Asok Nadhani-Companies Act 1956-Company

Company

By Asok Nadhani

1.1 Applicability

i.      The Companies Act, 1956 came into force on 1.4.1956.

ii.    It extends to whole of India (Sec.1).

1.2 Company

i.      ‘Company’ means a company incorporated under the Companies Act, 1956 or any Companies Act enacted prior to that [Sec. 3(1) (i)].

ii.    A company refers to a group of persons associated for a common object or purpose.

iii.   A company is a voluntary association for profit with capital divisible into transferable shares with limited liability, having corporate entity and a common seal with perpetual succession.

1.2.1 Body corporate

i.      Generally, the term ‘body corporate’ or ‘corporation’ means an association of persons having  following characteristics:

a.     Incorporated or registered under any law

b.    Separate legal entity,

c.     Perpetual succession.

d.    Common seal.

e.     Own property in its own name

f.      Capacity to sue and be sued in its own name.

ii.    Body Corporate' includes the following:

a.     Company formed under the Companies Act, 1956

b.    Corporation formed under an Act of Parliament or State Legislature

c.     Foreign company

d.    Company incorporated outside India

e.     Nationalised bank

f.      Public financial Institution.

iii.   'Body corporate' or 'corporation' does not include: [s. 2(7)]

a.     a corporation sole  (e.g., the office of a President, Governor, Chief Minister, Public Trustee)

b.    a registered co-operative society;

c.    any other body corporate (not being a company as defined in this Act), notified by Central

Government;

d.    A registered society.

iv.   So, the term 'body corporate' is wider than the term 'company'. Every Incorporated Company is a Body Corporate. But every Body Corporate is not a Company.

1.3 Characteristics of a Company

a.     The common characteristics of the company are as follows:

­    Separate Legal Entity

­    Limited Liability

­    Perpetual succession

­    Common seal

­    Transferability of shares

­    Separate property

­    To Sue and being Sued

­    Limitation of action

­    Representative management

b.    These characteristics are explained below :

i.      Separate Legal Entity

A company is a legal person in the eyes of law distinct from the individuals who are its members .It gets an independent corporate existence and acquires a separate identity from the individual members forming it. It can enter into contracts with any other person in the same way as any other individual. [Salomon v. Salomon & Co. Ltd.], [Abdul Haq Vs Das Mal], [Kondoli Tea Co. Ltd.] Ex.1.1

a.     A Company is regarded as a separate entity from its members.

b.     It has an independent corporate existence.

c.     It is an artificial person, known by its Name, with capacity to own money & property, sue & be sued in its own name.

d.     Members cannot claim to be the same as that of Company.

e.     Assets and liabilities belong to the Company and not to the Members.

f.      Dealings by or with the Company are carried out in its own name and not as collective agent of its members.

g.     Shareholders do not have any insurable interest in Company's property.

h.     Any member may enter into a contract with the Company.

i.      Members may also be the Company's Creditors or Employees.

j.      The Company continues to exist, till it is wound up. Death, insanity, insolvency, etc. of shareholder does not affect the Company's existence.

k.     Nationality of the Company does not depend on the nationality of its shareholders.

        ii.    Limited Liability

Liability of members of a limited company, are limited irrespective of the liability of the company.

       iii.    Perpetual succession

The continuity of the company doesn’t come to an end with any sort or incapacity of any or all the members of the company.  A company is created by a process of law and remains in existence till it is wound up by the process of law only. Ex.1.2

4. Common seal

The company itself cannot sign any document as it is not human being. So, the common seal with the name of the company engraved on it is used as a substitute for its signature.  All documents issued by a company or on its behalf bear the common seal.

v.    Transferability of shares

The shareholders may dispose of their shares to others. So no shareholder is permanently or necessarily wedded to the company.

vi.   Separate property

A company is a separate entity from its members. So it is a legal person capable of owning and disposing of property in its own name. Although its capital and assets are contributed by its shareholders or the members, the members are not the co-owners of the property of the company. So they do not have any ownership right of the property of the company. [Macaura v Northern Assuarance Co. Ltd.], Ex.1.1

vii.  To Sue and being Sued

A company can sue and be sued in its corporate name. It may also inflict or suffer wrongs. In fact, it can do or have done to it most of the things which could be done by or to a human being.

viii.Limitation of action

a.     The creditors can make their claims (limitation) only against Company and cannot proceed against shareholders. Their action stops with company.

b.    Only the Company can call for any unpaid capital from its shareholders.

ix.   Representative Management

The Company is managed by elected representatives of the shareholders viz., Directors, collectively referred to as the ‘Board’.

