Define a company. Explain its Characteristics.

Definition of a Company: 

Section 2 (20) of the Companies Act, 2013 defines a company as “a company incorporated under this Act or under any previous company law.” Important previous companies laws are the companies laws passed in 1850, 1866, 1882, 1913 and 1956.

After passing of the Companies Act, 2013, all these acts have been repealed. The definition contained in the Act does not throw any light on the features of a company.

A more comprehensive definition of a company has been given by Prof. Haney : A company is an incorporated association which is created by law, having a separate entity with a perpetual succession and a common seal.”

Also read | Meaning Debenture, Features & Types of Debenture.

Two more features division of capital into transferable shares and limited liability of the members may be added to the definition given by Prof. Haney.

Thus, a company may be defined as “an incorporated association which is an artificial person created by law, having a separate entity, with a perpetual succession, a common seal, capital divided into transferable shares and carrying limited liability.

Characteristics and Features of a Company

Incorporated Association: 

A company must be registered under the prevalent Companies Act. If the number of members in an association exceeds 50 and the association is formed for carrying on a business with profit motive.

Also read | Current Ratio & Liquid Ratio.

It must be registered under the Companies Act or any other Indian Law otherwise it becomes an illegal association.

For forming a public company, at least seven persons and for forming a private company, at least two persons are required. For forming one person company, as a private company, only one person is required.

Artificial Legal Person: 

A company is an artificial legal person.

Also read | The Techniques of Financial Statements.

  • It is artificial because it is created by a process other than the natural birth.
  • It comes into existence through the operation of law.
  • Company is a legal person because it exists in the eyes of the law.
  • Company can do a number of things which can be done by a natural person a company can enter into a contract.
  • It can purchase and sell assets, it can be fined, and so on.
  • It acts through the board of directors elected by the members.

Separate Legal Entity (Doctrine of Corporate Veil): 

A company is a legal person and is different from its members. The property of the company belongs to the company alone and the members can not claim individually or jointly ownership rights in the assets of the company during its existence or in its winding up.

A company can file a suit against its members and the members can also file a suit against the company. Further, the members are not liable for the liabilities of the company.

Also read | Meaning of Ratio Analysis.

Their liability is limited to the extent of their shareholdings. Creditors of the company are the creditors of the company alone and they cannot proceed directly against the members of the company. The concept of separate legal entity was recognized in the famous case of Solomon vs. Solomon & Co. Ltd.)

In this case, Mr. Solomon  floated a company Solomon & Co. Ltd. and sold his business to the Company for £ 30,000. Seven members of the company were Solomon, his wife, daughter and four sons.

The purchase consideration of £ 30,000 was paid by the company in the form of 20,000 equity shares of £ 1 each and £ 10,000 in the form of debentures. The debentures had a charge on the assets of the company.

Also read | The limitations of analysis of financial statements.

One share of £ 1 each was subscribed for in cash by the remaining six members of his family. After a period of one year, the company became insolvent and went into liquidation.

At the time of liquidation, the position of the company was roughly like this : Assets £ 6,000, secured creditors (debentures issued to Mr. Solomon) £ 10,000 and unsecured creditors £ 7,000.

The unsecured creditors claimed priority over the debenture-holder (Mr. Solomon) on the ground that Solomon and Solomon & Co. were one and the same person.

Therefore, the assets of the company should be applied for the payment of their debts.

Also read | Proposed Dividend.

The lower court held that the company was a mere agent for Solomon who had to indemnify it against the losses. Mr. Solomon appealed in the higher court and the decision was reversed.

It was held that as soon as the company was duly incorporated, it became, in the eyes of law, a separate and independent person from its members.

Thus, the assets of the company must be applied in payment of the debentures first in priority to the unsecured creditors. Thus, unsecured creditors could not get anything.

In another case Lee vs. Lee’s Air Farming LTD, Lee formed a company Lee’s Air Farming Ltd.

Also read | Raunkiaer’s Life forms.

He held 2,999 shares out of 3,000 shares of the company. He appointed himself as the Managing Director of the company as well as the chief pilot at a salary.

While carrying out his duties, he died in the air cash. His widow claimed compensation on the plea that Mr. Lee was an employee of the company, The company opposed the claim on the ground that the same person can not be employer as well as the employee.

But the court decided that Lee and the company were separate in the eyes of the law.

Perpetual Existence:

A company has perpetual succession and is independent of the life of its members. Its existence is not affected by the death, lunacy or bankruptcy of its members. 

Also read | Meaning & Types of Amalgamation.

Members may come, members may go but a company continues for ever. A company comes into existence through the operation of law and it can come to an end only through the operation of la During the) war, all the members of a private company, while attending the general meeting, were killed by a bomb. But the company continued.

Legal representatives of the deceased members became the new members of the company.

Limited Liability: 

Liability of the members of the company is limited to the value of the shares subscribed by each of them. In case of company limited by grantee, the liability of the members of the company is limited to the extent of guarantee given by them.

Also read | Difference between amalgamation in the nature of merger and amalgamation in the nature of purchase.

Transfer ability of Shares: 

The shares of a company are freely transferable in the case of public companies whereas they are not so in case of private companies)

Common Seal:

Every company has its own common seal which is affixed on all the important documents of the company. The common seal with the name of the company engraved on it, is used as a substitute of its signature.

Separate property: 

Also read | Difference between pooling of interest method and purchase method.

A company, being a legal person, is capable of owning, enjoying and disposing of property in its own name. The property of the company is to be used for the company’s business and not for the personal benefit of its members.

In the case of Macaura vs. Northern Assurance Co. Ltd., Macaura (M), the owner of a timber estate sold all the timber to a registered company in exchange for the shares in the company.

The timber continued to be insured in M’s name personally. He held all the shares of the company except one. He had also advanced loan to the company.

Bulk of the timber was destroyed by fire. M claimed the loss from the insurance company.

Also read | The Purchase Consideration Calculation According to AS-14.

Held, the insurance company was not liable as M had no insurable interest in the company’s property. M, neither as shareholder nor as creditor, could insure the company’s property.

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