A company is a term widely used in commercial, legal, and economic contexts, yet it carries no strictly technical or legal meaning on its own. Historically, courts and legislations have described a company as an association of persons united for a common object, especially those relating to economic purposes such as business and trade. While people can associate with a wide range of objectives, both economic and non-economic, the word company is predominantly used in everyday language to refer to business entities formed for profit.
In legal parlance, a company is distinct from other forms of associations, particularly a partnership. Indian law provides two main forms of business associations: the partnership and the company. Although the word company is sometimes colloquially used for both, legally, they are entirely different structures governed by separate laws. Partnerships in India are regulated under the Indian Partnership Act, 1932, and the Limited Liability Partnership Act, 2008. These laws are built on the law of agency, where each partner acts as an agent of the other. Therefore, partnerships are typically suitable for smaller businesses with a limited number of members who trust one another.
However, a business with a large and fluctuating membership base requires a more sophisticated structure. Such an entity should ideally be granted corporate personality, meaning it is recognized as a separate legal person capable of rights and obligations distinct from those of its members. This is precisely what the company structure under Indian law offers. Incorporating under the Companies Act allows an association to acquire legal status distinct from its shareholders. Notably, a company can also be formed for non-profit purposes such as promoting commerce, art, science, sports, religion, or charity.
Legal Definition of a Company
While the Companies Act, 2013 provides a statutory basis for companies, its definition in Section 2(20) is simple: a company means a company incorporated under this Act or any previous company law. This legal definition does not offer much insight into the features or essence of a company. To gain a better understanding, one must turn to judicial interpretations and scholarly definitions.
According to Lord Justice Lindley, a company is an association of many persons who contribute money or money’s worth to a common stock, employed in a business, and share the profits or losses arising from it. The contributed amount is known as the capital of the company, and those who contribute are known as members or shareholders. The portion of capital each member holds is referred to as their share, and these shares are generally transferable, albeit sometimes with restrictions.
Chief Justice Marshall described a corporation as an artificial being, invisible, intangible, and existing only in the contemplation of law. It is a creation of law and possesses only those properties granted to it by its charter, either explicitly or by implication.
Prof. Haney characterized a company as an artificial person created by law, possessing a separate entity, perpetual succession, and a common seal.
These definitions collectively emphasize that a company is created by law, distinct from its members, and regulated entirely through legal provisions. Once registered, a company becomes a body corporate and acquires a legal personality that is separate from its owners or shareholders. It can sue and be sued in its name, own property, and perform all lawful activities like a natural person.
The Supreme Court of India, in G.V. Pratap Reddy Through G.P.A. TSR Research Pvt. Ltd. v. K.V.V.S.N. Associates, confirmed this legal understanding. The court held that when a Notice Inviting Tender (NIT) required a bidder to be an individual or a company, the term company must be interpreted strictly as defined under the Companies Act. Therefore, a partnership firm could not qualify as a company under such conditions, and its bid was lawfully rejected.
Incorporated Association and Separate Legal Entity
A company must be registered under the Companies Act, and its incorporation marks the beginning of its legal existence. The law mandates a minimum of two members for forming a private company and seven for a public company. Additionally, the concept of a One Person Company (OPC) allows even a single individual to incorporate a company under certain conditions.
Once incorporated, a company enjoys a legal status separate from its members. Unlike a partnership, where the partners are agents of each other, a company is considered a separate legal person distinct from its shareholders. This means that the company can own property, incur debts, enter into contracts, and initiate or defend legal actions in its name.
One of the earliest Indian cases affirming the doctrine of separate legal personality was Kondoli Tea Co. Ltd., Re ILR (1886). In this case, certain individuals transferred a tea estate to a company where they were shareholders. They argued that the transfer was not subject to ad valorem duty since it was merely a name change. The court rejected this argument and held that the company was a separate legal person from the shareholders. Therefore, the transfer was valid and subject to duty.
Similarly, the case of S.A.E. (India) Ltd. v. E.I.D. Parry (India) Ltd. emphasized that the company’s separate legal personality forms the bedrock of company law. This principle allows the company to act as an independent entity in business transactions.
