Tuesday, October 27, 2015

Nature of Company - CS EXECUTIVE & CA IPCC


Companies Act, 2013 is an Act of the Parliament of India which regulates incorporation of a company, responsibilities of a company, directors, and dissolution of a company.  The 2013 Act is divided into 29 chapters containing 470 sections as against 658 Sections in the Companies Act, 1956 and has 7 schedules. The Act has replaced The Companies Act, 1956 (in a partial manner) after receiving the assent of the President of India on 29 August 2013. The Act came into force on 12 September 2013 with few changes. 

SECTION (1) Companies Act is Having wide applicability
This Act may be called the Companies Act, 2013.
It extends to the whole of India including state of Jammu & Kashmir.
This section shall come into force at once and the remaining provisions of this Act shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint and different dates may be appointed for different provisions of this Act ( Applicability in installments that is why still certain sections of this act is yet to be notified)
The provisions of this Act shall apply to -
  1. companies incorporated under this Act ( New Companies)  or under any previous company law (existing Companies );
  2. insurance companies, except in so far as the said provisions are inconsistent with the provisions of the Insurance Act, 1938 or the Insurance Regulatory and Development Authority Act, 1999;
  3. banking companies, except in so far as the said provisions are inconsistent with the provisions of the Banking Regulation Act, 1949;
  4. companies engaged in the generation or supply of electricity, except in so far as the said provisions are inconsistent with the provisions of the Electricity Act, 2003;
  5. any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act; and
  6. Such body corporate, incorporated by any Act for the time being in force, as the Central Government may, by notification, specify in this behalf, subject to such exceptions, modifications or adaptation, as may be specified in the notification.


It means an association of both natural and artificial persons formed and registered under
  • this Act (The companies Act ,2013) New Company or
  • Any of the previous companies Laws. The Indian companies Act 1866, The Companies Act 1913  or companies Act 1956  Existing Company

Meaning of Company
It’s a formal organization of conducting business, and can be formed, continues and ends by following the law.

A company is a corporate body and a legal person having status and personality distinct and separate from the members constituting it. It is called a body corporate because the persons composing it are made into one body by incorporating it according to the law and clothing it with legal personality.
‘Corporation’ is a legal person created by a process other than natural birth. It is, for this reason, sometimes called artificial legal person. As a legal person, a corporate is capable of enjoying many of the rights and incurring many of the liabilities of a natural person.

An incorporated company owes its existence either to a special Act of Parliament or to company law. Public corporations like Life Insurance Corporation of India, SBI etc., have been brought into existence through special Acts of Parliament, whereas companies like Tata Steel Ltd., Reliance Industries Limited have been formed under the Company law i.e. Companies Act, 1956 which is being replaced by the Companies Act, 2013.

An association formed not for profit also acquires a corporate character and falls within the meaning of a company by reason of a license issued under Section 8(1) of the Act.

Section 9
From the date of incorporation mentioned in the certificate of incorporation, such subscribers to the memorandum and all other persons, as may, from time to time, become members of the company, shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company under this Act and having perpetual succession with power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name.

1. Incorporated association: A company is formed and registered under the companies Act. Registrations of a company are done by complying with the prescribed formalities prescribed under the Act.

2. Artificial person:
  • A company is an artificial person. But it is not a fictitious person.
  • A company is not a natural person. A company is formed under law. However the law regards company as an artificial person as distinct from members who form the company.

3. Separate legal entity:
  • A company is a legal person in the eyes of law distinct from its members
  • A company is a separate person having its own rights and obligations.
  • Case References – Salomon v Salomon & Co. Ltd., Lee v Lee’s Air Farming Ltd.

4. Perpetual Succession:
Prof. Grower rightly said “members may come & go, but the company can go on forever
  • Death, insolvency, insanity etc. of any member does not affect the continuity of the company. Thus, the life of a company does not depend upon the life of its members
  • It is generally said that ‘members may come and go, but the company goes on forever’. A company is created under a law and can be wound up only in accordance with the law. In the words of Grower  “ Even a hydrogen bomb cannot destroy
  • A company.

5.  Limited Liability
  • Liability of members of a company is limited. . The extent of liability depends upon the type of company.
  • Nature of company ,
  • Company Limited by Shares
  • Amount unpaid on the shares held by every member.
  • Company limited by Guarantee
  • Amount guaranteed by every member.
  • Unlimited company
  • Every member is liable to contribute to the assets of the company until all the debts of the company are paid in full

6. Transferability of shares
  • Shares are movable property (Sec. 44).
  • Shares are transferable in the manner provided in articles (Sec. 44).
  • Private company the right to transfer the shares is restricted.
  • Public company – shares are freely transferable.

