Introduction
The word ‘company’ has no strictly technical or legal meaning. It may be described to imply an association of persons for some common object or objects. The purposes for which people may associate themselves are multifarious and include economic as well as non-economic objectives. But, in common parlance, the word ‘company’ is normally reserved for those associated for economic purposes, i.e., to carry on a business for gain. Used in the aforesaid sense, the word ‘company’, in simple terms, may be described to mean a voluntary association of persons who have come together for carrying on some business and sharing the profits therefrom.
It should be noted that the Companies Act, 2013 even allows a company to be formed and registered for the promotion of commerce, art, science, sports, religion or charity, i.e., for non-economic purposes. In this blog, we will be discussing the definition and characteristics of a company.
Definition of the Company
The Companies Act, 2013 does not define a company in terms of its features. Section 2(20) of the Companies Act, 2013 defines a company to mean a company incorporated under this Act or under any previous company law. This definition does not clearly point out the meaning of a company. In order to understand the meaning of a company, let us see the definitions as given by some authorities. Some of these definitions are: —
Lord Justice Lindley -
“A company is an association of many persons who contribute money or monies worth to a common stock and employed in some trade or business and who share the profit and loss arising therefrom. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute to it or to whom it pertains are members. The proportion of capital to which each member is entitled is his share. The shares are always transferable although the right to transfer is often more or less restricted.”
Chief Justice Marshall -
“A corporation is an artificial being, invisible, intangible, existing only in contemplation of the law. Being a mere creation of law, it possesses only the properties which the Charter of its creation confers upon it, either expressly or as incidental to its very existence.”
Prof. Haney -
“A company is an artificial person created by law, having separate entity, with a perpetual succession and common seal.”
The above definitions clearly bring out the meaning of a company in terms of its features. A company to which the Companies Act applies comes into existence only when it is registered under the Act. On registration, a company becomes a body corporate, i.e., it acquires a legal personality of its own, separate and distinct from its members. A registered company is, therefore, created by law and law alone can regulate, modify or dissolve it.
Characteristic features of a Company
Some of the characteristics of the company are as follows-
- Separate Legal Entity
The most important characteristic features of a company are ‘separate legal entity’ of the company. A company is a separate legal entity distinct from its shareholders or members. This means it can own property, enter into contracts, sue or be sued, and carry out its activities in its name. The company exists independently of the individuals who run it.
- Incorporated Association
A company must be incorporated or registered under the Companies Act. Minimum number of members required for this purpose is seven in the case of a ‘public company’ and two in the case of a ‘private company’ (Section 3). However, section 3 of the Companies Act, 2013 allows formation of ‘One Person Company’ also.
- Legal entity distinct from its members
Unlike partnership, the company is distinct from the persons who constitute it. Hence, it is capable of enjoying rights and of being subjected to duties which are not the same as those enjoyed or borne by its members. As Lord Macnaughten puts it, “the company is at law a different person altogether from the subscribers......; and though it may be that after incorporation the business is precisely the same as it was before and the same persons are managers and the same hands receive the proceeds, the company is not in law, the agent of the subscribers or trustee for them.
In Kondoli Tea Co. Ltd., Re, certain persons transferred a tea estate to a company and claimed exemption from ad valorem duty on the ground that they themselves were the shareholders in the company and, therefore, it was nothing but a transfer from them in one to themselves under another name. Rejecting this, the Calcutta High Court observed - “The company was a separate person, a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property, as if the shareholders had been totally different persons.”
Further, in Solomon v Solomon & Co. Ltd, Solomon was a prosperous leather merchant. He converted his business into a Limited Company—Solomon & Co. Ltd. The company so formed consisted of Solomon, his wife and five of his children as members. The company purchased the business of Solomon for £39,000, the purchase consideration was paid in terms of £10,000 debentures conferring a charge over the company’s assets, £20,000 in fully paid £1 share each and the balance in cash. The company in less than one year ran into difficulties and liquidation proceedings commenced. The assets of the company were not even sufficient to discharge the debentures (held entirely by Solomon himself). And nothing was left for the unsecured creditors.
