What is Company meaning and definition.
The word 'company' is a derivative of the Latin word 'companis.'
'Companis' is made up of two words: 'com' and 'panis'. 'Com' means 'together' and 'panis' means 'bread' Originally, the word 'company' implied, a group of persons who ate together.
Meaning
A company is a for-profit organisation of individuals that was established with the intention of making money through the transfer of capital in the form of limited liability shares. The Companies Act allows it to be incorporated and registered as an artificial person.
Definition
According to Sections 3(1)(i) and 3(1)(ii) of the Indian Companies Act, 1956
"Company means a company formed and registered under this Act or an existing company; 'existing company means a company formed and registered under any of the previous companies laws.”
Characteristics/Features of a Company
(1) Incorporated Association of Persons
(2) Artificial Person by Law
(3) Separate Legal Entity
(4) Perpetual Succession
(5) Common Seal
(6) Limited Liability
(7) Number of Members
(8) Separation of ownership & Management
(9) Limitation of Action
(10) Transferability of Shares
(11) Termination of Existence
(12) Company is not a Citizen
(13) Risk Bearing
(1) Incorporated Association of Persons
An incorporated or registered association of people is called a corporation. No one person may establish a company under the Companies Act.
A minimum number of 7 persons can form a Public company while a minimum number of 2 persons can form a private Company. Its registration is essential.
(2) Artificial Person by Law
The fact that a company is a legally established artificial person is another crucial feature. 'Artificial human' is the term used to describe the fact that it was not born naturally.
It is regarded as a legal person with the ability to make agreements, hold property under its own name, file lawsuits, and be sued by others.
3) Separate legal entity
The company acquires a separate legal entity after it is incorporated which is distinct from its members.
As a result, a company can enter into a contract, buy property in its name, borrow or lend money, open a bank account or file a suit in a court of law against a third party. Likewise, others can also file a suit against the company. In other words, a company can do all such acts which a natural person would do in the course of his business.
CASE: Salomon Vs. Salomon and Co. Ltd
The verdict in the case of Salomon es. Salomon and Co. Ltd. is an important illustration of the separate legal entity of a company. Salomon was a trader in shoes who formed a company named Salomon and Co. of which he, his wife, daughter and four sons were the members. He sold his business to the company for £30,000 in consideration of which the company alloted him £20,000 worth of shares and £10,000 worth of debentures. The company was later wound up because of excessive financial loss. At the time of winding up, the assets of the company amounted to £6,000 whereas its liabilities included £10,000 of debentures and £7,000 of unsecured creditors. The creditors put up the claim that since Salomon and Salomon and Co., were the same entity unsecured creditors should get priority over the debenture holder (who was Salomon himself). It was held than Salomon and Salomon & Co were two separate entities and the debenture-holder should have the priority in payment.
The verdict testifies to the fact that even if an individual has almost all the shares of a company, from the view point of law, the identity of the company is separate from that of the Individual.
(4) Perpetual Succession
Perpetual succession IS another important characteristic of a company. Its existence is not dependent on that of its shareholders or directors. The shareholders or the directors might change, but the company goes on.
Death, insolvency or lunacy of its members has no effect on the existence of the company. Members. may come and member may go, but the company goes on.
(5) Common Seal
A company is an artificial person so it cannot put its signature on documents. That is why it is mandatory under law that every company must have a common seal with its name engraved upon it. The common seal is the symbol of the company's identity and is as good as a signature. When it puts its seal on a document, the company becomes bound by the contents of the document.
As per the Companies (Amendment) Act, 2015, now for a company to have a common seal is not mandatory.
(6) Limited Liability
The liability of the shareholders of the company is limited. In case of financial loss to the company, the liability of the shareholders is limited to the amount unpaid on their shares, and their personal property cannot be used to pay the company debts.
Example
If A buys 100 shares of a company at Rs. 10 each. His liability is limited to Rs. 1,000, and he cannot be asked to pay more than that in case the company suffers a loss.
(7) Number of Members
The minimum number of members in a public company is 7 and the maximum number of members in a public company is indefinite and is not specified.
In a private company, the minimum number of members is 2, and the maximum is 200 (As per Companies Act, 2013)
(8) Separation of ownership & Management
A company is deemed to be an artificial and imaginary person and, as such, it cannot manage its own affairs.
The shareholders are too many in number and scattered far and wide-which makes it impossible for the company affairs to be controlled by them. Besides, the objective of the shareholders is to make a profit not to run the company's business.