7.  Separation of ownership from management
  • The members do not participate in day  to day affairs of the company
  • The management of the company lies in the hands of elected representatives of members, commonly called as Board of directors or directors or simply the Board.
  • The directors are appointed as well as removed by the members. Thus, the Act has ensured the ultimate control of members over the company.

8. Separate property
  • A company can own and enjoy property in its own name.
  • Members are not owners or co-owners of the company’s property.
  • Members have no insurable interest in the property of the company. Example
  • M virtually owned all the shares in a company.
  • The timber belonging to the company was insured in the name of M.
  • The timber was destroyed by fire. M made a claim  against the insurance company for loss of timber,
  • The insurance claim was rejected since M had no insurable interest. Timber was property of the company and  not a property of M.

9. Capacity to sue and be sued
  • A company can sue others and be sued in its own name.

- A company is a legal entity separate from its members
- It is known by its own name, has rights and liabilities of its own.
Salomon v Salomon & Co. Ltd.
- Transfer of sole proprietorship business to company. Mr. Salomon was carrying on the business of boot manufacturing as a sole proprietor. He incorporated a company named Salomon & Co. Ltd. for the purpose of taking over this business.
- Payment of purchase consideration by the company:
(a) Total consideration                                                          £ 39,000
(b) Cash paid                                                                          £    9,000
(c) Fully paid shares of £ 1 each issued to Salomon         £  20,000
(d) Secured debentures issue to Salomon                         £  10,000

Constitution of Salomon & Co. Ltd. The 6 members of the family of Mr. Salomon were issued one share each. Salomon was the managing director of Salomon & Co. Ltd. Salomon & Co. Ltd. is commonly called as ‘one man company.

- Inability to pay debts by the company in liquidation. In the course of business, the company borrowed from creditors to the extent of £ 7,000. Due to trade depression, the company ran into financial difficulties and eventually went into liquidation. The assets realized only £ 6,000.
Since Salomon was a secured creditor, he made a claim on the amount with the company.
- Contention of unsecured creditors – one man cannot owe money to himself. The unsecured creditors contended that Salomon was carrying on business in the name of Salomon & Co. Ltd. Thus, Salomon and Co. Ltd. was a mere agent for S.
- Decision of the Court. It was held that Salomon & Co. was a real company fulfilling all legal requirements. It had an identity different from its members, and therefore, the secured debentures were to be paid in priority to unsecured creditors.
Implications of the Rule of ‘separate legal entity’

- There can be a transfer of property from a member to the company and vice-versa.
- A person can be a member, director, employee and creditor of the company at the same time.
- A company has the rights and duties of its own.
- A company is not an agent of members or directors.


The legal personality of a company is distinct and different from its members individually and collectively. Comment and point out the circumstance when the separate personality of a company is disregarded by the courts.
Meaning of corporate veil
A company is a distinct entity.  A company is an Artificial judicial person.  A company cannot function on its own.  A company is managed and controlled by Directors and Members. However a company is considered as distinct entity from its members and directors. Thus there is a veil between the company and its directors.

By fiction of law a company is seen as a distinct entity, yet in reality it is an association of persons who are in fact the beneficial owners of all the corporate property. This fiction is created by a fictional veil, i.e., the corporate veil.
Effect of corporate veil
Only a company is liable for the acts (and defaults) done in the name of the company even though members, directors, or any officer or employee of the company had acted on behalf of the company.
 In the eyes of law, company is seen as a distinct entity.
- Case References – Salomon v Salomon & Co. Ltd., Lee v Lee’s Air Farming Ltd.
Meaning of lifting or Piercing the corporate veil
The separate personality of a company is a statutory privilege and it must be used for legitimate business purposes only.
As separate personally of the company is a statutory privilege. It must be used for legitimate business purpose only. Where a fraudulent and dishonest use is made of the legal entity, the individuals concerned will not be allowed to take shelter behind the corporate personality. The court will break through the corporate shell and applies the principle of what is known as “lifting of or piercing through the corporate veil”.
  • Lifting of corporate veil means ignoring the separate identity of a company.
  • Lifting of corporate veil means disregarding the corporate personality and looking behind the real persons who are in the control of the company

Lifting is permissible only in exceptional cases
Lifting of corporate veil is permissible only if-
  • it is permitted by the Statute; or
  • There is a clear evidence of abuse of the device of incorporation.
The Court has the discretion whether or not to lift the corporate veil may be lifted.

