What is a company ?

Definition of a company
In India the COMPANIES ACT OF 1956 governs the affairs of the company. According to the companies act of 1956 the word company is defined as a company formed and registered under the companies act or an existing company Meaning of company Lord Lindley described the company as an association of many persons who contribute money or moneys worth to a common stock and employ it in some trade or business and who share the profit and loss arising there from

INTRODUCTION
In order to over come the deficiencies of Constitutions of business like proprietorship concern, HUF and partnership firm to do the business, and to share the liability in a limited manner and to enjoy the fruits to the extent of the capital invested and to have perpetual succession and legal entity COMPANY form of constitution came into being which is of great success in the business.

The common stock contributed by persons is know as CAPITAL And those who so contribute is called as MEMBERS The proportion of capital to which each member is entitled is his SHARE, Selling of the share by members is through TRANSFER OF SHARE The continuation of the company forever is PERPETUAL SUCCESION

v v v v v v v

Different types of the company. Company limited by shares Company limited by guarantee Unlimited company Public company Private company Holding company and subsidiary co,

Government company Non-trading company Chartered company Statutory company Registered company

v We can understand the company as

A company is an association of persons formed to do the business which is an artificial person having separate entity from that of its members who contribute towards the common fund and the company is having perpetual succession and a common seal.

1. INCORPORATED ASSOCIATION I

Incorporated means registered under the companies act of 1956, when a company is to be formed it has to follow certain rules and conditions like, to form a pubic company at least 7 persons are needed and to form a private company at least 2 persons are needed. Sec 11 says in case of banking company 10 persons and in case of other business 20 persons are maximum numbers of members allowed or other wise it becomes illegal association.

2 ARTIFICIAL PERSON A company is created with the sanction of law and is not itself a human being it is therefore called an artificial and since it is clothed with certain rights and obligations it is called as a person. Hence a company is termed as legal person.

3 SEPARATE LEGAL ENTITY Un like partnership firm, the company is distinct from it members. The famous case on this point is SOLOMAN VS SOLOMAN AND COMAPNY

Salomon carried on business as a leather merchant and sold his business for 30000 pounds to a company formed by him along with his wife daughter and 4 sons. The purchase consideration was by allotment of 20000 shares of one pound each and issue of debentures worth of 10000 pounds secured by floating charge on the assets of the company in favour of Saloman . All other shares holders contributed one share of one pound each,. Mr Salomon was also managing director of the company.

The company ran into difficulties and eventually became insolvent and winding up commenced. At the time of winding up the total assets of the company amounted to 6050 pounds it liabilities were 10000 pounds secured by the debentures issued to Mr Salomon and 8000 pounds owing to un secured trade creditor, The unsecured sundry creditors claimed the whole of the companys assets of 6050 pounds on the ground that the company was a mere alias or agent for Salomon

But Court held that since company in law is different from the member who formed and it could not be regarded as alias or agent or trustee for Salomon and hence their claim is not maintainable. Since the debenture is secured in favour of Salomon first it should be paid in priority.
The Supreme Court held in the case of Bacha F Guzdar Vs commissioner of income tax, that though the income of the company was partly from agricultural yet the same income when received by the shareholder as dividend, it cannot be regarded as agricultural income

4 LIMITED LIABILITIES Normally the liability of the members is limited to the extent of their share holding in the company. Eg: if A has 10 shares of 10 rupees each and in case of company become insolvent then the liability of A is Rs.100=00 only even the total loss to the company may be crores. In case of company limited by guarantee then the liability of the members is to the extent of the guaranteed amount. The limited liability of the member will become unlimited in the following cases:

The limited liability of the member will become unlimited in the following cases:

v When the members of the company reduced below 7 in case of public company and below 2 in case of private company and carry on business more than 6 months

v In the course of winding up if it is observed that company was carried on to defraud creditors the court may declare unlimited liability to whose who are knowing parties to the transactions

5
Since the company has a separate legal entity the members are not the owners if the properties of the company in the eye of law. The court also held in the case RF Perusal Vs H John that no one can claim himself to be owner of the companys Property during its existence or on its winding up.

6 TRANSFERABILITY OF SHARES The members are free to transfer their shares to others in the manner prescribed in the article of association However, the private company cannot transfer the shares freely there are restrictions placed on the transfer of shares but the right to transfer if not taken away absolutely.

