Company Origins and Regulations

• The term "company" comes from the Latin words "com" (with or together) and "panis" (bread), originally referring to people who share meals.
• In general, a company is an association of individuals with a common goal, traditionally known as a joint-stock company.
• A company is defined as an association of individuals who contribute money or its equivalent to a shared fund, using it for a common purpose, with the contributions forming the company's capital.
• The capital is divided into shares, with each member entitled to a portion.
• Shares are typically transferable, though this right can be restricted.
• A company is more than the joint contribution of capital and exists only within legal frameworks.
• Law establishes and dissolves it, and it can be formed through an Act of Parliament, Royal Charter, or company law registration.
• The essential aspect of a company is that it's a legally incorporated association.

Company Origins and Regulations

• Companies originated around 1600 A.D. with the East India Company, established via Royal Charter in England.
• Modern company forms arose from legislative developments in the mid-19th century in the UK.
• Companies are now a dominant business form due to the advantages they provide.
• Corporate laws worldwide regulate company formation and operations.

Indian Companies Act, 2013

• The Indian Companies Act of 2013 provides the law for companies in India, applying uniformly throughout the country.
• It replaced the Companies Act of 1956, becoming effective in fiscal year 2014-15.
• Contains 7 schedules, 29 chapters, and 470 sections.
• The Act applies uniformly in India, with some special provisions for certain states and UTs, and notifications by the Central Government.
• The Act applies to an array of entities including companies incorporated under the Act or previous laws, insurance, and banking companies.
• Also, it applies to electricity companies, and other entities under special acts, with some inconsistency exceptions in provisions.
• It applies to bodies incorporated by any Act, as specified by the Central Government's notification.

Administration of the Act

• The Central Government, through the Ministry of Corporate Affairs (MCA), is responsible for administering and enforcing the Companies Act.
• The National Company Law Tribunal (NCLT) and Appellate Tribunal (NCLAT) are quasi-judicial bodies that administer the Companies Act.
• Regional Directors, appointed by the Central Government, oversee regions comprising multiple states and UTs, supervising Registrars of Companies and Official Liquidators.
• Registrars of Companies (ROCs), appointed by the Central Government, register companies in States and UTs, ensuring compliance with the Act.
• Special Courts may be established by the Central Government for speedy trials of offenses under the Act, consisting of a single judge appointed with the High Court's concurrence.

Definition of a Company

• Section 2(20) of the Companies Act defines a company as one incorporated under this Act or previous company law.
• A company formed and registered under the Companies Act, 2013, or previous laws, falls under this definition.
• A body corporate has perpetual succession, a common seal, and is a separate legal entity.
• Body corporates include: Companies under the Companies Act, foreign companies, and corporations formed by special Acts.
• Also, Financial institutions are included plus limited liability partnerships registered under the Limited Liability Partnership Act, 2008.
• Body corporates excludes cooperative societies plus entities specified by the Central Government in the Official Gazette.
• All companies are body corporates, but not all body corporates are companies

Characteristics of a Company

• A company is an incorporated association via registration under the Companies Act (or previous laws).
• Public companies require at least 7 persons and private companies at least 2 persons.
• These individuals subscribe to the memorandum of association and comply with legal requirements for incorporation.
• A company gains a legal existence, enabling it to act like a person, owning property, entering contracts, and engaging in legal proceedings.
• It can partner with individuals or other companies and can buy shares or debentures.
• A company is an artificial legal person as it exists in the eyes of the law, with a nationality, domicile, and residence.
• It can not seek the use of constitutional rights.

Independent Legal Entity

• A company's legal existence is distinct from its members/shareholders.
• It is autonomous, self-controlled, and can possess property, enter contracts, open bank accounts, and engage in lawsuits.
• Shareholders are not considered part owners of the company, and the company's assets are for its benefit, not personal gain.
• A company can be held responsible for criminal acts, breaches of law, and torts committed by employees.
• Creditors can only seek remedy from the company and its assets.
• The company's existence is separate from the intentions or actions of individual shareholders.
• Directors/managing directors are not personally liable for the company's debts or employee salaries.
• The House of Lords recognized this principle of separate legal entity in Oakes v. Turquand and Harding (1867).
• The House of Lords clarified it in Salomon v. Salomon & Co. Ltd. (1897), confirming the company's independence from its members even if they are also creditors.
• The separate existence concept was confirmed in Lee v. Lee's Air Farming Ltd. (1961), enabling someone to be both a master and servant via corporate personality.

Legal Entity in Indian Courts

• Indian courts support the independent legal entity of a company.
• In Re. Kondoli Tea Co. Ltd. (1886), the court stated that a company is separate from its shareholders, treating property transfers as conveyances.
• The claim of third parties is against the company, not its directors or employees.
• Directors or members cannot individually enforce company rights.
• In Abdul Haq v. Das Mal (1910), the court ruled that an employee's salary claim lay against the company, not the director.
• The concept of separate corporate entity is known as the veil of incorporation.
• Courts may bypass the separate personality in specific situations to access the members.

Separate Property

• Corporate property is different from the property of its members.
• Members have no direct property rights, only shares.
• Company cannot be the property of someone who owns all the company's shares, nor can it be considered the agent.
• Members cannot claim ownership of assets during the company's existence or winding up.
• Shareholder's do not have legal interests in the company's property.
• Shareholder does not have any insurable interest in the property of the company is Macaura v. Northern Assurance Co. Ltd. (1925).