(A) Lifting of corporate veil under statutory provisions.
Fraudulent trading (Sec.339)
  • if in a winding up
  • it appears to the tribunal
  • that the business of the company has been carried on with intent of defraud its creditors or any other person,
  • the court may declare
  • that any of the directors or officers who are parties to the fraud
  • Shall be personally liable.

Various other section of companies Act 2013
Apart from section 339 there are various other sections under which  directors and promoters are personally liable for the offences committed by the company.
Arrears of tax (Sec. 179 of the Income Tax Act, 1961)
-    In case a private company
-    Is being wound up, but
-    any tax payable by the company cannot be recovered.
-    Then, every person who was a director at any time during the relevant previous year
-    shall be jointly and severally liable for the payment of tax.

Ultra Virus Acts
The directors of a company shall be personally liable for all the ultra vires acts done by them on behalf of the company Ultra virus Acts means those acts of the company which are beyond  the  powers of the company as stated in the memorandum of Association of the company.
(B) Lifting of corporate veil under judicial decisions
Protection of revenue
Re, sir Dinshaw Maneckjee Pettit
An assessee was receiving huge dividend and interest income on certain investments.
  • He formed four private companies. The whole of the investments were transferred to these private companies
  • The interest and dividend received by these companies were within the exempted limits under the Income Tax Act of that time.
  • These companies did not have any business or asset except these investments.
  • The income received on investments by these companies was diverted to the assessee in the form of pretended loans, which were never paid back by him.
  • The Court held that the only purpose of incorporating these private companies was to evade taxes. Each of these companies was a sham. Therefore, income earned by all these private companies was treated as the income of the assessee.

Prevention of fraud or improper conduct
Gilford Motor Co. Ltd. v Horne
  • An employee entered into a contract with his employer that he will not solicit the customers of the employer after leaving the employment.
  • After leaving the employment, the employee incorporated a company. He, his wife and one other person were the only members of this company.
  • The company started soliciting the customers of the employer.
  • The Court held that the purpose of formation of the company was to avoid a legal obligation arising from a contract, which was not permissible. It was held that the company and the controlling persons were same.
  • Therefore the company was restrained from soliciting the customers of the employer.

Determining the character of the company – whether an enemy company
A company can be regarded as having enemy character under certain circumstances.
Daimler Co. Ltd. v Continental Tyre & Rubber Co. Ltd.
  • A company was formed in England for the purpose of selling tyres made by a German company. The German company virtually held the entire share capital of the English company. All the directors were German residents.
  • During the First World War, the English company commenced an action to recover a trade debt from another English company
  • It was held that the corporate personality of the company be ignored and the persons in the ultimate control of the company shall be considered. Since the persons controlling the company were enemies, the suit was not maintainable.  The company recovering the debt was  considered as german company though it was formed in England.

Check avoidance of welfare legislation
  • Workmen employed in Associated Rubber Industries Ltd. v Associated Rubber industries Ltd.
  • As per Bonus Act, 1965, the basis of payment of bonus is the profits earned.
  • A company was earning huge profits. The company incorporated a subsidiary company and transferred some valuable investments to it.
  • The subsidiary company did no business, and had no assets except the investments transferred to it.
  • Looking at the purpose of formation of the subsidiary, the court lifted the corporate veil. It was held that the subsidiary was formed merely for the purpose of reducing the liability of bonus payable under the Bonus Act. Therefore the profits earned by the subsidiary company were held to be the profits of the holding company.

IS COMPANY 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. Some fundamental rights are  given to citizens only  and some fundamental rights are availabl;e to all persons , citizens as well as non citizens.. Since a company is not a citizen, the fundamental rights which are available only to a citizen, 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.



