Introduction to Company Law

Business law or Commercial law deals with the sale and distribution of goods. Whereas Corporate or Company Law is a legal field that governs the formation of companies, shareholder rights, mergers, and acquisitions. 

Company law in India, is the cherished child of the English Parents. Company legislation in India owes its origin to the English Company Law. Joint Stock Companies Act, 1844 in England, the first Companies Act was passed in India in 1850. After this, The Amending Act of 1857 conferred the right of registration of companies with or without limited liability. Subsequently this right was aslo granted to banking and insurance companies by an Act of 1860. The Companies Act of 1856 was introduced which repealed all the previous Acts. This Act included the aspects of incorporation, regulation and winding up of companies and other associations. This act was also amended in the year 1882, 1913, 1936. In 1948, England passed a comprehensive Companies Act in England. By the mean time The Indian Government promulgated the Indian Companies (Amendment) Ordinance in 1951 which was later replaced as Amending Act of 1951. 

Companies Act, 1956

In the late 1950s Government of India appointed a Committee under the Chairmanship of  Mr. H.C. Bhabha to study company for the entire country. The Committee submitted a comprehensive report on all aspects of company law in March 1952. This Bill to enact the Companies Act, 1956 was introduced in Parliament. The Act came into force on 1st April, 1956 with consolidation and amendments of the earlier laws relating to companies and certain other associations. This Act was the longest piece of legislation ever passed by our Parliament. It consist of 658 Sections and 15 Schedules. Full and fair disclosure of various matters in prospectus, Detailed information of the financial affairs of company to be disclosed in its account, Provision for intervention and investigation by the Government into the affairs of a company, Restrictions on the powers of managerial personnel, Enforcement of proper performance of their duties by company management, Protection of minority shareholders were the main features of the Companies Act, 1956. This Act provided the legal framework for corporate entities in India. The Companies Act, 1956 had undergone changes by amendments in 1960, 1962, 1963, 1964, 1965, 1966, 1967, 1969, 1971, 1977, 1985, 1988, 1996, 1999, 2000, 2002 and 2006. Companies (Amendment) Bill, 2003 containing important provisions relating to Corporate Governance and aimed at achieving competitive advantage was also introduced.

Companies Act, 2013

Due to the overall development of economic activity in the both National and International level, in India especially after the 1990s, the Company Act, 1956 had outlived its utility. In order to have fresh concept on the entities in India, Government of India constituted a committee under the Chairmanship of Dr. J J Irani, the then Director, Tata Sons on 2nd December,2004. The committee was entrusted with the objective of having a simplified compact law that will be able to address the changes taking place in the national and international scenario. The Committee submitted its report to the Government on 31st May 2005 to the government. The Government considered the recommendations of Irani Committee and the Companies Bill, 2009 was introduced in the Lok Sabha on 3rd August, 2009. It was referred to the Parliamentary Standing Committee on Finance for examination. After amendments, a revised Companies Bill, 2011 was introduced. The amended Bill was passed by the Lok Sabha on 18th December, 2012 and by the Rajya Sabha on 8th August, 2013 and thus Companies Bill, 2012 finally became the Companies Act, 2013 after receiving assent from the President on August 29, 2013 and was notified in the Gazette of India on 30.08.2013. After these, Companies Act, 2013 has undergone amendments, viz., Companies (Amendment) Act, 2015, Companies (Amendment) Act, 2017 are of most importance.  The Act was also amended by The Insolvency and Bankruptcy Code, 2016 and Finance Act, 2017 and so far Ministry has come out with several circulars, notifications, Orders and various amendment rules.

Meaning of Company

A Company, generally, means, a group of person associated together for the attainment of a common end, social or economic. The word ‘company’ is derived from the Latin word (Com=with or together; panis =bread). A company denotes an association of likeminded persons formed for the purpose of carrying on some business or undertaking. It is a corporate body and a legal person having status and personality distinct and separate from the members constituting it. The word ‘corporation’ is derived from the Latin term ‘corpus’ which means ‘body’. ‘Corporation’ is a legal person created by a process other than natural birth.

