Elements Of Company
The word COMPANY is derived from the Latin words COM which means TOGETHER and PANIS which means BREAD. Company is an artificial person created by law. It has perpetual succession and separate legal entity. In India Companies are governed by Companies Act 2013. Following are the features of a Company.
CREATION OF LAW
A company is an association of persons who have agreed to form the company and become its members or shareholders for the object of carrying on a lawful business profit. It comes into existence when it is registered under the Companies Act.
SEPARATE LEGAL ENTITY
In the eyes of law, a company formed and registered under the Companies Act has a distinct legal entity. After registration, the company is treated as an artificial person because in reality no such, natural person exists. It is invisible, intangible and without any physical or natural existence. Although a company is a legal person having a nationality and domicile, it is not a citizen. In case of Salomon Vs. Salomon Co. Ltd., Mr. Salomon was running a shoe business in England. We formed a company known as 'Saloman and Co. Ltd.' It consisted of Saloman himself, his wife, his four sons and a daughter. The shoes business of Mr. Saloman was sold to the company for ?30,000. Mr. Saloman received from the company purchase price in the form of £20,000 fully paid shares of £1 each and £10,000 in debentures. One share off £1 each was subscribed for in cash by each member of Saloman's family. Saloman was the managing director of the company. During the course of business, the company became liable for some unsecured loan. The company ran into financial difficulties after some time and went into liquidation within a year. On winding up, the assets realized £6,000. The company owed £10,000 to Mr. Saloman and £7,000 to unsecured creditors. Thus, after paying off the debenture holder that was Mr. Saloman, nothing was left for unsecured creditors. The creditors claimed priority over the debentures contending that Mr. Saloman and Saloman and Co. Ltd. were one and the same person, the company was only a façade to defraud the innocent creditors. Mr. Saloman should not therefore, be treated as a secured creditor. It was held that the company had been validly constituted and it had an independent existence distinct from its members. Therefore, Mr. Saloman was entitled to be paid his dues first as a secured creditor. It was observed that the business belonged to the company and not to Mr. Saloman. The company and Mr. Saloman enjoyed separate legal entities.
A major advantage enjoyed by a company is that the liability of its members is limited. If the member has paid full amount of the face value of the shares subscribed by him, his liability shall be nil and he cannot be asked to-contribute anything more. Similarly, in the case of a company limited by guarantee, the liability of the members is limited up to the amount guaranteed by a member.
The term perpetual succession means the continued existence. The existence of the company is not affected by reasons such as the insolvency, death, unsoundness of mind of its members. The company has a perpetual succession. Members may come and members may go but the company goes on. Even if all the members of a company die, the legal existence of the company will not come to an end. In case of Meat Suppliers (Guildford) Ltd. all the members of the company were killed by a bomblast. It was held that the company would survive.
As a company is an artificial legal person hence it can hold property in its own name. All the property in the name of the company is its separate property which is held, controlled and managed by the company. Members of the company cannot claim to be the owner of the property.
TRANSFERABILITY OF SHARES
The shares of a public limited company are freely transferable. A shareholder can transfer his shares to any person without the consent of other members. Under the articles of association, even a public limited company can put certain restrictions on the transfer of shares but it cannot altogether stop it.
A company is an artificial person. It cannot act on its own. It acts through natural persons who are known as directors. All the contracts entered into by the director must be under the common seal of the company. The common seal with the name of the company on it is used as its signature. No document issued by a company is binding to it unless it does not bears the seal of the company.
CAPACITY TO SUE AND TO BE SUED
A company is a legal person and it can enforce its legal right, similarly it can be sued for the breach of the contract. All legal proceedings against the company are to be instituted in its own name. Similarly, the company may bring an action against anyone in its own name. A company’s right to sue arises when some loss is caused to the company, i.e. to the property of the personality of the company. The company is entitled to sue for damages in libel or slander as the case may be
A company, being a separate legal entity different from its members, can enter into contracts for the conduct of the business in its own name. A shareholder cannot enforce a contract made by his company; he is neither a party to the contract nor entitled to the benefit of it, as a company is not a trustee for its shareholders. Likewise, a shareholder cannot be sued on contracts made by his company.
However if a director fails to disclose a breach of his duties to his company, and in consequence a shareholder is induced to enter into a contract with the director which he would not have entered into had there been disclosure, the shareholder cannot rescind the contract.
A member of a company cannot sue in respect of torts committed against the company, nor can he be sued for torts committed by the company.
LIMITATION OF ACTION
A company cannot go beyond the power stated in the Memorandum of Association. The Memorandum of Association of the company regulates the powers and fixes the objects of the company and provides the edifice upon which the entire structure of the company rests. The actions and objects of the company are limited within the scope of its Memorandum of Association.
VOLUNTARY ASSOCIATION FOR PROFIT
A company is a voluntary association for profit. It is formed for the accomplishment of some public goals and whatsoever profit is gained is divided among its shareholders or restored for the future expansion of the company. Only a Section 4(1) company can be formed with no profit motive.
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