This article is written by Adwitiyo Raha, Amity University, Kolkata, LLM, during his internship at LeDroit India.

Abstract : 

A company is a unique legal entity formed under the Companies Act, 2013, marked by its independent legal status, limited liability, continuous existence, and organized management. These features set a company apart from other business forms and lay the groundwork for its stability and operational effectiveness. Separate legal entity ensures that the company operates independently from its shareholders, while limited liability shields members from personal financial liabilities. Moreover, perpetual succession allows the company to persist despite changes in ownership. The ability to transfer shares in public companies facilitates liquidity, and the capacity to initiate or face legal action ensures legal responsibility. Additionally, companies function under a specified ownership and management framework, guaranteeing specialised administration. This summary outlines these essential characteristics, highlighting their importance in promoting corporate stability, governance, and legal adherence.

Keywords: Separate legal entity, limited liability, perpetual succession, artificial person, corporate governance, body corporate.

Introduction  : 

A company is a voluntary association of persons, who come together for the pursuance of a common objective i.e. to carry on a business and share the profits earned from it.

Prof Lewis Henry had defined a company as an artificial person that is created by law, having a separate entity. A company shall have perpetual succession and a common seal.

 According to Section 2(20)  a company is an  association of different persons and comes into existence after being incorporated. 

The most fundamental characteristic of a company is its incorporation (recognised by the law). A company shall only come into existence once it is incorporated. A company gains legal status after the completion of its incorporation process. As formulated by the House of Lords in the landmark case of Salomon v. Salomon & Co. Ltd. (1897), once incorporated a company becomes a separate legal entity, separate from its members and shall have the right to enter into contract, hold property, sue and be sued in its own name. The article shall elucidate the following characteristics of a company, comprehensively.

Characteristics of a Company : 

The characteristics of a company are as follows : 

1. Separate Legal Entity : 

A company has a separate legal identity from its members[1]. In simpler terms it means  that a company’s assets and liabilities are distinct from the liabilities of its shareholders. The principle of separate legal personality had its inception in the case of Salomon v. Salomon & Co. Ltd [2],  protecting shareholders from personal liability for the company’s debts.

Salomon v. Salomon & Co. Ltd. [1895-99] All ER 33 (HL)

Facts : In the well known case of Salomon v. Salomon & Co. Ltd. [1895-99] All ER 33 (HL), Salomon, a leather merchant, had converted his business into a Limited Company— Salomon & Co. Ltd [3]. The company consisted of Salomon, his wife and his five children, as members. Later on another company purchased the business of Salomon for £39,000, the purchase consideration was paid in terms of £10,000 debenture conferring a charge over the company’s assets, £20,000 in fully paid £1 share each and the balance in cash. Within a year of its functioning the company ran into difficulties and entered liquidation [2]. The creditors demanded a refund for their contribution and according to them Salomon was personally liable to them.

Judgement : : In its judgement, the House of Lords held that a company had been validly constituted under the respective Act. The business belonged to the company and not to Salomon, and Salomon was its agent. Therefore Salmon cannot be held accountable for the liabilities of the company.

Lee v. Lee’s Air Farming Ltd. (1960) 3 All E.R. 420    

Facts : In 1954, Lee, the appellant’s husband, established a company called LEE’S AIR FARMING LTD. to engage in the business of aerial top-dressing. The company was formed with a share capital of 3,000 shares, each valued at 1 euro, with Lee personally owning 2,999 of these shares. Lee also served as the company’s director, wielding complete authority over its operations and making all contractual decisions. The company entered into several contracts with insurance agencies to insure its employees, and some premiums for Lee’s personal policies, taken out in his own name, were paid from the company’s bank account but recorded as debits in Lee’s account in the company’s books. Besides being the director, Lee was also a pilot. In March 1956, Lee tragically died while piloting an aircraft during an aerial top-dressing operation. Lee’s wife, the appellant, sought worker compensation under the New Zealand Workers’ Compensation Act of 1922, asserting that Lee was an employee of the company at the time of his death. However, the New Zealand Court of Appeal rejected her claim, ruling that Lee could not be considered a worker since a person cannot effectively employ themselves.

Issues Raised by the Respondent : The respondent contended that Mr. Lee could not be considered the owner because there was no master-servant relationship between him and the company.

Judgement : The Privy Council decided in favor of Lee’s wife, determining that a company is legally distinct from its shareholders, even if a single individual owns all the shares and manages the business. The court found that Lee and his company had an employer-employee relationship through a contract, despite his controlling role. As a separate entity, the company was capable of employing him under a valid contract. Consequently, his wife was eligible for workers’ compensation. This significant decision reinforced the principle established in Salomon v. Salomon & Co. Ltd (1895-1899), confirming the concept of corporate separate legal personality and the validity of sole directors being employees of their own companies.

2. Limited Liability : 

 A company ensures limited liability for its members and shareholders as it is a separate legal entity [1]. Section 3(2) of the Companies Act, 2013, classifies companies as either a company limited by shares or a company limited by guarantee. In a company limited by shares, the liability of its members extend till the unpaid value of their shares [3]. In informal terms, it means that the financial liability of the shareholder is limited to a specific amount i.e. the value of their shares. Limited by guarantee means that the members of a company are only responsible for paying a fixed amount, as a “guarantee”, if the company faces financial trouble or is about to wind up. Limited liability protects the members personal assets from the company’s debts and obligations.