Mode of creation: A company comes into existence only when it is incorporated under the Companies Act, 1956. A partnership  is formed on the basis of an agreement.  A partnership may or may not be registered under the Indian Partnership Act ,1932.
Separate legal entity: A company has an identify of its own. Law does not consider partnership as a separate legal entitiy.
Perpetual succession: A company enjoys the benefit of perpetual succession. Death or insolvency of shareholder(s) does not affect the continuity of the company. A partnership  comes to an end on the death,  or insolvency of a partner.
Transfer of shares: A member of the company can transfer his shares. On such transfer, the transferee becomes a member of the company.
Management: A company is managed by the directors.
Mutual agency : There is no mutual agency between the members of a company. Thus, no member of the company is bound by the acts of any other member. Similarly, the company is not bound by the acts of a member.  Acts of the partner bind other partners.
Separate property: A company has separate property
Capacity to sue and to sued : A company can sue and be sued in its own name.  Law regards partner and   firm as one.
Liability : The liability of the members is generally limited. Liabilty of partners is unlimited except where a firm has been constituted under Limited liability partnership Act.
Minimum number of  persons: There must be at least 2 members in case of a private company, and 7 members in case of a public company. Minimum two partners are required to form a partnership firm.
Maximum number of persons: The maximum number of members in case of a private company is 50. There is no maximum limit in case of a public company. Maximum number of partners is 10 in case of banking business and 20 in case of any other business.
Audit :The audit of accounts is mandatory in case of all companies
Minimum :Every private must have a minimum paid up capital of Rs. 1 lakh. Every public must have a minimum paid up capital of Rs. 5 lakhs.
Non-profit activities : A company may be formed for carrying on a non-profit activity.
Limitation of action: No creditor of the company has a right to proceed against any member for recovery of any amount payable by the company. This will be so, even if a member holds partly paid shares.  A credit can proceed against the partner if the firm is unable to pay its debt.
Contracts with members : Since a company has a separate identity apart from its members, it can enter into a contract with any member.
Division of profits :The distribution of profits is optional since a company may or may not declare dividends even if it has earned huge profits. Thus, no member is entitled to a fixed share of profits earned every year.

Section 11 is replaced by section 464
Under section 464 of the companies Act, an association or partnership which has been formed for the purpose of carrying on any business that has for its object acquisition of gain should have more than 50 members. If the number of members exceed fifty it should be  registered under the companies act or should be formed under any other law for the time  being in force.

In order to prevent the mischief arising from large trading undertakings being carried on by large fluctuating bodies so that persons dealing with them did not know with whom they were contracting, the law has put a ceiling on the number of persons constituting an association or partnership. An unincorporated company, association or partnership consisting of large number of persons has been declared illegal. Rule 10 of Companies (Miscellaneous) Rules, 2014 prescribes 50 persons in this regard.

By virtue of section 464 of the Companies Act, 2013, no association or partnership consisting of more than such number of persons as may be prescribed shall be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the association or partnership or by the individual members thereof, unless it is registered as a company under this Act or is formed under any other law for the time being in force. The number of persons which may be prescribed under this section shall not exceed 100. Section 464 of the Act does not apply to the case of a Hindu undivided family carrying on any business whatever may be the number of its members. 

However, this section is also not applicable to an association or partnership, if it is formed by professionals who are governed by special Acts. Since, the law does not recognize it, an illegal association:

  1. cannot enter into any contract;
  2. cannot sue any member, or outsider, not even if the company is subsequently registered;
  3. cannot be sued by a member, or an outsider for recovery of any debts;
  4. cannot be wound up by an order of the Court.

In fact, the Court cannot entertain a petition for its winding up as an unregistered company, for if it did, it would be indirectly according recognition to the illegal association However, an illegal association is liable to be taxed The members of an illegal association are individually liable in respect of all acts or contracts made on behalf of the association; they cannot either individually or collectively, bring an action to enforce any contract so made, or to recover any debt due to the association

Under sub-section (3) of section 464, every member of an illegal association shall be punishable with fine which may extend to one lakh rupees and shall also be personally liable for all liabilities incurred in such business.

Applicability of Section 464 to LLPs This section will not be applicable to LLPs as they are incorporated as bodies corporate under LLP Act.
The Government considered the recommendations of Irani Committee and also had detailed discussions and liberations with various stakeholders viz Industry Chambers, Professional Institutes, Government Departments, Legal Experts and Professionals etc. Thereafter, the Companies Bill, 2009 was introduced in the Lok Sabha on 3rd August, 2009, The Bill laid greater emphasis on self regulation and minimization of regulatory approvals in managing the affairs of the company. The Bill promised greater shareholder democracy, vesting the shareholders with greater powers, containing stricter corporate governance norms and requiring greater disclosures.

The objectives of the Bill were:
  1. Revising and modifying the Act in consonance with the changes in the National and International economy,
  2. Bringing about compactness of company law by deleting the provisions that had become redundant and by re-grouping the scattered provisions,
  3. Re-writing of various provisions of the Act to facilitate easy interpretation,
  4. De linking the procedural aspects from the substantive law and provide greater flexibility in rule making to enable adoption to the changing economic and technical environment.
  5. Enabling the corporate sector to operate in a regulatory environment of best international practices that fosters entrepreneurship, investment and growth. 


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