In B.F. In Guzdar v. CIT, the Supreme Court ruled that shareholders do not own company property directly. Even when a person owns all the shares in a company, the company’s assets belong to the company, not the shareholder. The distinction is so fundamental that even a sole shareholder cannot claim ownership rights in the company’s property.
In the case of Rajendra Nath Dutta v. Shibendra Nath Mukherjee, the Calcutta High Court ruled that if a wrong is done to a company, it must sue or be sued in its name, not in the name of its shareholders or directors.
Judicial Precedents on Corporate Personality
The concept of a company as a separate legal entity was firmly established in the landmark English case Salomon v. Salomon & Co. Ltd. Salomon, a leather merchant, incorporated his business as a company. His wife and five children became shareholders to meet the legal requirement of seven members. He sold his business to the company for £39,000, receiving debentures, fully paid shares, and cash in return. When the company went into liquidation within a year, its assets were insufficient to repay the debentures held by Salomon, leaving nothing for unsecured creditors.
The House of Lords held that the company was a legally valid entity, distinct from Salomon. Although he controlled the company entirely, it was not his agent. The Act required seven members but placed no restrictions on their relationship. The business was that of the company, and Salomon was merely its agent, not its principal. This case laid the foundation for the doctrine of a separate legal entity in common law jurisdictions.
Another important precedent is Lee v. Lee’s Air Farming Ltd. In this case, Lee formed a company and held almost the entire shareholding. He also served as its governing director and chief pilot. When he died in an air crash, a claim for workers’ compensation was filed. The issue was whether he could simultaneously be an employer and employee of the same company.
The Privy Council ruled in favor of Lee, holding that the company and its controlling shareholder were separate entities. Hence, Lee was legally employed by the company and entitled to workers’ compensation.
A similar approach was followed in H.S. Sidana v. Rajesh Enterprises, where the court ruled that a decree issued against a company could not be enforced against its managing director personally.
In Bacha F. Guzdar v. The Commissioner of Income-Tax, the Supreme Court addressed whether dividends received by a shareholder from a tea company should be considered agricultural income. The court held that although the company’s income was partly agricultural, dividends received by the shareholder did not inherit that character and thus could not be treated as agricultural income.
In Chamundeeswari v. CTO, Vellore Rural, the Madras High Court held that tax dues owed by a company must be recovered from the company itself and not from its directors, again emphasizing the principle of separate legal personality.
These cases reinforce the principle that once incorporated, a company becomes a distinct legal entity, separate from its promoters, shareholders, and directors. This separation shields individual members from personal liability and also imposes legal responsibilities on the company as an independent entity.
The Company as an Artificial Person
A company, though considered a legal person, is not a natural person. It is an artificial entity created entirely by law. It cannot act on its own or perform any physical activity. For all practical purposes, it must act through human agents such as directors, officers, and employees. These individuals carry out all the tasks required to operate the business. However, when these individuals act within the scope of their authority, the acts are legally recognized as being performed by the company itself.
Despite not having physical existence, a company has legal rights and responsibilities similar to those of a natural person. It can own property, enter into contracts, sue or be sued, and perform all other legal functions through its representatives. However, any liability arising from such actions rests on the company and not on the individuals acting on its behalf, provided they are acting within their authority.
The artificial nature of a company also implies that its legal existence is separate from those who manage or own it. This characteristic is central to the concept of incorporation and is essential to understanding the liability and rights of corporate entities.
Limited Liability of Members
One of the most attractive features of forming a company is the concept of limited liability. This means that the liability of the members of the company is limited to a certain extent, depending on the type of company and the nature of their investment.
In a company limited by shares, the liability of a shareholder is confined to the amount unpaid on the shares they hold. If a shareholder has fully paid for their shares, they bear no further responsibility for the company’s debts, even if the company becomes insolvent. This protects personal assets and encourages investment in corporate enterprises.
In contrast, companies can also be formed with unlimited liability. In such cases, members may be personally liable for all the debts of the company. However, this form is rare due to the risks involved.