1.4 Advantages of incorporation

i.          Separate legal entity/Corporate personality

ii.        Perpetual Succession

iii.       Limited Liability of members

iv.       Transfer of shares

v.         Separation of ownership from management

vi.       Separate property

vii.      Capacity to sue and be sued in its own name

viii.     Limitation of action

ix.       Death, Insolvency, Insanity or separation of members does not affect the continuity of the Company.

x.         Can have property in its own name.

xi.       No limit to the maximum number of members in a Public Limited Company.           

xii.      Huge amounts can be mobilized through a public issue, to undertake ventures requiring huge investments.

xiii.     Directors manage the Company's affairs separating the ownership and management.

1.5 Disadvantages of incorporation

i.          Formalities of incorporation

Incorporation of a company requires many formalities, like availability of name, preparation of various documents like memorandum, articles, statutory declaration etc., filing of various forms and returns, etc., which are time consuming and expensive.

ii.        Lifting of corporate veil

In various circumstances, the Court may lift the corporate veil, and make liable the members, directors or other officers of the company for acts done on behalf of the company.

iii.       No rights of citizens

A company is not a citizen, and therefore it cannot avail of the fundamental rights available to citizens.

iv.       Dispersed membership

Lack of control by members over the affairs of the company as most of the members may not attend the general meetings of the company.

v.         High tax liabilities

Tax rates applicable to companies are higher compared to other forms of business organization.

vi.       No Secrecy

The published and filed annual accounts unveils its internal information to the public.

vii.      Regular filing of returns and forms

A company has to regularly file various returns and forms as required under Companies Act, 1956.

viii.     Approvals and Sanctions

Approval of various authorities, like Central Government, Company Law Board and Court are required causing delays involving heavy expenditure.

ix.       Corporate Governance

Corporate governance calls for total transparency, integrity and accountability of the management, and discharge of social responsibility of the company, imposing a lot of burden of social responsibilities on companies.

x.         Expensive and time consuming winding up procedure

Winding up of Companies is very expensive and time consuming process with legal hurdles.  

xi.       Strict Legal Provisions

The Companies Act, 1956 is an enormous legislation. Its compliance requires experts and consultants, attracting penalties and legal actions.

xii.      Corporate Frauds

As control of economic resources is in few hands, there is possibility of huge frauds.

1.6 Corporate Veil

A company is a separate legal person distinct from its members. The law creates a fictional veil by which a company is not seen as an association of person, but seen as a separate person. This fictional veil of incorporation is perceived as ‘Corporate veil’.

1.6.1 Effect of Corporate Veil

i.      The effect of corporate veil is that the company is regarded as a distinct person having its own rights and liabilities, its own powers and functions, and its own property.

§  The business is carried on by the company and not by the directors or the members.

§  A contract made by any officer, employee or director binds the company only when made on behalf of the company.

§  The company is liable for the acts (and defaults) done by members, directors, officer or employee of the company, on behalf of the company, under authority.

§  Any profit, loss or liability arising from any transaction or contract made on behalf of the company shall accrue only to the company.

§  The property of the company belongs only to the company. No member can claim any ownership right or insurable interest in the property of the company.

§  A company can enter into a contract with any director or member of the company in the same way as the company enters into a contract with an outsider. 

§  Any person can be a member, creditor, director and employee of the company at the same time.

ii.    Thus, it is seen that the overall effect of the ‘corporate veil’ is that a company is regarded as a distinct person having its own rights and liabilities, its own powers and functions, and its own property.

