The Company is a form of business organization in which the funds of a large number of investors are managed by a few persons for the purpose of earning profits which are shared by all the investors. The main objects and purposes of statutes relating to companies are as follows :
1.Encourage investments in companies by providing certain facilities, e.g., limitation of liability, transferability of shares etc. 2.Ensure due and proper administration of the funds and assets of companies in the interest of the investing public.
3.Preferment malpractices by directors and managers.
4.Arrange for investigation into the affairs of companies and provide for effective audit in dealing with cases of dishonesty ,and fraud in the corporate sector.
WHAT IS A COMPANY?
The term Company is used to describe an association of a number of persons, formed for some common purpose and registered according to the law relating to companies. Section 3(1)(i) of the Companies Act, 1956 states that a company means,
"a company formed and registered under this Act or an existing company."
Lord Justice Lindley defines a company as follows : "By a company is meant an association of many persons who contribute money or money's worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share."
A company, formed and registered under the Companies Act, is regarded by law as a single person, having specified rights And obligations. The law confers on a company a distinct legal personality, with perpetual succession and a common seal. Therefore a company is different t from its members and the individuals composing it. Suppose that, A, B, C and 50 other persons form a company called XY & Co. The Company, XY & co is a legal person quite separate from A, B, C and others. Therefore, A, B, C. etc. can enter into contracts with XY & Co
This principle is illustrated in the case Salomon v. Salomon & Co.ltd Salomon had a business in boot manufacture. He formed a company called Salomon & Co. (with himself, his wife, daughter and 4 sons as shareholders) and transferred to it his business. As consideration for the transfer he received the major portion of the shares of the company and debentures for £ 10,000. Later on, the company went into liquidation. Salomon, as a debenture holder, claimed to be a secured creditor and demanded priority in the payment of £ 10,000, out of the assets of the company. The unsecured creditors of the company objected on the ground that the business really belonged to Salomon and he should not be allowed to claim as a secured creditor. It has held that Salomon as an individual, was quite distinct from Salomon & Co.- and he could therefore be a secured creditor of the company, even though he happened to hold the majority of the shares.
ESSENTIAL FEATURES OF A COMPANY
The principal characteristics of an incorporated company can be summarized as follows:
- Registration : A company comes into existence only after registration under the Companies Act. But a Statutory Corporation is formed and commence business as notified or stated in the Act and as passed in the Legislature. In case of partnership, registration is not compulsory.
- Voluntary Association : A company is an association of many persons on a voluntary basis. Therefore a company is formed by the choice and consent of the members.
- legal personality: A company is regarded by law as a single person. It has a legal personality. This rule applies even in the case of "One-man Company." Salomon v. Salomon & Co. (ibid.).
- Contractual capacity: A shareholder of a company, in its individual capacity, cannot bind the company in any way. The shareholder of a company can enter into contract with the company and can be an employee of the company.
- Management: A company is managed by the Board of Directors, whole time Directors, Managing Director or Manager. These persons are selected in the manner provided by the Act and the Articles of Association of the company. A shareholder, as such, cannot participate in the management.
- Capital: A company must have a capital, otherwise it cannot work. .
- Permanent existence : The company has Perpetual Succession. The death or insolvency of a shareholder does not affect its existence. A company comes into end only when it is liquidated according to provisions of the Companies Act.
- Registered Office : A company must have a registered office.
- Common Seal: A company must have a Common Seal.
- Limited Liability: The liabilities of shareholder of a company are usually limited. 'The creditors of a company are not creditors of individual shareholders and a decree obtained against a company cannot be executed against any shareholders. It can only be executed against the assets of the company.
- Transferability: The shareholder of a company can transfer its share and ordinarily the transferee becomes. a member of the company.
- Statutory Obligations : A company is required to comply with various statutory obligations regarding management, e.g., filing balance sheets, -maintaining proper account books and registers etc.
- Not a citizen: A company is an artificial person, not a natural person. Therefore a company is not a Citizen, although it may have a Domicile. State Trading Corporation of India v CTO .Divisional Forest Officer v. Bishwanath Tea Co. Ltd.
- Residence : A-company has a residence (for taxation and other purpose). A company does not possess any fundamental rights. Tata E. 8c L. Co. Lid' v. State of –Bihar.
- fundamental rights :though a company has" no fundamental rights, it can challenge a law as void if the law happens to violate fundamental rights of citizens)in order to succeed the company must prove that the impugned law is expropriatory of a citizen's property. Prithvi Cotton Mills v. Broach Borough Municipality'"
It is true that the Statesman newspaper being a Company has no fundamental rights. But the fundamental rights of the shareholders of the' Company as citizens are not lost when they associate to form a company. The shareholders' rights are equally and necessarily affected if the rights of the Company are affected." Statesman Ltd. and others v. Fact Finding Committee and others. '
- Social Objective : The. present view as regard the legal nature of Company Law is that the Company is a social institution having duties and responsibilities toward the community, its workers, the national economy and progress.