There is also the structure of companies limited by guarantee. These companies are generally formed for non-profit objectives. Members of such companies guarantee to contribute a specific amount toward the company’s liabilities in the event of its winding up. This amount is predetermined and does not depend on the number of shares held.
A company limited by guarantee may or may not have share capital. If it has share capital, the members’ liability includes both the guaranteed amount and any unpaid amount on their shares.
The Companies (Amendment) Act, 2017, introduced Section 3A, which imposes personal liability on members if a company continues its business with fewer than the required number of members for over six months. In such cases, any person who is aware of this fact and continues to be a member can be held personally liable for the entire debt of the company during that period. This provision ensures compliance with the statutory requirement regarding the minimum number of members.
Doctrine of Separate Property
A company, being a separate legal person, is capable of owning, using, and disposing of property in its name. Shareholders do not have any direct legal rights or ownership over the company’s property. Their interest is limited to their shares, which confer specific rights such as voting, receiving dividends, and attending meetings.
This principle was affirmed in the Supreme Court case of Bacha F. Guzdar v. Commissioner of Income-Tax, Bombay. The court held that although shareholders are entitled to a share in the profits through dividends, they have no claim over the company’s assets. The company remains the sole owner of its property.
The doctrine of separate property was further emphasized in the English case Macaura v. Northern Assurance Co. Ltd. Macaura owned nearly all the shares in a timber company and had insured the company’s timber in his name. When the timber was destroyed by fire, his insurance claim was rejected. The court held that he had no insurable interest in the timber as the property belonged to the company, not him.
The case highlighted that even total ownership of shares does not confer ownership of company assets. Shareholders, regardless of their stake, do not possess legal or equitable interest in the company’s property. The legal distinction between the company and its shareholders must be preserved to maintain the integrity of corporate law.
This principle ensures that the assets of a company are protected from individual claims of shareholders and creditors of shareholders, thereby maintaining the financial stability and continuity of the corporate entity.
Transferability of Shares
One of the defining features of a company, especially a joint-stock company, is the free transferability of its shares. This allows investors to buy and sell shares without affecting the existence or operations of the company. It also contributes to the liquidity of investments and facilitates the raising of capital from the public.
Section 44 of the Companies Act, 2013 affirms that the shares or any other interest of a member in a company are considered movable property and are transferable in the manner provided by the company’s articles of association. This provision underlines the statutory recognition of the right to transfer shares.
In public companies, shares are generally freely transferable. However, the articles of association may impose certain procedural requirements. These cannot altogether prohibit the transfer of shares, as doing so would contradict the principle of free transferability.
In private companies, the law mandates certain restrictions on share transfers. These restrictions must be reasonable and cannot amount to an absolute prohibition. The Companies Act recognizes shareholders’ agreements, including clauses like the right of first offer and the right of first refusal. These rights enable existing shareholders to purchase shares being sold before they are offered to outsiders.
Despite restrictions, the right to transfer shares in private companies is preserved to some extent to ensure fairness and legal compliance. This characteristic differentiates the corporate form from partnerships, where transfer of interest typically requires the consent of all partners.
The free transferability of shares is a vital component in the appeal and functionality of the corporate structure. It allows the ownership of a company to change hands smoothly without disrupting its operations or legal identity.
Perpetual Succession
A company enjoys perpetual succession, meaning its existence is not affected by changes in its membership. It continues to exist until it is legally dissolved through a prescribed process under the Companies Act. Death, insolvency, or retirement of members has no impact on the company’s existence.
This concept signifies that the company, being an artificial person, does not suffer from the limitations of human life. It is immune to natural causes such as illness or death and can only cease to exist through legal dissolution.
An example that illustrates this principle occurred during World War II when a bomb killed all members of a private company during a general meeting. The court held that the company survived despite the tragedy. The company continued to exist as a legal person capable of appointing new members and continuing business.
This characteristic provides continuity and stability to the corporate form of organization. It also ensures that contractual obligations, ownership of assets, and business operations are not interrupted due to personal misfortunes of members or directors.
The concept is often summarized with the phrase “the king is dead, long live the king,” implying that the institution (the company) survives the individuals who constitute it at any given point in time.
