This article is written by Pooja Biswas, of 8th Semester of South Calcutta Law College, University of Calcutta pursuing BA LLB, during her internship at LeDroit India.
KEYWORDS –
Company, Legal Entity, Limited Liability, Perpetual Succession, Corporate Personality, Shareholders, Judicial Precedents, Statutory Compliance, Corporate Governance, Business Law
ABSTRACT –
A company is a separate legal person created to carry on business with a view to making profit or serving certain purposes. This article discusses the primary features of a company, including its artificial legal personality, distinct existence from the shareholders, perpetual succession, and limited liability. It also classifies companies according to liability, control, incorporation, ownership, purpose, and nationality. Through a comprehension of such features and juridical principles, companies and investors can function within the world of corporations proficiently while meeting statutory requirements.
INTRODUCTION –
A company is a legally valid entity formed by individuals or groups of people to carry out business operations with the aim of making profits or meeting specific goals. It has a separate legal personality apart from its owners and managers, enabling it to acquire property, make contracts, and operate in its name. Legal separation is an essential aspect of business administration, which makes it easy to comply with statutory laws and promote commercial expansion.
The term “company” comes from the Latin words ‘com’ (together) and ‘panis’ (bread), meaning a group effort for a common objective. In law, it is a body incorporated that can make business transactions independently. As per Section 2(20) of the Companies Act, 2013, “A company means a company incorporated under this Act or under any previous company law.”
A company is typically defined as a business organization in which people work together towards a common goal, usually with the goal of making a profit. Nevertheless, from a legal perspective, a company has a more formal and defined meaning.
CHARACTERISTICS OF A COMPANY –
- An artificial legal person
An artificial legal person created by the law is a company. It possesses the same rights as a natural person, including the ability to hold property, enter into agreements, and take part in court cases. However, it is made possible by human agents who make choices on its behalf, such as officers and directors.
- A distinct legal entity
A company’s legal personality is distinct from that of its directors and stockholders. This theory, which was established in the 1897 case of Salomon v. Salomon & Co. Ltd., ensures that the owners are not held liable for the company’s debts. Financial security is provided by the fact that shareholders are not held personally responsible for the company’s debts. - Unending Succession
A business has perpetual succession, meaning that it will continue to exist regardless of changes in ownership, member resignations, insolvencies, or deaths. Until the business is legally liquidated through winding-up proceedings, it remains in operation.
- Liability Limitations
The liability of shareholders is limited to the number of shares they own. Except for their involvement in the company, creditors cannot seize personal property from shareholders if the company has debts or contractual commitments. This clause encourages company growth while protecting investors.
- Share Transferability
Shares of publicly traded corporations can be easily transferred between investors, offering investment opportunities and liquidity. Private firms may use their articles of association to limit the transfer of shares.
- Capacity to File and Receive Lawsuits
A company’s independent legal standing is confirmed by the ability to sue or be sued in its own name. This promotes legal accountability and makes it easier to enforce commitments and contracts.
- Distinct Management and Ownership
Owners or shareholders designate a Board of Directors to manage the business; they do not personally administer it. This distinction guarantees professional management and allows businesses to access seasoned leadership.
- Common Seal (Optional in Certain Jurisdictions)
In the past, companies employed a common seal as a formal signature for legal purposes. Although obligatory in some jurisdictions, contemporary legislation more frequently enables specific authorized directors or officers to sign documents on behalf of the company.
- Voluntary Association for Profit
Firms are normally established voluntarily by persons or organizations with the view of operating businesses for gain. The profits are shared among shareholders in the form of dividends.
- Statutory Compliance and Regulation
Statutory compliance involving annual filings, financial disclosures, and regulatory requirements according to applicable company laws has to be maintained by a company. These controls guarantee corporate accountability and transparency and safeguard stakeholders’ interests.
TYPES OF COMPANY –
Companies can be classified on the basis of –
- Liability –
- Limited Liability Company (LLC): In these companies, the shareholders’ liability is limited to their investment in shares.
- Unlimited Liability Company: In these companies, the members are personally liable for company debts beyond their investments.
- Control –
- Holding Company: In these companies, a parent company controls other companies (subsidiaries) by holding a majority of shares.
- Subsidiary Company: In these companies, a company is controlled by another company (holding company).
- Incorporation –
- Statutory Companies: These companies are created by a special act of Parliament or legislature (e.g., Reserve Bank of India, Life Insurance Corporation).
- Registered Companies: In these companies, they are incorporated under the Companies Act or similar legislation.
- Ownership –
- Public Company: In these companies, the shares are freely transferable and can be listed on stock exchanges.
- Private Company: In these companies, the share transferability is restricted, and it cannot raise funds from the public.
- One-Person Company (OPC): In these companies, a single individual owns and manages the company with limited liability protection.
- Purpose –
- For-Profit Companies: These companies are formed with the objective of earning profits.
- Non-Profit Organizations (NPOs): These companies are established for charitable, social, or educational purposes (e.g., Section 8 companies in India).