So the company is administered and managed by representatives called the Directors who are appointed by the shareholders. So there is a separation of ownership and management in a company.
(9) Limitation of Action
A company cannot go beyond the power and objectives stated in its Memorandum of Association. No company can cross this limitation of action and engage itself in an activity which is not listed in its Memorandum.,
A company cannot, of its own will, start a new business or change its field of activity and do something which does not conform to its objectives.
(10) Transferability of Shares
According to Section 44 of the Companies Act, 2013, the shares or 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.
So each shareholder can freely transfer his or her shares. But in some specific situations, the company may impose restrictions on the transfer of shares.
(11) Termination of Existence
Like it is born by an act of law, a company may also be terminated by law.
(12) Company is not a Citizen
A company is a legal person or entity, but under Article 19 of the Indian Constitution, it is not a citizen. It has no fundamental rights like a citizen has.
(13) Risk Bearing
In the sole trade, all the risks have to be borne by a single individual. In case of a company, the risk gets divided among numerous shareholders and nobody feels the burden.
That is why, a company does not hesitate to undertake more risky ventures. So it has more risk bearing ability as compare to others.
Corporate Veil
A company in the eyes of law is regarded as an entity separate and distinct from its members. Any of its members can enter into contracts with the company in the same manner as with any other individual.
Further, a shareholder or member of a company cannot be held liable for the acts of the company even if he holds the entire share capital. The company's money and property belong to the company, and not to the shareholders.
There is a Veil between shareholders/members and company.
CASE: Salomon Vs. Salomon and Co. Ltd
The verdict in the case of Salomon es. Salomon and Co. Ltd. is an important illustration of the separate legal entity of a company. Salomon was a trader in shoes who formed a company named Salomon and Co. of which he, his wife, daughter and four sons were the members. He sold his business to the company for £30,000 in consideration of which the company alloted him £20,000 worth of shares and £10,000 worth of debentures. The company was later wound up because of excessive financial loss. At the time of winding up, the assets of the company amounted to £6,000, whereas its liabilities included £10,000 of debentures and £7,000 of unsecured creditors. The creditors put up the claim that since Salomon and Salomon and Co., were the same entity unsecured creditors should get priority over the debenture-holder (who was Salomon himself). It was held than Salomon and Salomon & Co were two separate entities and the debenture-holder should have the priority in payment.
The verdict testifies to the fact that there is a corporate veil between a company and its members when it is incorporated, which lawfully gives a separate entity to the company and its members.
Lifting the Corporate Veil
This principle of differentiating the legal entity of the company from that of its shareholders may be referred to as 'Corporate veil'.
If the legal entity of a corporate body is misused for fraudulent purposes, the individuals concerned will not be allowed to take shelter behind the corporate entity of the company.
However, under certain exceptional circumstances the courts may lift or pierce the corporate veil of a company. Lifting or Piercing the corporate Veil means to hold persons controlling the affairs of the company liable for the acts of the company.
Exceptions of Lifting the Corporate Veil
The circumstances under which the courts may lift the corporate veil may be discussed under the following two heads:
1. Common Law Exceptions or (Judicial interpretations): The corporate veil has been lifted or pierced by the courts.
II. Statutory Provisions/Exceptions
I. Common Law Exceptions /(Judicial interpretations)
1. Determination of Enemy Character of a Company
The Tribunal/Court lifts the corporate veil to determine the enemy character of a company and examine the real promoters of the company.
If the company's management constitutes hostile aliens, or residents operating under the direction of hostile aliens, the Tribunal can lift the corporate veil and have a look at the company's.
CASE :Daimler Co. Ltd. VS. Continental Tyre and Rubber Co. Ltd.
Daimler Co. Ltd was incorporated in England for the purpose of selling the motor tyres manufactured in Germany by a German company. The German company held the bulk of the shares in Daimler Co. Ltd and all the directors were Germans resident in Germany. During the First World War, Daimler Co. Ltd company commenced an action to recover a trade debt. The House of Lords held that the Daimler Co. Ltd was an enemy company for the purposes of trading because its effective control was in enemy hands. Accordingly the company was debarred from maintaining the action. It would be against public policy to allow alien enemies to trade.
2. Where company is a sham
The court will lift the veil where the company is a mere cloak or sham i.e. where the device of incorporation is used for some illegal or improper purpose.
CASE: Gilford Motor Co. Ltd. VS. Horne (1933)
Horne entered into an agreement with his employer company that after the termination of the employment he would not solicit his employer's customers for a certain period of time. Soon after the termination of his employment he formed a company of which the two shareholders were his wife and one another person. The company sent out circulars to customers of his former employer. An injunction was granted against Horne and against the company he has formed restraining them from soliciting the plaintiff's customers. The court held the company was a mere cloak for the Horne to commit a breach of his agreement against solicitation.