The Common Seal
Since a company is an artificial person, it cannot physically sign documents or express intentions. Historically, the common seal functioned as the official signature of the company. It was a symbol of authenticity, and affixing the seal was necessary to execute deeds and contracts.
The Companies (Amendment) Act, 2015,, made the use of a common seal optional. Section 22 allows a company to authorize any person to execute deeds on its behalf through a general or special power of attorney. If the company chooses to have a common seal, the deed must be signed and sealed accordingly. If it chooses not to have a seal, the deed must be signed by two directors or by a director and a company secretary, if one is appointed.
This amendment simplifies the execution of documents and aligns with modern practices. It also reduces the administrative burden, especially for small companies. Nonetheless, where a common seal is adopted, it still carries the same legal effect and continues to be a valid mode of authentication.
The role of the common seal has evolved, but it remains a part of corporate law, reflecting the symbolic and procedural aspects of a company’s existence as a legal person.
Common Seal and Legal Personality
One of the key features of a company is its possession of a common seal. Although not mandatory under the Companies (Amendment) Act, 2015, the common seal acts as the official signature of the company. It is used on important legal documents like deeds and contracts. A company, being a legal person, cannot physically sign documents. Therefore, the common seal substitutes for the company’s signature in transactions and agreements. When affixed by the Articles of Association and company resolutions, the common seal holds the company legally accountable. The presence of a common seal, even if optional, symbolizes the company’s distinct legal personality.
The concept of legal personality distinguishes a company from its members. The company can own property, enter into contracts, and sue or be sued in its. This separation ensures that members are not personally liable for the company’s obligations. The idea was solidified in the landmark case Salomon v. Salomon & Co. Ltd., where the House of Lords established the principle of corporate personality. It ruled that once a company is legally incorporated, it becomes a separate legal entity, distinct from its members, regardless of how much capital each member holds.
Perpetual Succession and Transferability of Shares
Perpetual succession means that a company’s existence is unaffected by changes in membership. Death, insolvency, or retirement of shareholders or directors does not impact the company’s life. It continues to operate until it is wound up by the law. This feature is significant because it allows the company to outlive its founders and ensures long-term continuity. A company’s perpetual existence enhances stability and allows for more sustainable planning and investment.
In addition, shares in a company are generally transferable, enabling shareholders to exit or enter the company without affecting its legal standing. The ability to transfer shares provides liquidity to investors and enhances the company’s appeal in capital markets. Public companies, in particular, benefit from this feature as it facilitates raising funds from the public. Private companies may impose restrictions on the transferability of shares, but the concept remains central to the corporate structure.
Capacity to Sue and Be Sued
Since a company is a legal person, it can initiate legal proceedings in its name and can also be sued by others. This capacity allows the company to enforce its rights under contracts and protect its interests in legal disputes. Likewise, any party affected by the company’s actions can hold it accountable through legal means. This legal independence is critical in ensuring that the company is treated as a separate legal entity.
Courts recognize the autonomy of companies and enforce legal actions accordingly. For example, in Foss v. Harbottle, the court established that if a wrong is done to the company, the proper plaintiff to bring the action is the company itself. This principle supports the separate legal personality of the corporation and limits the ability of individual members to bring claims on behalf of the company unless exceptions apply.
Capacity to Enter into Contracts and Own Property
A company has the legal authority to enter into contracts in its name. This includes employment agreements, purchase contracts, leases, and any other business arrangements. Contracts signed by directors or authorized agents on behalf of the company are legally binding on the company itself. The contractual capacity is not dependent on the individual identities of shareholders or directors, which enhances the company’s operational independence.
A company can also own, acquire, and dispose of property in its name. Land, machinery, buildings, patents, trademarks, and any other assets can be registered in the company’s name. Members do not have any direct rights over company property, and the property is not considered to belong to them individually. This principle was affirmed in the case of Macaura v. Northern Assurance Co Ltd., where the court ruled that a shareholder has no legal or equitable interest in the company’s property simply by owning shares.