1.6.2 Lifting of Corporate Veil

As a general rule, the corporate veil is not allowed to be lifted. However, in some special circumstances the corporate veil may be lifted, like:

-        To prevent improper means

• Protection of revenue
• Prevention of fraud or improper conduct
• To determine whether an enemy company
• Where the company is a sham
• Company avoiding legal obligations
• Company acting as agent or trustee of the shareholders
• Avoidance of welfare legislation
• Protecting public policy

-        For Statutory violations

• Number of members below statutory mini­mum (Sec. 45)
• Failure to refund application money [Sec. 69 (5)]
• Acts without company's name [Sec. 147 (4)]
• Fraudulent Trading (Sec. 542)
• Holding and subsidiary companies ((Sec. 212)
• Misrepresentation in the prospectus (Sec. 62)
• Non-recovery Tax

i.      Corporate veil lifted to prevent improper means:

The corporate veil may be lifted to prevent improper means in cases like :

a.     Protection of revenue: The corporate veil may be lifted when it is used as a means for tax evasion. [Sir Dinshaw Maneckjee Petit], [Dinshaw Maneckjee Petit]

b.     Prevention of fraud or improper conduct: The corporate veil may be lifted if the company is formed to:  [Jones v. Lipman]; [Daimler Co. Ltd. v. Continental Tyre & Rubber Co. Ltd]; [PNB Finance vs. Shital Pd. Jain]

-         defeat the law

-         defraud the creditors

-         avoid legal obligations (arising by way of a contract).

c.     To determine whether an enemy company: The corporate veil may be lifted to examine the character of persons in real control of the company to determine whether a company is an enemy company. [Daimler Co. Ltd. v. Continental Tyre & Rubber Co. Ltd.]; [Gilford Motor Co. Ud. v. Home]

d.     Where the company is a sham: The corporate veil may be lifted where a company is a mere cloak or sham (hoax). [Jones v. Lipman]; [Gilford Motor Co. Ud. v. Home]; [F. G. Films Ltd.]

e.     Company avoiding legal obligations: The corporate veil may be lifted if the only purpose of its incorporation is to avoid legal obligation. In such case, legal personality is disregarded assuming as if no company existed. [Jyoti Limited vs. Kanwaljit Kaur Bhasin]

f.      Company acting as agent or trustee of the shareholders: Where the company is just acting as an agent of the shareholders, shareholders will be made liable for the acts of the company.

7. Avoidance of welfare legislation: The corporate veil may be lifted if the only purpose of incorporating the company is to avoid a welfare legislation.

h.     Protecting public policy: The corporate veil may be lifted to protect public policy and to prevent actions contrary to the public policy. [Connors Bros. Vs Connors.]

ii.    Corporate veil lifted for Statutory Violations:

The corporate veil may be lifted on violation of statutory rules like:

a.     Number of members below statutory mini­mum (Sec. 45): If a company carries on business for more than 6 months after the number of its members has been reduced below statutory minimum (7 in case of a public company or 2 in case of a private company), the remaining or continuing members (those who continue to be members after six months) shall become personally liable and be severally sued for the debts contracted by the company during that period (i.e after 6 months).

b.     Failure to refund application money [Sec. 69 (5)]: If the company fails to refund the application money of those applicants who have not been allotted shares, within 130 days of the date of issue of the prospectus; the directors become jointly and severally liable to repay the application money with interest at the rate of 6 per cent per annum.

c.     Acts without company's name [Sec. 147 (4)]: An officer or agent of a company entering into a contract on behalf of the company, without mentioning the name of the company becomes personally liable for such act.

d.     Fraudulent Trading (Sec. 542): In the course of winding up of a company, if it appears that some business of the company has been carried on with intent to defraud creditor of the company (or any other person) for fraudulent purpose, any person who is knowingly party to the carrying on such business is personally liable without any limitation of liability for the debts or other liabilities of the company.

e.     Holding and subsidiary companies: In the eyes of the law, the holding company and its subsidiary companies are separate legal entities. But in the following circumstances, a subsidiary company may lose its separate identity :

i.      If a holding company, at the end of the year, fails to submit the accounts of the subsidiary company and the collective state of affairs including the subsidiary company, (Sec. 212)

ii.     Where a subsidiary com­pany is functioning merely as a branch or department of one large undertaking owned by the holding company. [Workmen of Associated Rubber Industries Ltd. Vs Associated Rubber Industries Ltd.]

f.      Misrepresentation in the prospectus (Sec. 62): In case of misrepresentation in a prospectus, every director, promoter and every other person, who authorized the issue of such a prospectus incurs liability towards those who subscribe for share on the faith of the untrue statement.

g.     Non-recovery of Tax:

i.      Under section 18 of Central Sales Tax Act, 1956, when any private company is wound up, any tax assessed on the company cannot be recovered, then, every person who was a director of the private company at any time during the period for which the tax is due shall be jointly and severally liable for the payment of such tax.

ii.    Under section 179 of Income Tax Act 1961, where any tax due from a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax.

iii.   Effect of Lifting Corporate Veil: When a corporate veil is lifted, the person acting on behalf of the company becomes personally liable.

