nature and definition of a company and some cases for reference

2. DEFINITION OF A COMPANY
 As per Sec. 2(20) of the Companies Act, 2013,
‘company’ means a company incorporated
“under this Act”; or “under any previous
company law”.
 A company is an artificial person created by
law, having “separate identity” and “perpetual
succession”.

3. NATURE OF A COMPANY
A company has a dual nature, as an
association of its members but also as a
person separate from its members. As soon as
necessary formalities of incorporation are
satisfied, a new entity comes into existence
which is separate and distinct from its
directors and shareholders.

4. CHARACTERISTICS OF A COMPANY
 Incorporated association
 Separate legal entity
Limited liability
Perpetual succession
Common seal
Transferability of shares
Separate property
Capacity to sue and be sued
Artificial person
Separation of ownership from management

5. INCORPORATED ASSOCIATION
 Every company must be compulsorily
registered or incorporated under the
company’s Act , 2013.
 According to sec 3 the minimum number of
persons required for forming a private
company is two, seven for a public company
and one for one person company. These
persons are also known as the subscribers to
the memorandum.

6. SEPARATE LEGAL ENTITY
 A company is in law regarded as an entity
separate from its member. It has an independent
corporate existence
 Any of its member can enter into contract with
it in the same manner as any other individual
can and he can not be held liable for the acts of
the company even if he holds virtually the entire
share capital

7. LIMITED LIABILITY
 In a company limited by shares, the liability
of member is limited to the unpaid value of
the shares.
 Company limited by guarantee is a
incorporated firm without share capital, and in
which the liability of its members is limited to
the amount each one of them undertakes to
contribute at the time the firm is wound up.

8. PERPETUAL SUCCESSION
Member may come and go but the company can
go on forever. It continues to exist even if all its
members are dead. The existence of company
can be terminated only by law
Ex:- All members of a private company were
killed by a bomb while in a general meeting held,
The company continues to exist through the legal
heirs of the deceased parties or member.

9. COMMON SEAL
 Common seal is the official signature of the
company.
 Any document on which common seal is
affixed, is deemed to be signed by the
company.

10. TRANSFERABILITY OF SHARES
In case of a public company the shares are
freely transferable but in the case of a private
company there will be certain restriction on
the transferability of shares.

11. SEPARATE PROPERTY
As a company is a legal person distinct from its
members, It is capable of owning ,enjoying
and disposing of property in its own name.
Although its capital and assets are contributed
by its shareholders, they are not the private
and joint owner of its property.

12. CAPACITY TO SUE AND BE SUED
A company being a separate legal entity has
the legal entity to sue others such as
members, directors, debtors, outsiders etc.
Similarly, a company may also be sued by
others such as members, directors, creditors,
outsiders.

13. ARTIFICIAL PERSON
 A company is not a natural person.
Consequently, a company cannot fall ill, or die
or be declared as insolvent.
 A company is an artificial person.
 But it is not a fictitious person. A company
does exist but only in the eyes of law. In other
words, a company exists only in
contemplation of law.

14. SEPARATION OF OWNERSHIP FROM
MANAGEMENT
 The members do not participate in day-to-day
affairs of the company.
 The management of the company lies in the
hands of elected representatives of members,
commonly called as Board of directors or
directors of simply the Board.
 The directors are appointed as well as removed
by the members. Thus, the Act has ensured the
ultimate control of members over the company.

15. CASES
 SALOMON V. SALOMON & CO. LTD. (1897)
MACAURA v NORTHERN ASSURANCE CO LTD
(1925) AC 619

16. SALOMON V. SALOMON & CO. LTD.
(1897)
 Transfer of sole proprietorship business to company. Mr.
Salomon was carrying on the business of boot manufacturing as
a sole proprietor. He incorporated a company named Salomon &
Co. Ltd. for the purpose of taking over this business.
 Payment of purchase consideration by the company.
 (a) Total consideration
£39,000
 (b) Cash Paid
£ 9,000
 (c) Fully paid shares of £ 1 each issued to Salomon
£ 20,000
 (d) Secured debentures issued to Salomon
£10,000.

17. Constitution of Salomon & Co. Ltd. The 6 members of
the family of Mr. Salomon were issued one share each.
Salomon was the managing director of Salomon & Co.
Ltd. Salomon & Co. Ltd. is commonly called as “one
man company’.
Inability to pay debts by the company in liquidation.
In the course of business, the company borrowed from
creditors to the extent of £ 7,000. Due to trade
depression, the company ran into financial difficulties
and eventually went into liquidation. The assets
realized only £ 6,000.
Contention of unsecured creditors - one man cannot
owe money to himself. The unsecured creditors
contended that Salomon was carrying on business in
the name of Salomon & Co. Ltd. Thus, Salomon and Co.
Ltd. was a mere agent for Salomon.

18. Decision of the Court. It was held that
Salomon & Co. was a real company fulfilling all
legal requirements. It had an identity different
from its members, and therefore, the secured
debentures were to be paid in priority to
unsecured creditors.

19. MACAURA v NORTHERN ASSURANCE
CO LTD (1925) AC 619
Fact - Macaura own land on which stood timber. He sold
the land and timber to a company he formed and
received as consideration all the fully paid shares. The
company carried the business of felling and milling
timber. A fire destroyed all timber which had been felled.
Macaura had earlier insured the timber against loss by
fire in his own name. He had not transferred the
insurance policy to the company.
Issue - When Macaura made a claim his insurers refused
to pay arguing that he had no insurable interest in the
timber. Only persons with a legal or equitable interest in
property are regarded as having interest in it.

20. Held By House Of Lords
The insurers were not liable. Only Macaura’s
company, as owner of the timber, which had
the requisite insurable interest in it. Only the
company, and not Macaura, could insure its
property against loss or damage. Shareholders
have no legal or equitable interest in their
company’s property.