Meaning, Features & Incorporation of a Company under Companies Act 2013

This article has been written by S.Aditya an alumnus of KLE Society’s Law College, Bengaluru. This article envisages an understanding of company with respect to body corporate and illegal association. This article has been written to encompass various facets of the meaning and nature of a Company.

Table of Contents

What is the Company?

Company is an artificial person created by Statute of legal sanctity, having “separate identity” and “perpetual succession”. Legal sanctity of a company is provided under the Company’s Act 2013 and previous legislations animate a company with a personality almost similar to that of a physical person. As per the provision 20 of the definition clause of the Act, a company simply means a company incorporated under the Act; or under any previous relevant law. These Companies incorporated under this enactment must operate under the boundaries defined by this Act.

In the famous case of S.S. Dhanoa , the Supreme Court referred to the definition of Corporation as given by C. J. Marshall of U.S.A. in the celebrated case of Dartmouth College. A corporation has been addressed as a legal creature existing only in law and its characteristic properties are the ones conferred impliedly or expressly upon it by law. The aforementioned definition very much constitutes a very easy way to understand the explanation of a corporation and the same can be extended to understand the legal identity of a Company.

Key or Characteristic features of Companies

• Legal Authentication to Company: A Company can only be established according to the provisions of law of the land. In India, the enterprises are registered and established under the Companies Law, excluding the Insurance and Banking enterprises for which another definite law (Banking Act and Insurance Act) is furnished.
• Independent Legal Personality: A company has a defined independent legal entity which is different from constituting members. As an independent person in law, a company may possess and convey any kind of properties; it may be a party to a contract and even open a bank a/c in its own name.
• Capped Liability: The liability risks of the member shareholders of a company, unlike a conventional partnership firm, is restricted to their portion of the shares. Incorporating a Company is a preferable choice for fixed risks.
• Never Ending Succession: The company is an inanimate person established by legal statute and continues to exist regardless of the member numbers or even existence. A company can only be dissolved by law. Even the circumstances of insanity/ death of any of the member shareholders of the company make no dent to the Company’s existence.
• Common Insignia: The company is an unreal person, and thus cannot sign its name like me and you. Hence, every company is mandated to have its own seal which works as an official signature of that company. Any document which does not carry the seal is not authenticated by the Company.
• Ease of Transfer of Shares: The shares of a Public Limited Company (PLC) are transferable. The authorisation of any member of the firm is not required for the conveyance of shares. The comfort of the transfer of shares garners the Company better trust amongst its shareholders.
• Court Ready: A company is a legal person, it can get into contracts. It can accuse and be accused in its name if there is a breach of contract by the other party or itself. The separate legal identity of the Company is meant to ease the litigation process involved.

Lifting Corporate Veil

As mentioned before, the company enjoys a separate legal entity and has a personality other than that of its individual members. But this characteristic feature of a company is sometimes used maliciously by the majority stakeholding members of that company. The director member, may at times, perpetrate illegal activities in the name of the company, aiming to shift the liability on the separate legal entity of Company;

Hence gaining personal benefits at the cost of various stakeholders. But the situation where a separate legal entity given to the company is used by the perpetrator as a veil between himself and course of justice of the Court or the Government pierces through such artificial veil.

Such lifting of the Corporate veil can be carried out through the following:

1. Judicial Interpretation
2. Statutory Interpretation

For instance: Germany was declared an alien enemy by Britain after World War-II and hence, if German citizens were to open a company in Britain and send all the profits back to Germany, the British government or court may choose to lift the corporate veil to make the promoter and other directors of such company liable.

Case Law: The celebrated case of Salomon v. Salomon & Co. Ltd.

• Facts: Mr Salomon had incorporated his old family business of shoe manufacture into a limited company. He was holding 99.97% of the shares and the other 6 members of his family held one share each, making their share 0.029% of the total. The company went into loss after some time. The debentures in the company were held mainly by two individuals and Mr Salomon was one of the Debenture holders. When the company was liquidated, both the Debenture holders recovered the money, i.e. Mr Solomon also recovered the money. Therefore the minor, unsecured creditors got nothing from the liquidation.
• Issue: Should the amount that was paid to Mr Salomon, the major debenture holder, be distributed amongst the minor unsecured creditors?
• Held: The High Court and the Court of Appeal believed that the Highest shareholder must suffer and the unsecured creditors must be paid. But it was held by the House of Lords that, the Company is a different legal entity in itself, also observing that a majority shareholder does not own the Company. The Company will not lose its identity to the majority shareholder under any circumstances.
• Ratio: The Company is a separate legal entity in itself. The creditors of a company cannot sue the company’s shareholders Majority or minority to pay the company’s debts.

Advantages of Incorporation

Incorporation offers various benefits to a company as compared to other kinds of business organizations. They may be listed as:

1. Limited burden – Limitation of liability during liquidation is another major advantage of incorporation. The companies, being a separate entity, leading its own business life free from the identity of its members, the members are not liable for its debts. The liability of members is limited by shares owned by them paying the nominal value of the shares held.
2. Independent corporate existence/Legal identity – the commendable feature of a company is its independent corporate existence. By registration under the Companies Act, a company becomes vested with corporate personality by law, which is independent of, and distinct from its members. A company after incorporation under the act is a legal person.
3. Perpetual succession – An incorporated company never dies. Members may join or leave, but the company is perpetual. Even the bomb killing the members of a company couldn’t kill the Company (K/9 Meat Supplies (Guildford) Ltd., Re.