3.Prevention of Fraud and Improper Conduct
If a company conducts its affairs in a fraudulent and improper manner, the Tribunal is empowered to ignore the separate entity of the company, and may treat the company and its members as one entity.
CASE: Jones VS. Lipman
Lipman had contracted to sell his land to Jones, but later changed his mind. To evade the contract, he formed a company and sold his land to it. The court held the seller of land and the company were one and the same entity, and made him sell his land to Jones with whom he had made the commitment in the first place.
4. Where the company is acting as the agent of the shareholders
Where a company is acting as an agent of its shareholders or of another company, it will be liable for its acts.
CASE: Re F.G. Films Ltd. (1953)
A British company was formed with a capital of 100 shares, out of which 90 shares were held by an American the director of United States Film Company, and 10 shares were held by another director, a British subject. The company produced a film called 'monsoon' the production of which was financed by the company. The court refused to agree that the film was made by the British company, the company was merely the nominee or agent of United States Film Company.
5. Protection of revenue
If it is revealed that the company was formed for the purpose of evading the payment of taxes, the court can pierce the corporate veil, and make the members liable for the responsibilities of the company.
Case: Sir Dinshaw Mancekjee Petit
D was a wealthy man getting huge dividend and interest income. In order to avoid super tax, he formed four private companies and transferred his investments in part to each of the four companies in exchange of their shares. Dividends received were credited in the account of the company and the amount was handed back to him as a loan. Thus, he divided his income in four parts to avoid tax liability. The court held that as the companies did no business, the four companies were formed purely and simply as a means of avoiding tax.
6. Avoidance of welfare legislation
Avoidance of welfare legislation is as common as the avoidance of taxation. Where the sole purpose for the formation of the new company was to use it as a device to reduce the amount to be paid by way of bonus, the Supreme Court upheld the piercing of the veil to look at the real transaction.
CASE: Workmen of Associated Rubber Industry VS. Associated Rubber Co.
A subsidiary was formed to split the profits of the company so that the incidence of bonus in the hands of the parent company will be reduced. The Supreme Court disregarded the existence of a separate company for the purpose of working out bonus for its employees.
7. Protecting Public Policy
The Courts invariably lift the corporate veil or disregard the corporate personality of a company to protect the public policy and prevent transactions contrary to public policy.
CASE :Daimler Co. Ltd. VS. Continental Tyre and Rubber Co. Ltd.
C, a private company, was incorporated in England for the purpose of selling the motor tyres manufactured in Germany by a German company. The German company held the bulk of the shares in company C and all the directors were Germans resident in Germany. During the First World War, C company commenced an action to recover a trade debt. The House of Lords held that the company C was an enemy company for the purposes of trading because its effective control was in enemy hands.
Accordingly the company was debarred from maintaining the action. It would be against public policy to allow alien enemies to trade.
II. Statutory Provisions/Exceptions
1. Reduction of Number of Members below the Statutory Limits
The Companies Act provides that if at any time the number of members of a company is reduced below the prescribed statutory minimum limit (i.e., below seven in case of public company and below two in case of private company) and even then the company carries on business for more than six months with reduced nümber then every member who is aware of this fact shall be liable for all the debts of the company which were contracted during that period
With the lifting of the corporate veil, its members too become individually and severally liable for the company's debts even if their liability is limited.
2. Liability for Fraudulent Conduct of Business
(Section 339)
If in the course of winding up vinding up of a company it appears that any business of the company has been carried on with the intention to defraud its creditors or for any fraudulent purpose, the Court may declare that any persons who were knowingly parties to such fraudulent conduction of business shall be personally responsible for all the debts or other liabilities of the company.
3. Liabilty for Ultra Vires Acts
Ultra vires means beyond one's power or authority. The directors of a company are personally liable for the ultra vires acts even if they are performed on behalf of the company.
4. Investigation of Ownership of Company (Section 216)
The Central Government may appoint one or more inspectors to investigate the membership and other related matters of the company for the purpose of determining the true persons behind it who have financial interest in the success or failure of the company, or who control or materially influence the policy of the company.
5. Mis-Description of Company's Name (Section 12)
If the name of the company and the address of its registered office has not been properly and clearly written or wrong name affixed on any document or contract, the persons actually responsible for such act shall be personally liable for the consequences of such act even if the contract is in the name of the company.
