Questions and AnswersCOMPANY LAW
Define Company and discuss the advantages and disadvantages of a company.
A: In ordinary sense, the term "Company" means a voluntary association of persons for any common object. Such object may be any trade, business, manufacture, research, and sport etc carries on in accordance with law. In other words, "Company" means, a group of individuals associates together, for fulfillment or attainment of any common. The term "Company" represents various kinds of associations, both, social and economic. Prof Haney defines company as "an artificial person created by law having a separate legal entity with a perpetual succession and a common seal."
Lord Justice Lindsay defines company as "an association of persons who contribute money or money's worth to a common stock employed in some trade or business and who share the profit and loss arising therefrom."
Definition under Companies Act, 1956: The term "Company" has been defined under Section 3 (1) (i) of the Companies Act, 1956 as, "A company formed and registered under this Act or an existing company."
Definition under Companies Act, 2013: The term "Company" has been defined under Section 2(1)(20) of the Companies Act, 2013 as, "Company " means a company incorporated under this Act or under any previous company law".
Basic features of a company The main advantages of forming a company which also constitute as its salient features are :
Advantages of a Company:
- Separate legal entity:
A company has a separate legal existence. It has separate legal personality or entity which is distinct and independent from its members who compose the Company and are known as shareholders. A company exists in the eyes of law, and therefore, it is described an artificial legal person. A company upon its incorporation is empowered to acquire, hold and transfer property in its own name and it is also empowered to sue and can be sued by its own members. Since the company has an independent existence any of its members can enter into a contact with the company in the same manner when he enters into a contract with any other individual. Such persons are not help liable for the acts of the company i.e even if he holds the entire share capital.
It was for the first time, in the case of Salomon and Salomon & Co. Ltd (1897 AC 22), the principal of separate legal entity or separate legal existence of a company was recognized by the House of Lords. Salomon & Co. Ltd was practically owned by Mr. Salomon. In the event of its liquidation, the question arise whether Mr Salomon has a right to a prior claim, with regard to the debentured held by hi, over the unsecured creditors of the company. The unsecured creditors claimed that since Mr. Salomon and the company were one and the same ( as company was owned by Mr. Salomon), Mr. Salomon should be held personally liable to satisfy their claims. It was held by the House of Lords that, once the company was incorporated, it becomes a separate person in the eyes of law. Mr. Salomon was virtually the holder of all the shares of the company, he was also a creditor secured by debentured and therefore, Mr. Salomon was entitled to replay in priority to the unsecured creditors of the company.
- Limited liability:
A corporate form of business is far superior to and much safe than that of a partnership firm as far as monetary risk factor is concerned. The shareholder of a company limited by shared is liable only upto to the unpaid amount on the shares held by him. For instance, if a shareholder holds one share of face value Rs. 100/-, on which Rs.80/- has already been paid up, his maximum liability on that share is Rs.20/- only. After he pays the amount his liability is reduces to nil even if the liability of the company runs into millions.
- Easy transferability of shares:
A shareholder can sell his shares in the market and get back his investment. Neither does he needs any permission of other shareholders not of the company in doing so. Due to advance technology and the option of "demat shares, a shareholder can sell or transfer his shares at the tap of a button or a call. S.44 of the Act clearly provides that shares of a member in a company constitute movable property and can be transferred in the manner provided by the articles of the company. This benefit cannot be availed by the members of the private company as it has certain restrictions on the transfer of its shares as per its definition.
- Separate property:
A company has separate legal entity and it is an artificial legal person which is different and distinct from its members. The company is capable of enjoying, owing, and disposing off the property in its own name because the company is the owner of its capital and assets. The members of the company commonly the shareholders of the company are not the owners of the company. (Gramophone & Typewriter Co. V/s. Starly (1906) 2 KB 856.
- Capacity to sue in its own name:
Since the company is a distinct entity in the eyes of law, it can sue in its own name and likewise it also can be sued in its corporate name. just as a person has a right to his reputation, so also a company has the right to protect its name from being tarnished and can sue a third person for a defamatory statement made against the company made by such person.
- Perpetual succession:
Until a company is wound up or dissolved, a company does not die. For instance, if all members of a company die in a fatal accident, the company does not die. Similarly, the insolvency of a member or all members of the company does not bring the life of the company to an end. The company is a distinct juridical entity, unaffected by any kinds of mishaps.
- Professional management:
A company with vast and almost unlimited resources, is capable of attracting best professional talent at the managerial level. The managers and officers of a company are generally assured of independent functioning as their "collective employer", the shareholders, can exercise scant control over them and that too in a remote manner.
- Democratic set –up:
The corporate setup follows a democratic method of management. A fairly large body (of shareholder) selects a small body of directors to run and manage the company. Several such directors are professionals and therefore experts in their own felids. This adds to the quality of management of the company.
- Capacity to raise finances:
A company is in a much better position to raise finances that any other form of business entity. A public company can issue a prospectus inviting members of the public to purchase its shares and debentures and thus take up huge quantities of finances to run the business and expand and diversify its activities. Bank and financial institutions are also less hesitant to advance loans to a company or a corporate body rather than to an individual or a firm.
Disadvantages of a Company:
As every benefit in the world comes for a price, below are the disadvantages of a company:
- Lifting the corporate veil:
Since a company is a separate legal entity, it is clothes with a corporate veil – and is to be look without touching this veil. The personalities of a company are different from the personalities of its shareholders and the corporate veil is a legal concept which exists to distinguish a company as a legal person which separate from its shareholders. There are times when the courts are often faced with a situation where it is almost impossible to do justice unless the corporate veil is lifted. The main instances where the doctrine of lifting of veil is applies are as follows
- Trading with the enemy.
- For benefits of revenue.
- Under statutory provisions.
- Fraud or improper conduct.
- Intentional mis description of name.
- Fraudulent conduct of business.
- Holding and subsidiary companies.
- Provisions of tax laws.
- Group enterprises.
- Criminal acts.
- Government companies.
The incorporation of the company requires a host of formalities to be complied with. Formalities start before the actual incorporation of a company, exists throughout the life of the company and continues even during its winding up. All these requirements also have a penalty for non compliance and the Act is replete with all kinds of corporate offences.
Expenses are involved in the incorporation of a company, in its day to day running and at the time of its winding up. At all three stages, the company has to borne expense like stamp duty, legal and registration fees, printing expenses, fees payable to solicitors, auditors, ROC and a heavy expenditure during the winding up or dissolution of the company.
- Denial of some fundamental rights:
Fundamental rights guaranteed by the Constitution of India are of two kinds. Some are Art. 14 which is available to all and some are like Art 19 which are available to only citizen of India. An interesting question arises here as to a company registered in India can enforce those fundamental rights which are only available to Indian citizens.
- Control possible without majority shareholdings:
To exercise control over the affairs of the company, it is not compulsory to hold majority of share by the shareholders. A company can manage its affairs without majority shareholdings.
- Possibility of fraud:
If the shareholding of a huge public company is spread out amongst thousands of small shareholders, it affords a good opportunity to the management of the company to play a financial fraud on the unsuspecting shareholder located in the different parts of the country. Despite of strict public accounting and auditing provisions, huge frauds are possible and if not detected in time, it becomes impossible to remedy or undo the damage.
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