In the words of Alfred Lord Tennyson company’s life term may be stated as “….For men may come and men may go, But the company goes on forever.”.

1. Common Signia or seal – A company is only a juristic person and can only act through its agents and all such contracts entered into by such agents must be under the seal of the company. The common seal is like a signature of such company.
2. Case filing ability – A Company can be sued and it can sue in its own name as it has a personality in the eyes of law. The names of managerial personnel need not be impleaded.
3. Proficiency in Management – A Company is capable of attracting professional managers. It is due to the fact that being attached to the management of the company gives them the status of the business or executive class.
4. Transferability of shares – Earlier when JS(joint-stock) companies were established, the object was that the shares should be capable of being easily transferred. Provision of statutes gives expression to this principle by providing that the shares or other interest of any member are transferable in the manner provided by the articles of the company.
5. Separate vesting of property – The property of an incorporated company can be held and enjoyed in its own name. None of the members can claim ownership of any asset of the company’s assets until liquidation is initiated.

Disadvantages of Incorporation

1) After the lifting of the corporate veil for reasons of law, a Company is no more viewed as a different personality, but it becomes important to take a gander at the people behind the corporate veil trying to use its garb to perpetrate illegal actions, few examples of removal of such veils are:

• Determination of the nationality of a company: The decision in Daimler Co. Ltd case, declared that even though the company was incorporated and registered in England, it would be treated as a non-national, since the real control of the company was with the nation which was declared as enemy, the need to remove the veil of the corporate entity was necessary to understand the nationality of the Company.
• For the curbing of tax evasion: When the different identity of an organization is purposely made for the avoidance of taxes which were imposed by the respective administrator.
• Illegal object: In a case, in an organisation, one of the major shareholders had been stopped from investing under a covenant; so to get around such restraint, he started a company.
• Under statutory law: The Act sometimes mandatorily looks into individual default behind the veil in certain occasions like, where agreement is made by faking the names of organizations, or when business is created to cheat people etc.

2) Formality and cost of Incorporation are an over the top expense. It requires various legal and customary formalities.

3) The Supreme Court decided that a company is not a citizen in State Trading Corporation v. Commissioner Tax case . Supreme Court also decided that the citizen’s rights and recognition of citizenship cannot be granted to a company via its members.

Company viz-a-viz Body Corporate

The Act of 2013 defines a Company under Section 2 (20) as a company incorporated under the aforesaid Act or under any previous company law. The term ‘ body corporate’ is defined in Section 2(11) of the above Act. Body corporate means a corporate entity which has a legal presence. Which includes one person’s company, a private company, a public company, etc. Body corporate/ corporation also has in its ambit, a company incorporated outside India. However, body corporate does not include—

1. co-operative societies and
2. other body corporate announced by the Central Government;

The Companies registered under the Companies Act, 2013, can be called as a Company or as a Body Corporate for e.g.- Tata Consultancy Services Limited, Reliance Communications Ltd. etc. since they are registered in India. Whereas, the entities like Samsung Electronics, Apple Inc, etc incorporated outside India can only be termed as Body Corporate but not companies.

Is Company a Citizen?

Though a company is an artificial legal person, it is not a citizen under the citizenship legislation or constitution. A company cannot be treated as a citizen as the citizenship recognition is only available to natural biological persons and not to juristic persons. The Apex Court in State Trade Corporation India case essentially stated that a company is not treated as a citizen and hence a company cannot claim the protection of fundamental rights expressly guaranteed to citizens, but it certainly can claim the protection of such fundamental rights which are granted even to aliens.

In another case of TATA v. State of Bihar , it was further decided by the Supreme Court where it was reiterated that the identity of a company is different from that of its members and its share­holders, a Company cannot claim the protection of fundamental rights guaranteed to a citizen through its members.

Illegal association

According to the provision of Law – Any company or association of persons or partnership where the number of members of the company is more than 100 and if it carries on business for the motive of earning a profit, is not registered under specified act then it will fall into the definition of an illegal association.

Illegal Association does not have any legal existence which means the following things:

• unlike a registered company, it cannot sue and be sued in a court of law.
• winding up or dissolution process cannot take place as there is nothing to wind up or dissolve.

The liability of the members is unlimited to the extent of the whole of the liabilities of illegal association. Every member of an illegal association is under the law, liable to pay a fine of Rs.1 lakh.

Under provisions of law , if any person is forming a part of such illegal association which uses the prefix or suffix in its name to defraud people, without any registration as a company in the register of companies then, on doing of such wrongful actions, a minimum fine of Rs. 500 and maximum up to Rs. 2000 will be levied for the period till such wrongful act of defrauding continues, plus unlimited burden shall be cast on all the people who comprise of such illegal association.

It is important under the provision of law to identify an unregistered company having more than 50 members and running for-profit as an unlawful association. If there is no profit motive then the association is not illegal, implying that charitable, literally, religious, and scientific association, clubs association are not illegal.

Also, the aforementioned provision of illegal association doesn’t apply to chit funds, joint Hindu families, and stock exchanges. Income tax is levied in the money of illegal association. Illegal nature of an illegal association remains wrong in law till it gets registered.

References

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