with those of such Special A 616 (d)] These companies are generally formed to meet social needs and of earning profits. C. Registered or incorporated companies. These are Act, 1956 or under the Companies Act passed ear

ome

into existence only when they are register

ficate of

incorporation has been issued by the Reg the most popular mode of incorpora

mpanies may further

be divided into three categorie mpanies have a share capital

i) Companies limited and the liability of e extent of face v the comp amo

limited by the Memorandum to the m. In other words, during the existence of up, a member can be called upon to pay the ares subscribed by him. Such a company is called company limited by shares may be a public company or are the most popular types of companies.

mited by Guarantee : These types of companies may or may not pital. Each member promises to pay a fixed sum of money specified in orandum in the event of liquidation of the company for payment of the debts liabilities of the company [Sec 13(3)] This amount promised by him is called

(13)

‘Guarantee’. The Articles of Association of the company state the number of mem r with which the company is to be registered [Sec 27 (2)]. Such a company is company limited by guarantee. Such companies depend for their existen and subscription fees. They may or may not have a share capital. member is limited to the extent of the guarantee and the f subscribed by them, if the company has a share capital. be a public company or a private company. The amount of guarantee of each member is in t

s amount

cannot be called upon except in the even

Non-

trading or non-profit companies f

, science, religion,

commerce, charity, sports etc. a

ies limited by guarantee. e to the promoters to form a

iii) Unlimited Compa company with or wit

y not having any limit on the liability

of its members

ny’ [Sec 12(c)]. An unlimited company

may or m or a

has a share capital it may be a public company any has a share capital, the article shall state the which the company is to be registered [Sec 27 (1)] unlimited company shall state the number of member with is to be registered. Basis of Number of Members he basis of number of members, a company may be :

(1) Private Company, and (2) Public Company.

(14)

A.

Private Company According to Sec. 3(1) (iii) of the Indian Companies Act, 1956, a private

is that company which by its articles of association : i)

limits the number of its members to fifty, excluding members or ex-employees who were and conti

ii)

restricts the right of transfer of shares, if

iii)

prohibits any invitation to the publ

s or

debentures of the company. Where two or more persons hold sh

ingle member.

According to Sec 12 of the Co

mber of members to

form a private company is tw

e the word “Pvt” after its

name. any. The main features of a private

Characteristics or of a private co i)

cts the right of transfer of its shares. The shares ny are not as freely transferable as those of public e articles generally state that whenever a shareholder of a ompany wants to transfer his shares, he must first offer them to existing members of the existing members of the company. The price of the shares is determined by the directors. It is done so as to preserve the family nature of the company’s shareholders.

(15)

ii)

It limits the nu...