The House of Lords unanimously held that the company had been validly constituted, since the Act only required seven members holding at least one share each. It said nothing about their being independent, or that there should be anything like a balance of power in the constitution of the company. Hence, the business belonged to the company and not to Solomon. Solomon was its agent. The company was not the agent of Solomon.
In Rajendra Nath Dutta v Shibendra Nath Mukherjee, it was held that for any wrong done, the company must sue or be sued in its own name. It was observed that as the company is a distinct legal personality, distinct from its shareholders and/or directors, the company, if aggrieved by some wrong done to it, must sue or contrarily be sued in the name of the company.
In Chamundeeswari v CTO, Vellore Rural, it was held that a company being a legal entity by itself, any dues from company have to be recovered only from company and not from its directors.
- Delegated Management
The management of the company is distinct from its ownership. Shareholders (owners) elect a board of directors to manage the day-to-day operations of the company. This separation allows for professional management and governance. The concept of separate management ensures that a company is managed by those with the necessary expertise while allowing shareholders to retain ownership and control through oversight. This division of responsibilities contributes to the efficient operation and governance of the company.
- Artificial Person
The company, though a juristic person, does not possess the body of a natural being. It exists only in contemplation of law. Being an artificial person, it has to depend upon natural persons, namely, the directors, officers, shareholders, etc., for getting its various works done. However, these individuals only represent the company and accordingly whatever they do within the scope of the authority conferred upon them and in the name and on behalf of the company, they bind the company and not themselves.
- Limited Liability
The liability of the company's shareholders or members is limited to the extent of their investment in the company. In the event of the company incurring debts or facing legal action, the personal assets of the shareholders are protected. On the basis of liability, there are three types of company namely, Company limited by Share, Company limited by Guarantee, and Unlimited Liability Company.
- Transferability of Share
One particular reason for the popularity of joint stock companies has been that their shares are capable of being easily transferred. The Act in section 44 echoes this feature by declaring “the shares, debentures or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company”. A shareholder can transfer his shares to any person without the consent of other members.
Articles of association, even of a public company can put certain restrictions on the transfer of shares but it cannot altogether stop it. The Companies Act, 2013 even upholds shareholders’ agreements providing for the ‘Right of first offer’ and ‘Right of first refusal’ as valid even in the case of a public company. What it means is that Articles of a company, whether private or public, may contain a clause that in case a member wishes to sell his shares, he will have to first offer the same to existing members. Only if they refuse to buy within the stipulated period, they can be sold to outsiders.
- Perpetual Succession
Company being an artificial person cannot be incapacitated by illness and it does not have an allotted span of life. Being distinct from the members, the death, insolvency or retirement of its members leaves the company unaffected. Members may come and go but the company can go for ever. It continues even if all its human members are dead. In the above circumstance, the legal heirs of the deceased shareholders will become the members.
- Common Seal
A company being an artificial person is not bestowed with a body of a natural being. Therefore, it does not have a mind or limbs of human being. It has to work through the agency of human beings, namely, the directors and other officers and employees of the company.
As per section 22, as amended by the Companies (Amendment) Act, 2015, a company may, under its common seal, if any, through general or special power of attorney empower any person to execute deeds on its behalf in any place either in or outside India. It further provides that a deed signed by such an attorney on behalf of the company and under his seal where sealing is required, shall bind the company. In case a company does not have a common seal, the authorisation under this subsection shall be made by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary.
Conclusion
A company plays a crucial role in modern business, serving as a distinct legal entity that allows individuals to conduct business activities with a clear separation between personal and corporate responsibilities. Defined as a separate legal entity, a company can own assets, enter into contracts, and be held accountable for its debts independently of its shareholders. Key characteristics such as limited liability, perpetual succession, and the ability to raise capital through share issuance make the company an attractive business structure. These features provide protection for shareholders, ensure the company's continuity, and allow for professional management. Understanding the definition and characteristics of a company is important for anyone involved in business, as it helps guide decisions related to the organization and management of business activities.