- Centrally Administrated: The administration of Company Law is entrusted to the Central Government.
- . "Lifting the veil" of the company
Is a Company a Property of the Shareholders ?
The new Concept of Company. There has been a considerable debate as to whether a Company is the property of the shareholders. In the case, National Textile Workers' Union v. P. R Ranrakrish:an3 the views of Supreme Court are quoted below :
It is now accepted on all hands, even in predominantly capitalist countries, that a company is not property. The traditional view that the company is the property of the shareholders is now an exploded myth. A company according to the new socioeconomic thinking, is a social institution having duties and responsibilities towards the community in which it functions. Maximisation of social welfare should be the legitimate goal of a company and shareholders should be regarded not as proprietors of the company, but merely as suppliers of capita! entitled to no more than reasonable return and the company should be responsible not only to shareholders but also to workers, consumers and the other members of the community and should be guided by considerations of national economy and progress.
COMPANY AND PARTNERSHIP
The points of difference between a Partnership and a Company can be summed up as follows
A company is regulated in accordance with the Companies Act, 1956 and its subsequent amendments, while a partnership is regulated by the Indian Partnership Act, 1932
- Registration : A company comes into existence only after registration under the Companies Act. In the case of a partnership, registration is not compulsory.
- Minimum number of members : The minimum number of persons required to form a company is 2 in the case of private companies and 7 in the case of public companies- The minimum number of persons required to form a partnership is 2.
- Maximum number of members : A public company may have any number of members. A private company cannot have more than 50 members. A partnership carrying on banking business cannot have more than IU members and partnership carrying on other types of business cannot have more than 20 members.
- Legal status : A company is regarded by law as a single person. It has a legal personality. A partnership is a collection of individuals. It is not considered, to be a single person.
- Authority of members : The property of a partnership is the joint property of the partners. Each partner has authority to bind the firm by his acts. The property of the company belongs to the company. A shareholder in his individual capacity cannot bind the company in any way.
- contractual capacity : The shareholder of a company can enter into contracts with the company and can be an employee of the company- Partners can contract with other partners but not with the firm as a whole.
- Management : . A partnership firm is managed by the partners themselves. The work of management can be distributed among them in any manager they like. A company is managed by the Board of Directors or Whole Time Directors or Managing Directors or Manager , who are selected in the manner provided by the Act. A shareholder, as such, cannot participate in the management.
- Length of existence : A company has perpetual succession. The death or insolvency of a member does not affect its existence. It comes to an end only when liquidated according to the provisions of the Companies Act. A partnership, in the absence of a contract to the contrary, comes to an end when a partner dies or becomes insolvent.
- Liability of members: The liability of the members of i partnership for. the debts of the firm is unlimited. The liability; of the members of a company is limited.
- Liability of firm and company: The creditors of. a firm are creditors of the individual partners, and a decree obtained against a firm can be executed against the individual partners The, creditors of a company are not creditors of the individual shareholders and a decree obtained against a company can no be executed against any shareholder. It can only be executed against the assets of the company.
- Transferability: A partner of a firm cannot transfer his interest in the firm to an outsider and make the transferee ; partner . without the, consent of all the other .partners.. The shareholder of a. company can. ordinarily. transfer, his share. 4ni the transferee becomes a member of the company.
- Statutory obligations: A company is required to comply: with various statutory obligations regarding management, e.g. filing balance sheets, maintaining proper account books and registers. In the case of,, partnership there are no such statutory obligations..
TYPES OF COMPANIES
There are two types of companies-Public and Private.
1. Private Company
a private company is one which by its articles,
(a) restrict the right of the members to transfer their shares, if any ;
(b) limit the number of its members (not counting its employees) to 50 and
(c) Prohibits any invitation to the public to subscribe for any shares in, or debentures of, the. Company
Where two or more persons. hold one or more. shares in company, jointly, they ,shall, for the purposes of this definition be treated, as a single. member.
2. Public Company
All companies other than private companies are called public companies .sec: 3(1)(iv)
Public companies may be classified into three types :
(i) companies limited by shares,
(ii) companies limited by guarantee, and
(iii) unlimited companies.
Private companies may be limited by shares or limited by guarantee. There cannot be a private company with unlimited liability.
Company Limited by Shares
In these companies there is a share-capital, and each share has a fixed nominal value which the shareholder pays at a time or by installments. The member is not liable to pay anything more than the fixed value of the share, whatever may be the liabilities of the company. Most of the companies in India belong to this class.