For example, if a company's functionary signs a promissory note on behalf of the company with affixing the wrong company's name on it, he shall be held personally responsible for the promissory nate.
6. Mis-statements in Prospectus Section 34 & 35)
As per the Companies Act, if there is any mis-statement in prospectus, then every director, promoter, and every other person who authorized the issue of prospectus shall be liable to pay compensation to every person who subscribes for any shares on the faith of the prospectus, for any loss sustained by him due to such untrue statement.
7. Failure to Refund Application money (Section 39)
One liability of a company is that it must return all moneys received from the applicants of shares who are not allotted the shares they had applied for.
If any such money is not repaid within 15 days from the date of closure of issue. If such money is not refunded to applicants who have not been allotted any shares, the directors of the company shall be jointly held liable along with 15% interest.
Private Company {Section 2(68)}
According to Section 2(68) of the Companies (Amendment) Act, 2015, a Private Company, is a company having a Minimum paid-up Capital of Rs.1,00,000 which by its Articles of Association:
RESTRICTS the right of it members to transfer its shares
Except in case of one person company, LIMITS the number of its members to 200 (Excluding members in the employment of the company)
PROHIBITS any invitation to the public to subscribe for any securities (shares or debentures) of the company.
Public Company {Section 2(71)}
According to Section 2(71) of the Companies (Amendment) Act. 2015, A public company means a company:
1. Which is not a Private Company ie it
a) DOES NOT RESTRICT the right to transfer its shares
b) DOES NOT LIMIT the number of its member,
c) DOES NOT PROHIBIT invitation to the public to subscribe for Shares or Debentures of the company
2. Has a minimum paid-up capital of Rs. 5,00,000
3. Subsidiary of a public company.
CONVERSION OF A PRIVATE COMPANY INTO A PUBLIC COMPANY
A Private Company may become a Public Company by the following ways:
1) Conversion by default
2) Conversion by choice
1) Conversion by default
Where any default is made by a Private Company in complying with the provisions of Section 2(68), the Private Company loses the privileges and exemptions and it shall be converted into be a Public Company, and this conversion is called conversion by default, where Private Company makes a default in respect of any the following provisions:
a) Private Company transfers the shares of its members or
b) Number of members crosses the limit ot 200 members or
c) Private Company invites public for subscription.
2) Conversion by choice
Where a Private Company chooses to become a Public Company by choice, it may follow the following procedure:
a) It shall have to remove all the THREE restrictions from its Articles of Association made under Section 2(68) by passing a special Yesolution to alter its Articles
b) It shall have to comply with all the provisions of the Companies Act, applicable to a Public Company
c) Within 30 days of its becoming a Public Company, it shall file with the Registrar, copy of the prospectus or a statement in lieu of prospectus and a copy of the special resolution.
d) Where the number of members is less than the required number of SEVEN members, it must be raised to seven.
e) Where the number of directors is less than THREE, it must be raised to at least three.
f) The word "Private" shall be deleted before word "Limited" in its name.
g) It shall have to enhance its paid-up capital to at least Rs. 5 lakh, if its existing paid-up capital was less than Rs. 5 lakh.
CONVERSION OF PUBLIC COMPANY INTO A PRIVATE COMPANY:
1) First of all the company should convene a meeting of Board of Directors and get the proposal for conversion approved by it.
2) A Public Company may be converted into a Private Company by altering the Articles of Association, incorporating the THREE restrictions as per the Section 2(68) by passing special resolution in general meeting as under:
RESTRICTS the right to transfer its shares;
LIMITS number of its members to 200 (Excluding members in the employment of the company)
c) PROHIBITS any invitation to the public to subscribe for any securities(shares or debentures) of the company.
Some alterations shall have to be made in the Articles relating to other provisions also, like provision of the issue of share warrants shall have to be deleted as a private company cannot issue share warrants.
3) A copy of the special resolution passed to alter the Articles of Association of the company shall be filed with Registrar within 30 days of passing the special resolution alongwith Form 23 of the companies (Central Government's) General Rules and Forms. An Application on Form 1-B has to be made within three months of passing of the special resolution..
4) On receipt of the application, the government, i.e. the Registrar may require the company to publish a suitable notice in a newspaper and a cutting thereof be sent to the Registrar. Three copies of notice should also be sent to the Stock Exchanges.
5) Name of the company shall also be changed and the word "Private" shall be added before the word "Limited".
6) A printed copy of the altered Articles of Association shall be filed with the Registrar within one month.