Indian companies are formed and incorporated according to the provisions given under the Companies Act, 2013. All the Indian companies are registered under the Companies Act, 2013 and work according to the procedure given under this Act.
In this law note, we will learn about the nature and characteristics of a company. This will give us a basic understanding of what a company is and its existence.
What Is a Company
In simple words, a company is a business organization formed by an individual or group of individuals who work jointly to achieve a common goal or objective.
Nature and Characteristics of a Company
A company incorporated under the Companies Act, 2013 has certain nature and characteristics, which makes it a separate entity and also help us to understand the concept of a company, its functions and features in society.
The characteristics of a company are:
- Voluntary association.
- Company is an artificial person created by law.
- Company is not a citizen.
- Separate legal entity.
- Company has limited liability.
- Company has a perpetual succession.
- Transferability of shares.
- Separate property.
- Capacity to sue and be sued.
- Contractual rights.
- Limitation of action.
- Separate management.
- Termination of existence.
Let us learn more about these 13 characteristics of a company.
1. Voluntary association.
A company is a voluntary association formed by an individual or group of individuals. Most companies are formed with the motive of profit-making except the Section 8 companies (NGO). Profit earned is divided among the shareholders or saved for the future expansion of the company.
2. Company is an artificial person created by law.
A company is an artificial person created by law. It is regarded as a legal person capable of entering into contracts, owning property in its name, suing, and being sued by others.
Case Law: Union Bank of India vs Khader International Constructions and others: The Supreme Court held that the word ‘person’ mentioned in Order 33, Rule 1 of Civil Procedure Code, 1908 includes any company. Thus a company may also file a suit as an indigent (poor) person.
Info: Order 33, Rule 1 of CPC permits a person to file suit under the code as an indigent person if they cannot bear the cost of litigation.
3. Company is not a citizen.
In State Trading Corporation of India Ltd. vs CTO (Commercial Tax Officer), Supreme Court held that the State Trade Corporation, although a legal person, is not a citizen and can act only through a natural person.
Certain fundamental rights provided by the Indian Constitution to protect a person are also available to a company. For example – The right to equality (Article 14).
4. Separate legal entity.
A company incorporated under the Companies Act, 2013 is treated as a separate person distinct from its members under law. Therefore, the company will be liable for all the acts of the company except any illegal act done by the directors of the company.
Case Law: Salomon vs Salomon: Salomon had a business in leather and shoe manufacturing. Due to some circumstances, he created his own company and sells his previous business of shoe manufacturing to this company. Salomon gave one share each to his wife, daughter, sons, and the rest of the company’s shares were held by him. After few years, the company was wound up and had some existing liabilities but did not have enough assets to pay off the liabilities. Unsecured creditors sued Salomon for repayment of their money, but the court held that the company was not an agent or a trustee for Salomon. The company is entirely different from the individual, and hence the contentions of the creditors could not be upheld.
5. Company has limited liability.
The liability of a company may be limited either by Shares or Guarantee.
- Company limited by Guarantee: Liability of shareholders is limited to a certain amount of guarantee mentioned in the memorandum payable only at the time of wind up and losses occurred by the company.
- Company limited by Shares: Liability of the members shall be limited to the extent of unpaid money or shares held by them.
6. Company has a perpetual succession.
A company can come to an end only by the process of winding up. Death or retirement of a person does not affect the life of a company.
7. Transferability of shares.
There are three types of companies under the Companies Act:
- Public company.
- Private company.
- One Person company.
A public company is free to transfer its share from one person to another, whereas in a private company, the right to transfer shares is restricted. And in One Person Company (OPC), transferability of shares is not allowed.
8. Separate property.
As we have already studied, a company is a separate artificial person created by law, and a company is different from its members. Therefore, a company has its separate property and can own, enjoy, and dispose of properties in its name.
Case Law: In RF Perumal vs H. John Deavin it was held that no member can claim themselves to be the owner of the company’s property during its existence or its wind up. A company cannot even have an insurable interest in the property of the company.
9. Capacity to sue and be sued.
A company can sue and be sued in its name and may even sue its members. It also has a right to seek damages where a defamatory matter is published about the company, which affects its business.
Case Law: Abdul Haq vs Das Mal: In this case, Das Mal was an employee in the company and was not paid salary for several months, and therefore he sued the directors. The court held that the remedy lies against the company and not against the directors or members of the company.
10. Contractual rights.
A company can enter into contracts for the conduct of business in its name.
As a company is not a trustee for its shareholders, a shareholder cannot enforce a contract established by his company because he is neither a party to the contract nor entitled to any benefit from it.
11. Limitation of action.
A company cannot go beyond the power stated in its Memorandum of Association. The Memorandum of Association regulates the power and fixes the objects of the company. Acts done beyond the powers given in the Memorandum of Association are ultra-vires and hence treated void.
12. Separate management.
Members may derive profits without being burdened with the management of the company.
Must See: 9 Types of Directors in a Company
13. Termination of existence.
A company is created by law, throughout its life, carries on its affairs according to the law, and ultimately is wind up by law. A company can be terminated only by the procedure of winding up.