Company Limited by Guarantee
In these companies, each member promises to pay a– fixed sum of money in the event of liquidation of, the company. This Amount is called* the Guarantee. Sometimes the members. are required to buy a share of a fixed value and also give a guarantee for a further sum in the event of liquidation. There is no liability it) pay anything more than the value of the share_ (where there !r a share) and .the guarantee.
lit these companies the liability of the shareholder is unlimited, as in partnership firms. Such companies are permitted under the Companies Act but are not known.
statutory Public Company
the Central Government may by licence, permit the omission v words Limited or Private Limited in the case of companies which are formed for promoting commerce, art, science, religion, or any other useful object, and which are non-profit and non dividend paying organizations (e.g., Chambers of Commerce). The licence given may be withdrawn, if the company ceases to fulfill the conditions mentioned above.-Sec. 25.
At the time of granting the registration of such an association. the central government can provide restrictions on their working. The Government can direct the inclusion of the -restrictions in the memo and the articles of association of the institution. After registration its members can get all the benefits of the Companies Act, including limited liability. The Central Government can exempt any of the restrictions by a general or a special notification.
DIFFERENCES BETWEEN A PRIVATE COMPANY & A PUBLIC COMPANY
The main points of difference between the 2 types of companies are enumerated bellow:
Number of members: the number of members in a private company cant be less than 2 & cant be more than 50
In a public company, the number of members cannot be less than seven but no maximum has been fixed. There may be any number of embers.
restrictions on transfer of shares : In a private company here must be regulations ,restricting the transfer of shares. In a public company there need not be any. By restricting transfer, a private company can prevent the membership of persons or classes of persons who are considered to be undesirable. Sec. 3(1)(iii)(a).
restriction on invitation to public: A private company "Cannot invite the public to purchase its shares or debentures. A public company may do so.-Sec. 3(1)(iii)(c).
Restriction on name : A private company must add the words, "Private Limited" at the end of its name.-Sec. 13.
Prospectus : A private company need not file a prospectus 'or a statement in lieu of prospect us.-Sec.70(3).
Issue of rights shares: When a public company proposes increase its subscribed capital by the issue of new shares, it must be offered first to the existing equity shareholders pro rata, unless the members in a general meeting decide otherwise. This provision does not apply to private companies.-Sec. 81(3).
Commencement of business: A private company can commence business immediately on incorporation, whereas a public company has to wait until it obtains a certificate for the Commencement of Business.-Sec. 149(7).
Statutory Meeting and Statutory Report : A private company need not hold the Statutory Meeting or file the Statutory Report.-Sec. 165(l 0).
managerial Remuneration : In the case of public companies there are certain limits to managerial remuneration. This rule does not apply to a private company which is not a subsidiary of a public company.-Sec. 189.
Number of directors : The Act provides that a private YV company must have at least 2 directors and a public company at least 3 directors.-Sec. 232.
Rules regarding directors :The rules regarding directors are less stringent-in-the case of private, companies which are not subsidiaries of public companies Following examples are given :It is not necessary to file with the Registrar the consent of a director to act as such; amendment of articles regarding appointment of whole-time or non-rotational, directors do not require the previous sanction of the Government ; pr-)visions regarding the share qualifications of directors laid down in Sections 270-272, do not apply; a private company may provide additional grounds for, disqualification of directors and their ' vacation from office ; private companies can give loans to directors ; directors of a private company may participate in the discussions of the Board of Directors where contracts in which they are personally interested are being dealt with ; the restrictions regarding the appointment of managing directors laid down in sections 316 and 317 do not apply to private companies ; etc. X12.
Company's own share: In a private company any person can get financial assistance for purchasing the company's own share.
Procedure of meeting: The law relating to the procedure of Meeting is relaxed in a private company. Appeal against transfer: Under certain circumstances, share holders have no right to appeal against the Board of Directors, if it refuses to register their transfer of shares.
memo of Contract: In the case of a public company, if an agent enters into an agreement in which the company is the undisclosed principal, he must make a memorandum of the contract and keep it with the company, otherwise the agreement is not binding on the company. The rule is not applic3ble to a private company, unless it is a subsidiary of a public company’s. 416.
JURISDICTION OF COURT
Suits relating to the constitution of a company and its winding up 'are ordinarily dealt with in the High Court of the area in which the registered office of the company is situated. But the Central Government may, by notification, confer power on a District Court to try certain matters relating to companies. Sec. 10. Suits of other types (e.g., money suits) by or against the company, may be tried by all Courts. Which court will try the suit is determined by the rules regarding jurisdiction of courts as laid down in the Civil Procedure Code.