7 PERPETUAL EXISTENCE

A company is an artificial person cannot be incapacitated by illness and it does not have an allotted span of life. The death insolvency or retirement of its members will be affect the company. It has a perpetual succession

8 COMMON SEAL

A company being an artificial person is not bestowed with a body of natural being hence it works through directors, officials hence it has a common seal which is the official signature of a company. This common seal is to be affixed on the documents enumerated in the article of the association of the company.

CHIEF CHARACTRERSTICS OF A COMPANY

A company is a separate entity from the ` members who formed it. It is not a mere aggregate of the share holders q A member may be a creditor of the company also q A company is not an agent or trustee of members There need not be any equitable
q

distribution of shares members of the company

among

the

1) COMPANY MAY SUE AND BE SUED IN ITS NAME

Since the company is having separate existence it may sue others and be sued by others in its name in the court of law

owner of the company or its property

q

A share holder is not part owner or co

A company is a artificial legal person and enjoy almost all the rights and is subjected to the obligations as in the case of a natural person. The shares in the share capital of the company are transferable. Hence the life of the company is independent and has perpetual succession

The liability of the share holders may be made limited to the unpaid value of the share held by them
q

A company being a person has nationality and a domicile

q

A company is not a citizen and has not fundamental rights under the constitution.
q

A company being an artificial person can act only through natural persons
q

A company can sue and can be sued and can enter into contract and can open a bank account and can exercise all the powers incidental to the attainment of its objectives given the M/A
q

There are some distinct situation in which the principle of separate entity of the company has laid down in the Salomon case is ignored/ Technically this is know as LIFTING OF THE CORPORATE VEIL.
q

Veil means the shield or protection

This means that the advantages of the incorporation are allowed to be enjoyed only by those who want to make an honest use of the company. IN case of dishonest and fraudulent use of the facility of incorporation, then the law will left the corporate veil or the shelter given by law and the facilities enjoyed by the company will not be available in such circumstances.

Cases when corporate veil may be lifted

For the protection of revenue

Where the company is acting as agent of shareholder

Where the company has been formed for some fraudulent purpose Where the company has been formed by the those who wants to avoid their contract Where the company membership goes below 7 in public co and two in case of private company al obligations Where the company formed is against public interest/policy

Where the company prospectus includes a fraudulent misrepresentation For investigation of ownership of a company Where an officer of the company signs a negotiable instruments on behalf of a company without mentioning the name of the company there on .During the course of winding up as provided in sec 542 of the companies act Where breach of economic offence is involved

. Where company is used as a medium to avoid

welfare

legislation say bonus

To punish for contempt of court

. To determine technical competence of a company Where the company is used for some illegal or

improper

purpose

FORMATION OF A company

It can be studied in 3 stages

PROMOTION OF THE COMPANY

REGISTRATION OF THE COMPANY

FLOTATION OF THE COMPANY

1) Promotion of the company Promotion is the first step in starting of the company for the purpose of the registration of flotation of a The persons who assume the task of the promotion are called promoters The promoters may be individuals or group of persons or associations etc. Promoters are the persons who are interested in the formation of the company and persons engaged or interested in the preparation of the prospectus.

Duties and liability of the promoters

It is the duty of the promoters to disclose all the

Material facts relating to the formation of the company of the company He should not make any secret profits at the expenses

The company can compel him to account for the profit if any made by him

It is the duty of the promoter to disclose the whole real truth to those who are induced by the promoters to join the company . Because looking at the promoters the inventors will invest their money into the company
They believe the promoters and put money into the company by way of purchasing the shares and debenture etc.,

In case the promoter fails to make full disclosure at the time the contract was made the company may Cancel the contract and recover the purchase price

Where he sold his own property to the company , then company can Recover the profit made in the deal

Claim damages for breach of fiduciary duty/

He is liable to the original share allotted if any mis statement is made in the prospectus, he may be imprisoned for a term of 2 years and fine up to rupees 50,000=00

 In course of winding up on an application by

the official receiver the court may make a promoter liable for misfeasance or breach of trust. The death of the promoter does not relieve his estate from liability arising out of abuse of his fiduciary position.