Perpetual Existence

• A company has perpetual succession, not limited by lifespan.
• Company's dissolution and members' share transfer rights ensure company's existence regardless of its members' lives.
• A company can only be legally terminated and does not cease to exist if members (even founders) die or leave.
• It can continue contracts and agreements regardless of membership changes.
• Confirmed in Re Meat Suppliers Guildford Ltd as the company survived after a bomb killed all of the companies members.

Common Seal

• A company is an artificial person without physical existence, so it needs a common seal as its signature for official documents.
• Acts are authorized by its common seal as a signature.
• Use of a common seal has been made optional under the Companies (Amendment) Act, 2015.

Separation of Ownership

• A company is owned by shareholders, with shareholder representatives (directors) managing affairs to pursue goals.
• Directors hire professional managers to run daily operations under their control.
• This separation raises corporate governance issues.

Limited Liability

• Shareholders' liability is distinct from the company's liability.
• Shareholders have liability limited to the unpaid value of their shares, facing no further obligations after full payment.
• Creditors cannot claim from shareholders' personal wealth.
• Guaranteed companies have members contributing an agreed sum to assets when the company winds up.

Transferability of Shares

• Ownership rights can be sold through share transfers.
• Transferability is free in public companies, with restrictions possible in private companies.
• Transferability and limited liability enable the rise of companies worldwide.

Advantages of a Company

• It has unlimited resources for undertaking enterprises.
• Limited liability attracts more company investors.
• Liquidity to funds is increased through share transfers.
• Shareholder elected representatives manage and control the actions of the business.
• Continuity: Stability is ensured due to not being impacted by death, insolvency or insanity of its members.
• Large Capital: It is easy to generate capital by issuing shares or debentures.

Difficult Incorporation

• Complying with prescribed legal formalities is necessary to form a company, including the filing of documents such as the memorandum of association.

Diffused Risk

• Risks are diffused over people as the loss becomes increasingly low.

Large Membership

• The organization of a business becomes much easier due to the lack of restrictions.

Disadvantages

• Lack of Personal Interest: The shareholders may not take a personal interest in the working of the business which may lead to company losses.
• Separation of Ownership from Management: The shareholders do not have a say in the company and their voice may remain unheard.
• Lack of Secrecy: It is difficult to maintain secrecy in the company because they are obligated to publish documentation.
• Too many Legal Formalities: There are many legal formalities to compile with.
• Slow Decision-Making Process: The company does not vest with the final authority and the decisions are taken within general meetings which causes significant delays.
• Possibility of Frauds: The separation of ownership and management increase fraud possibilities.

Differences Between Companies and Partnerships

• Company is an incorporated association while a partnership is the relation of people who distribute business profits.

Statutory Distinctions

• In Company Mode of Creation is under the Companies Act, 2013 while in Partnership under the Partnership Act, 1932.
• In Company the Legal Status is distinct from members and has a perpetual succession while in Partnership there is no perpetual succession.
• In Company, the Liability of Members is limited, while in that of Partnership, it is unlimited.
• In Company, the Authority is managed by the Board of Directors while in Partnership it is Common.
• Transfers of Members are freely transferrable while in Partnership in is not.
• In Company, the minimum number of members is 7 in Public Companies, while in Partnership it is 2.
• Company Legal Formalities: Statutory books must be maintained while in Partnerships registration is not compulsory.
• Company Resources: Large and limited resources in companies while limited resources in partnerships.
• Company Conduct of Affairs: Affairs are conducted as per the Companies Act while In Partnerships they decide.
• Company Dissolution: May only be dissovled by provisions of law while in Partnership by a dissolution of agreement.

Lifting the Corporate Veil

• Corporate veil can be put under two categories, judicial and statutory provisions.

Cases under Judicial Interpretation

• Judicially, the courts have generally disregarded the concept of independent corporate personality when corporate personality has been used as a cloak for fraud/improper conduct/doing things against public policy or for evading personal responsibility.

Cases Under Statutory Provision

• Reduction in membership.
• Holding and Subsidiary Company Relationship.
• Investigation in the Affairs of Company.
• Investigation of Ownership in Company.
• Directors with Unlimited Liability.
• Fraudulent Conduct of Business.
• Failure to Return. Application Money.
• Misrepresentation in Prospectus.
• Mis-description of Name.
• Pre-incorporation Contracts.
• Ultra vires Acts.
• Liability under Other Statutes.

Cases under Judicial Interpretation

• Determination of Character of Company.
• Company Acting as Agents of the Shareholders.
• Benefit of Revenues.
• Evasion of Personal and Statutory Obligation.
• Avoidance of Welfare Legislation.
• Fraud and Fraudulent Schemes.
• Diversion of Business Opportunity.
• Determining Expertise of Company.

Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (1916)

• The company was barred from recovering debt.

Workmen as Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd.

• The bonus distribution would be disregadred during times of business and fraudulent schemes.

Gilford Motor Co. v. Horne (1933)

• The company started by Horne was prevented from enticing away from Gilford Motor Company's customers.

Important Cases

• Salomon vs. Salomon & Co. Ltd.
• Lee vs. Lee's Air Farming Ltd.
• Re. Kondoli Tea Co. Ltd.
• Abdul Haq vs. Das Mal
• Rajendra Nath Dutta vs. Shibendra Nath Mukherjee
• Macaura vs. Northern Assurance Co. Ltd.
• Re. Meat Suppliers Guildford Ltd.
• Daimler Co. Ltd. vs. Continental Tyre and Rubber Co.
• Merchandise Transport Limited vs. British Transport Commission
• Ref. F.G. (Films) Ltd.
• Apthrope vs. Peter Behoenhofer Brewing Co.
• Re. Dinshaw Maneckjee Petit
• Gilford Motor Co. ws. Horne