Company as a Trustee or Agent
A company can act as a trustee or agent for others, provided it is authorized by its memorandum and articles of association. As a trustee, the company manages assets on behalf of others and has a fiduciary duty to act in their best interests. As an agent, the company acts on behalf of a principal and must follow lawful instructions. These roles are legally recognized and allow companies to operate in a wide range of professional and financial services.
For instance, trust companies, asset management firms, and corporate service providers often perform such functions. Their status as corporate legal entities enables them to offer continuous, professional services while ensuring liability is limited to the company itself, not the individuals managing the business.
Doctrine of Indoor Management and Constructive Notice
Two important doctrines governing company operations are the doctrine of indoor management and the doctrine of constructive notice. The doctrine of constructive notice holds that anyone dealing with a company is presumed to know its public documents, including the memorandum and articles of association, which are available in the public domain. This doctrine places the burden on outsiders to be aware of the company’s rules and limitations.
In contrast, the doctrine of indoor management protects outsiders dealing with a company in good faith. It assumes that internal company procedures have been properly followed, even if they have not been. This principle was established in Royal British Bank v. Turquand, where the court ruled that an outsider is not required to verify internal compliance. These doctrines create a balance between the rights of the company and the interests of external parties.
Impact of Separate Legal Entity in Judicial Practice
The concept of a separate legal entity has been the subject of various landmark judgments. This principle means that a company is an entity distinct from its shareholders or members. It can sue or be sued in its name, own property, incur debts, and enter into contracts. This concept was firmly established in the famous English case of Salomon v. Salomon & Co. Ltd. (1897). The court held that the company was not the agent of its shareholders and that debts owed by the company were not owed by Mr. Salomon personally. This decision laid the foundation of corporate personality and has been followed widely in Indian jurisprudence.
In India, the concept has been applied in numerous cases, including State Trading Corporation of India Ltd. v. Commercial Tax Officer (1963), where the Supreme Court ruled that a company, even if wholly owned by the Government, does not become a part of the Government. It remains a separate legal person. Another important case is Tata Engineering and Locomotive Co. Ltd. v. State of Bihar (1964), where the court again reiterated that the corporate veil cannot be lifted unless it is clearly shown that the company was formed for fraudulent purposes or to defeat the law.
Corporate Veil and Its Lifting
While the principle of separate legal entity is well-established, there are instances where courts may disregard this concept. This is referred to as “lifting the corporate veil”. It means that in certain circumstances, the courts may look beyond the legal personality of the company to hold the members or directors personally liable. The corporate veil may be lifted in cases of fraud, tax evasion, or to prevent misuse of the corporate form.
In the case of Gilford Motor Co. v. Horne (1933), the court lifted the veil because the company was formed to avoid an employment contract. In Delhi Development Authority v. Skipper Construction Co. (1996), the Supreme Court of India lifted the corporate veil to prevent fraud and held the individual responsible for misappropriation of public funds.
In modern jurisprudence, courts have become increasingly willing to lift the corporate veil to promote justice and ensure that the corporate structure is not misused. However, it remains an exception to the general rule and is applied with caution.
Perpetual Succession and Its Significance
Perpetual succession means that the existence of a company is not affected by the death, insolvency, or incapacity of its members or directors. It continues to exist until it is legally wound up. This principle makes the company a more stable and reliable form of business organization compared to a partnership or sole proprietorship.
This concept was illustrated in the case of Life Insurance Corporation of India v. Escorts Ltd. (1986), where the Supreme Court emphasized the independent and continuous nature of the company’s existence. Even if there is a complete change in the ownership of shares, the company continues as the same legal entity.
The concept of perpetual succession is crucial in ensuring the continuity of business and maintaining long-term contracts and obligations. It also enhances investor confidence and facilitates the accumulation of capital over extended periods.
Transferability of Shares
One of the key features of a company, especially a public company, is the free transferability of shares. This means that members of a public company can transfer their shares without seeking the consent of other shareholders. This feature promotes liquidity and makes it easier for investors to exit or enter the company.
However, in the case of private companies, the right to transfer shares is usually restricted by the articles of association. These restrictions are valid as long as they do not constitute an absolute prohibition on transfer.