The second step is the Registration of the company

For registration of the company the following documents are necessary and it is to be filed before the registrar of the company

the memorandum of the company the article of association the agreement if any for appointment of whole time director or manager

The M/A and A/A has to be signed by all the initial members of the company, [ 7 in case of public and 2 in case of private co] The filing of the documents with the registrar of the company is know as STATUTARY DECLARATION OF THE COMPLIANCE The declaration certify that all requirements of the act and rules made there under in respect of registration have been complied with On registration the company comes into existence as a legal person and a certificate of incorporation will be issued by the registrar of the company.

The last step is the floatation of the company It means that after getting the certification of incorporation it is ready to floatation that is it can go ahead with raising capital sufficient to commence business and to carry it on. The share can be issued to the public and for this company will issue what is known as prospectus which is a statement by the company inviting the subscription or for purchase of any share in the company.

It is the charter of the company which contains the fundamental conditions upon which alone the company can be incorporated. IT tells us the objects of the companys formation and the utmost possible scope of it operation beyond which its action cannot go. Thus it defines the powers of the company with in which the company has to function and in case the company does anything beyond this powers it is called ULTRA VIRUS ie beyond the powers and as such it is void

IMPLICATIONS
It is the charter of the company which contains the fundamental conditions upon which alone the company can be incorporated. IT tells us the objects of the companys formation and the utmost possible scope of it operation beyond which its action cannot go. Thus it defines the powers of the company with in which the company has to function and in case the company does anything beyond this powers it is called ULTRA VIRUS ie beyond the powers and as such it is void

If the act of the company is such that it is Beyond the permitted acts in the memorandum Of association then it is ultra virus. Exception to the rule ==================== 1. If the act is that of directors which is ultra virus then the share holders can ratify it. .

2. If it is ultra virus of Article of Association than it can be rectified by amendment.

3. If it is money spent on purchase of property then right over property not effected

MEMORANDUM OF ASSOCIATION DEFINES THE UTLIMATE POWERS OF THE COMPANY AND THROUGH THE MEMORANDUM OF ASSOCIATION OUTSIDE WORLD KNOWS COMPANYS PURPOSE

It serves two fold purpose one it enables the share holders, creditors and others to know what is the power of the company

There are various clauses in the Memorandum of Association

1.

Name clause

It contains the name of the company as approved by the the case may be. If the company wants to use the names Corporation the minimum authorized capital should be .
International Global or Universal Continental etc Hindustan Bharat, India Industries/ Udyog

5 crores

the minimum authorized capital should be..

the minimum authorized capital should be..

1 crore
50 lakhs

the minimum authorized capital should be . 1 crore

2. REGISTER OFFICE CLAUSE Specifying the state where in the registered office of the company is situated. 3.OBJECT CLAUSE

Specifying the object of the company and its activities and purpose for which the company is floated and tells what the company will do. It has 3 parts, main object, incidental or ancillary object and other object

4. LIABILITY CLAUSE States the liability of its members to the extent of unpaid amount of the shares help by them
5 .CAPITAL CLAUSE

States the authorized capital up to which the company can issue its shares. It also specifies how the capital is divided into how may shares of which face value.

6.ASSOCIATAION OF CLAUSE

It contains whether the subscribers declaration their desire of being formed into company and agree to take the specified numbers of shares in the companys capital

What is Doctrine of Ultra Virus ? Explain its implications?

The company cannot go beyond objectives stated in Memorandum of Association; its activities are confined strictly to the objects mentioned in Memorandum of Association. If the company goes beyond the object or scope of the Memorandum of Association then such acts are ultra virus and it is void. The purpose of the declaring the act, as ultra virus is to protect the shareholders of the company and others who deal with the company

IMPLICATIONS 1) Any member can get an injunction restarting the company from acting ultra virus.

2) The directors become personably liable and should make good the loss if any to the company

3) Directors are personally liable to the 3rd parties if any loss incurred by him, where such 3rd party was incited by the directors to contract with the company in a matter that was ultra virus 4) Money or property gained must be restituted to the other party

Eg :of ultra virus

Company having main object of leather goods,business wants to do the cotton ready-made garments

Exceptions to the doctrine

q
q

If the ultra virus act is the power of the director only ,the shareholders can ratify it.
If it is ultra virus act of Article of Association of company the act can be ratified by the amendment of the Article of Association Where companys money is spent which is ultravirus in purchasing some property the companys right over that property are not affected.