Definition

In terms of the Companies Act, 2013 (Act No. 18 of 2013) a “company” means a company incorporated under this Act or under any previous company law [Section 2(20)].

Lord Justice Lindley has defined a company as “an association of many persons who contribute money or money’s worth to a common stock and employ it 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 contributed in it or form it, or to whom it belongs, 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 them may be restricted.”

Characteristics of Company

1. Separate legal entity

A company is in law regarded as an entity separate and distinct from its members. A company incorporated under the Act is vested with a corporate personality so it bears its own name, acts under name, has a seal of its own and its assets are separate and distinct from those of its members. It is a different ‘person’ from the members who compose it. A shareholder cannot be held liable for the acts of the company even if he holds virtually the entire share capital. Important Case law which deals with the above point is Salomon v. Salomon and Co. Ltd., held in the year of 1897.

2. Company as an artificial person

A Company is an artificial person created by law. It is considered as a legal person which can enter into contracts, possess properties in its own name, sue and can be sued by others etc. It is not considered as natural person but it is managed by natural person and hence it is capable of enjoying rights and being subject to duties.

3. Company is not a citizen

In India, citizenship to the natural persons are governed by either Citizenship Act, 1955 or the Constitution of India. The company, though a legal person, is not a citizen under the above laws. Specifically, Section 2(f) of Citizenship Act, 1955 expressly excludes a company or association or body of individuals from citizenship. Hence company cannot be considered as a citizen.

4. Company has Nationality and Residence

Though it is established through judicial decisions that a company cannot be a citizen, yet it has nationality, domicile and residence. A joint stock company resides where its place of incorporation is, where the meetings of the whole company or those who represent it are held and where its governing body meets in bodily presence for the purposes of the company and exercises the powers conferred upon it by statute and by the Articles of Association.

5. Limited Liability

A company may be a company limited by shares or a company limited by guarantee. In the case of limited by shares, it is up to the unpaid value of shares, and in the case of guarantee, it is up to the limit of  contributions.

6. Perpetual Succession

Perpetual succession, means that the membership of a company may keep changing from time to time, but that shall not affect its continuity. Members may come and go but the company can go on forever (until dissolved). A company is a juristic person with a perpetual succession. It means that a company's existence persists irrespective of the change in the composition of its membership. 

7. Separate Property

A company being a legal person and entirely distinct from its members, is capable of owning, enjoying and disposing of property in its own name. In a case, it was held that, “no member can claim himself to be the owner of the company’s property during its existence or in its winding-up”.  A member does not even have an insurable interest in the property of the company.

8. Transferability of Shares:

Section 44 of the Companies Act, 2013 enunciates the principle by providing that the shares held by the members are movable property and can be transferred from one person to another in the manner provided by the articles. So the Shares, are freely transferable, so that no shareholder is permanently or necessarily wedded to the company, subject to certain conditions. The Stock Exchanges provide adequate facilities for the sale and purchase of shares.

9. Capacity to Sue and Be Sued

To sue, means to institute legal proceedings against (a person) or to bring a suit in a court of law. All legal proceedings against the company are to be instituted in its name. A company, as a person distinct from its members, may even sue one of its own members.

10. Contractual Rights

A company, being a separate legal entity distinct from its members, can enter into contracts for the conduct of the business in its own name. A member cannot enforce a contract made by the company because he is not a party or beneficiary to the contract entered in the name of the company.

11. Cannot go beyond the powers

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. So the company must act as per the stated or mentioned terms of the memorandum of association. It cannot operate beyond the powers of its constitution.

12. Common seal

Either the members or directors or any person who must act as agents and all such contracts entered by them in any conditions must be validated under the seal of the company. Since the company has no physical existence, the common seal acts as the official signature of the company.

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Redrafted for Educational Purpose.

Deekshith Kumar,
Assistant Professor of Commerce

Book Reference:

1. Elements of Mercantile Law by N. D. Kapoor
2. Principles of Mercantile Law by Avtar Singh
3. A Textbook of Business Law by Dr. Umesh Maiya
4. Business Law by B.S. Raman