The Supreme Court in V.B. Rangaraj v. V.B. Gopalakrishnan (1992) ruled that share transfer restrictions must be specified in the articles of association; otherwise, they are not binding. This judgment underlines the importance of proper corporate documentation to enforce shareholder agreements.
Common Seal and Its Relevance Today
Traditionally, companies used a common seal to authenticate documents. The common seal acted as the official signature of the company. However, with changes in company law, especially the Companies (Amendment) Act, 2015 in India, the requirement of a common seal has been made optional.
Section 9 of the Companies Act, 2013 originally required companies to have a common seal, but after the 2015 amendment, it is no longer mandatory. A document signed by a director and authorized officer is now legally valid without the seal. This change has been made to ease the process of doing business and simplify compliance.
Though the common seal still exists in some companies, especially for formal or ceremonial purposes, its practical importance has diminished significantly.
Capacity to Sue and Be Sued
As a separate legal person, a company can initiate legal proceedings in its name and can also be sued. This principle reinforces the distinct legal identity of the company and is crucial for enforcing contractual obligations and protecting corporate interests.
In the case of Bennett Coleman & Co. v. Union of India (1973), the Supreme Court recognized the company’s right to approach the court for the protection of its constitutional rights. Similarly, in companies facing defamation or breach of contract, legal actions are taken in the company’s name.
This feature provides clarity in legal relationships and protects the rights of both the company and third parties dealing with it. It ensures that liabilities are not arbitrarily imposed on the members or directors of the company unless there is specific legal justification.
Doctrine of Ultra Vires
The doctrine of ultra vires means “beyond the powers.” It refers to acts carried out beyond the scope of the company’s objects as defined in its memorandum of association. Such acts are void and cannot be ratified by the shareholders.
This principle was established in the case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche (1875), where the company’s contract to finance a railway project outside its objects was held void. In India, the doctrine continues to be relevant, although the Companies Act, 2013, allows companies more flexibility in defining their objects.
To avoid the complications of ultra vires transactions, many companies now draft their object clauses in very broad terms. However, if a transaction falls outside the stated objects, it remains unenforceable.
Doctrine of Constructive Notice and Indoor Management
Two important doctrines relevant to company law are the doctrines of constructive notice and indoor management. The doctrine of constructive notice states that since the company’s public documents are available at the registrar’s office, anyone dealing with the company is presumed to know their contents. This doctrine protects the company from outsiders who claim ignorance of company rules.
However, this doctrine is balanced by the doctrine of indoor management, which protects outsiders dealing in good faith with the company. It assumes that internal proceedings have been properly carried out. The doctrine was laid down in Royal British Bank v. Turquand (1856). It helps protect third parties who rely on the company’s apparent authority.
These doctrines together form a legal framework that balances the interests of companies and external stakeholders.
Liability of Members and Directors
In most companies, the liability of members is limited to the amount unpaid on their shares. This feature protects personal assets and encourages investment. However, in cases of fraud or deliberate wrongdoing, the limited liability may not protect members or directors.
Under the Companies Act, 2013, particularly Section 447, stringent penalties are imposed for fraudulent activities. Directors and officers responsible for such acts can be held personally liable.
In the Sahara India Real Estate Corporation Ltd. case (2012), the Supreme Court ordered the company’s promoters to refund a large sum collected through optionally fully convertible debentures. The court pierced the corporate veil and held the individuals accountable.
The evolving judicial approach shows that while limited liability is a general rule, it will not shield wrongdoers from legal consequences.
Conclusion
The legal identity of a company is a cornerstone of modern business law. The principles of separate legal entity, perpetual succession, and limited liability have been consistently upheld by courts, enabling companies to function efficiently and contribute to economic development. At the same time, judicial scrutiny has evolved to ensure that these principles are not abused.
Recent case law reflects a trend towards corporate accountability and transparency. Courts have increasingly applied doctrines like lifting the corporate veil and enforced fiduciary duties of directors to ensure justice and uphold the rule of law. The Companies Act, 2013, with its amendments, has also introduced provisions to align with global best practices and improve compliance standards.