3. Transferability of Shares : 

Transferability of shares allows shareholders to buy, sell, or transfer their ownership interest in the company without affecting its existence. This feature provides liquidity and flexibility, making investment in companies more lucrative. As provided in Section 44 of the Companies Act, 2013 shares are a movable property [3]. For a public company, shares are transferable without restrictions; however for a private company, strict compliance with the procedure prescribed in the article of association (AoA) must be adhered to.

Implications of Transferability of Shares:

• Liquidity for Investors : Shareholders of public companies can easily sell their shares. This makes the option of investing in a public  company more lucrative. 

• Continuity of Business : Since share transfer does not affect the company’s operations, ownership changes without disrupting the company’s legal existence.

• Wealth Creation and Capital Mobilization : Companies that are listed can raise capital  by issuing shares that can be traded freely in a recognised stock exchange.

4. Perpetual Succession : 

Perpetual succession refers to a company’s ability to continue its existence regardless of changes in ownership, management, or membership. A company continues to exist even after the death, retirement or insolvency of its members  [3]

Perpetual succession is an inherent feature of a company after incorporation as mentioned under Section 9 of the Companies Act, 2013

5. Capacity to Sue and be Sued :

 Since a company is  a body corporate, it can sue and also be sued in its own capacity (name) [6].  This means that companies can be parties to legal proceedings that are instituted in its name. It can either be the complainant or the respondent in a proceeding before the NCLT.

6. Capacity to Contract : 

As a separate legal entity, a company can enter into contracts in its own capacity (name). A company’s capacity to enter into and enforce contracts is foundational to its operations. This ability ensures that businesses can uphold agreements essential for their growth and sustainability. Contracts entered into by the directors who are its authorized agents are binding on the company itself.

7. Artificial person : 

A company is an artificial person. Being an artificial person, a company is bound to rely upon natural persons, the directors and  officers, for successfully functioning. These individuals function as an agent of the company and accountability of  the act performed by them , within the authority granted, are binding on the company as whole and not on individual members, However the Court may apply “Piercing of the Doctrine of the Veil” if necessary and as required by the facts of the case, can hold individuals accountable for misfeasance. [3]

It was observed in the case of Bates Vs 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”.

It was held in the case of State Trading Corporation of India Vs C.T.O  (1963),  that, “ neither  the provisions of the  Constitution  nor the Citizenship Act apply to  it (the company in question). 

8. Common Seal : 

A company is an artificial person and cannot sign documents for itself. But having a legal identity, it acts through its directors, natural persons. Section 22 of the Companies Act, 2013 has provided for the use of a “common seal” to be used as a substitute for its signature. All contracts entered into by the directors will be under the common seal of the company. Documents that bear the company’s common seal are legally binding on the company and therefore can be enforced against it.

9. Separate Property : 

A company has the capacity to hold property in its own name. The directors or shareholders cannot claim the company’s property to be their own. The company can manage or  dispose of the property at its own volition. 

Conclusion : 

The notion of a company as a separate legal entity is fundamental to corporate law, allowing businesses to function effectively, expand sustainably, and uphold accountability as outlined in the Companies Act, 2013. The essential features of a company—distinct legal identity, limited liability, perpetual succession, organized management, and the ability to transfer shares—together form its legal and operational structure. These characteristics enable companies to act as independent entities, promoting economic development, innovation, and investor trust. A key benefit of corporate personality is the principle of a separate legal entity, which protects shareholders from direct liability while allowing the company to enter into contracts, initiate lawsuits, and be sued in its own name. This principle, highlighted in landmark cases such as Salomon v. Salomon & Co. Ltd and Lee v. Lee’s Air Farming Ltd, emphasizes the corporation’s independence from its members. It ensures that the company’s financial and legal responsibilities are distinct from those of its shareholders, thereby encouraging investment by minimizing personal financial risk.

Corporations play a crucial role in economic development by fostering innovation, generating employment, and attracting foreign investment. Their capacity to function as distinct legal entities facilitates large-scale operations and global expansion, thereby contributing to a nation’s GDP. Concurrently, the emergence of corporate social responsibility (CSR) underscores that companies are not solely profit-oriented entities but also bear ethical and social obligations. This dual role—economic and social—renders corporate governance a vital component of contemporary business regulation.

References : 

1. https://www.linkedin.com/pulse/lifting-corporate-veil-legal-perspectives-case-studies-abhishek-khare-oibwf
2. https://www.lawctopus.com/academike/corporate-veil
3. https://www.taxmann.com/post/blog/what-is-a-company-definition-characteristics-and-latest-case-laws
4. https://www.studocu.com/row/document/mzumbe-university/business-law/11-g-law-assignment-on-business-law/97421762
5. https://indiankanoon.org/doc/118940463
6. https://lawalpine.com/blog/legal-characteristics-of-a-corporate-body