- Nationality –
- Domestic Company: These companies are incorporated and operate within the same country.
- Foreign Company: These companies are registered in one country but conduct business in another.
- Multinational Corporation (MNC): These companies operate in multiple countries with a central headquarters.
ILLUSTRATIONS –
- Salomon v. Salomon & Co. Ltd. (1897) –
This was a leading case that set the doctrine of separate legal personality. The House of Lords held that a company is a separate entity from its proprietors, i.e., shareholders are not liable for the debts of the company beyond their investment. This case reinforced the doctrine of limited liability, holding that creditors should not be able to seek out the personal wealth of shareholders, thereby defining modern corporate law. It also explained that once a company is lawfully incorporated, it should be treated as an independent legal entity regardless of how many shareholders it has.
- Foss v. Harbottle (1843) –
This case established the “proper plaintiff rule,” that is, that where there are disputes within a company, the company itself rather than individual shareholders has to initiate proceedings. The rule avoids undue interference by shareholders in company affairs and maintains corporate democracy. The ruling also created that courts would not interfere in management disputes internally except where exceptions such as fraud or illegality were involved. This case is still central to corporate law, making sure that directors and majority shareholders make corporate decisions without perpetual legal attacks from minority shareholders.
- Gilford Motor Co. Ltd. v. Horne (1933) –
It was a case concerning a former employee who set up a company to circumvent a non-competitive agreement with his former employer. The court held that the company was a sham formed to circumvent legal obligations, and the veil of the company was lifted. This case established a significant precedent that the corporate personality will be disregarded where a company is employed for fraudulent or dishonest activities. It reaffirmed that the courts could step in to stop people from abusing corporate forms to avoid contractual obligations or engage in wrongdoing.
- Lee v. Lee’s Air Farming Ltd. (1961) –
The case reaffirmed the principle that an individual can be both an employee and a shareholder of a company. Lee, the sole director and shareholder of his company, was killed in an accident at work. His widow applied for workers’ compensation, but the insurance company contended that Lee could not be both employer and employee. The Privy Council held that as the company was a distinct legal person, Lee was a statutory employee according to the law. The case confirmed the doctrine of corporate personality and allowed individuals to contract with their own companies in distinct legal capacities.
- Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (1916) –
This case illustrated how legal personality could be overlooked when national security is involved. At the time of World War I, the UK government wondered if Continental Tyre, a UK-registered but German-shareholder-controlled company, could be dealt with as an enemy organization. The House of Lords held that the nationality of the company ought to be decided based on its controlling shareholders, resulting in the limitations of trading with enemy-controlled enterprises. The case demonstrated that the personality of a company is not fixed but could be overridden in extraordinary situations, especially those involving national interests.
- Ashbury Railway Carriage & Iron Co. Ltd. v. Riche (1875) –
The case set forth the ultra vires doctrine, which limits a company from carrying out activities other than those explicitly mentioned in its memorandum of association. The company had signed a contract to fund a railway line project, which was not among its authorized activities. The House of Lords declared the contract null and invalid since it overstepped the legal capacity of the company. The case highlighted the significance of complying with company goals and safeguarding shareholders against unauthorized commercial undertakings. While subsequent legislation, including the Companies Act 2006, restricted the strict enforcement of ultra vires, the case retains historical value under company law.
- Macaura v. Northern Assurance Co. Ltd. (1925) –
This case explained that the assets of a company belong to the company and not to the shareholders. Macaura had insured timber in his name although it was transferred to his company. The insurance claim was rejected after tthe imber was burned since Macaura, being a shareholder, could not have an insurable interest in property owned by a company. The decision underscored the strict segregation between a firm and its shareholders so that shareholders could not claim ownership over corporate property in their personal capacity. The case reaffirmed the need to preserve distinct lines of demarcation between personal and corporate property.
CONCLUSION –
A company is a legally recognized organization that functions independently of its owners, providing financial security in the form of limited liability and perpetual succession. The doctrines of corporate personality, including the doctrine of separate legal identity and compliance with statutes, are essential in business administration. Judicial precedents have strengthened these doctrines, setting forth clear guidelines for corporate functioning and accountability. Recognizing these traits allows businesses to operate effectively while protecting the interests of stakeholders. Companies are, therefore, basic pillars of economic development, promoting innovation, investment, and commercial growth.
REFERENCE –
- Salomon v. Salo–mon & Co. Ltd. [1897] AC 22 (HL)
- Foss v. Harbottle (1843) 2 Hare 461, 67 ER 189
- Gilford Motor Co. Ltd. v. Horne [1933] Ch 935 (CA)
- Lee v. Lee’s Air Farming Ltd. [1961] AC 12 (PC)
- Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd. [1916] 2 AC 307 (HL)
- Ashbury Railway Carriage & Iron Co. Ltd. v. Riche (1875) LR 7 HL 653
- Macaura v. Northern Assurance Co. Ltd. [1925] AC 619 (HL)
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