1.7 Difference between Company and Partnership firm

Basis	Company	Partnership
i.      Regulating Act	Regulated by the Companies Act, 1956.	Governed by the Indian Partnership Act, 1932.
ii.    Mode of creation	Comes into existence after   incorporation under the Companies Act, 1956.	Comes into existence by an agreement between the partners. Registration not compulsory.
iii.   Legal status	Has its own separate legal identity.	Has no separate legal identity.
iv.   Liability of members	The liability of the members is generally limited.	Liability of the partners are unlimited.
v.     Management	Managed by Board of directors	Managed by partners themselves.
vi.   Transferability of shares	A member can transfer his shares. On such transfer, the transferee becomes the member of the company.	A partner can also transfer his shares to an outsider. But the transferee does not become a partner in a firm, though he may be entitled to share the profits of the firm.
vii.  Powers	Company's powers are limited to those specified in its Memorandum and Articles of As­sociation.	A partnership firm can do anything which the partners agree to do.
viii. Insolvency and winding up	Members do not become insolvent when company is insol­vent.	The insolvency of a partnership firm means insolvency of the partners.
ix.   Claim on assets	In case of winding up, a member and a creditor to whom the company owes a debt, stand in same rank to claim payment out of its assets.	In case of winding up, a partner to whom the company owes a debt, cannot stand in competition to a creditor to claim payment out of its assets.
x.     Dissolution	A company has a perpetual succession. So members’ incapacity does not affect its existence. It comes to an end only when it is wound up according to the provisions of the Companies Act.	May be dissolved at any time by any partner, and may get dissolved by the death or insolvency of a partner.
xi.   Number of  members	Private company : Min. 2 members Max. 7 members. Public company : Min. 50 members Max. Unlimited.	Min: 2 members. Max: 10 members in Banking business, 20 members in any other business.
xii.  Audit of Accounts	A company must have its accounts audited annually by qualified auditors	There is no statutory provision for audit by qualified auditors.
xiii. Separate Property	A company has separate property.	A firm has no separate property. The property of the firm is held in the name of the partners.
xiv. Capacity to sue and be sued	A company can use and be sued in its own name.	A firm cannot sue and be sued in its own name.
xv.  Rights or creditors	No creditor of the company has a right to proceed against any member for recovery of any amount payable by the company, even if a member holds partly paid shares.	The creditors of the firm are the creditors of the individual partners. A decree obtained against the firm can be executed against the partners jointly and severally.

1.8 Company as a Partner

a.     A partnership results from an agreement between two or more ‘persons’ (called as partners). Since a Company is an ‘artificial person’ having separate identity and capable of entering into contracts, a company can enter into partnership with any natural or artificial person.

b.    A company can become a partner in a firm if ­-

i.      the memorandum of the company authorises the company to do so;

ii.    the contract to enter into partnership is not ultra vires the company, i.e., the business of partnership is contained in the object clause of memorandum.

1.9 Citizenship

i.      A Company is not a citizen either under (a) the Constitution of India or (b) the Citizenship Act, 1955.

ii.    A Company does not enjoy the fundamental rights, which are expressly available to citizen only.

iii.   Company can claim those fundamental rights which are available to all persons, e.g. Rights to own property, Right to Equality, etc.

1.10 Residential Status

  I.    A Company has a Nationality, Domicile and Residence as per the Country of its Incorporation.

II.    A Company ordinarily resides where the central control and management of its business is exercised.

Examples:

Separate Legal Entity

Ex.1.1 Mr. A is a shareholder of A & Co. Ltd. Thus, A & Co. Ltd is an entirely different person from Mr. A even if he holds practically all the shares in the company. The property of A & Co. Ltd is not the property of Mr. A. [Ref. 1.3(b(i, vi))]

Perpetual Succession

Ex.1.2 All the members of X Ltd. Co. dies in a plane crash. The shares are transmitted to their respective legal representatives who become the members of the company. Thus even death of all the members could not bring the company to an end. The company has a perpetual succession and remains in existence. [Ref. 1.3(b(iii))]

For more details, refer to Business & Corporate Laws, by Asok Nadhani, BPB Publications, www.bpbonline.com, bpbpublications@gmail.com