Meaning and nature of a company

Definition and nature of a company

A company can be defined as a group of persons associated together for the purpose of carrying on a business, with a view to earn profits. The word ‘Company’ is an amalgamation of the Latin word ‘Com’ meaning “with or together” and ‘Pains’ meaning “bread”. Thus, a company is nothing but a group of persons who have come together or who have contributed money for some common person and who have incorporated themselves into a distinct legal entity in the form of a company for that purpose.

There is very good definition by Lord Justice Lindey, “A company is an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business and who share the profit and loss arising there from. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share. The shares are always transferable although the right to transfer is more or less restricted.”

Characteristics of a Company

A company as an entity has several distinct features, which together make it a unique organization. The following are the defining characteristics of a company: -

1. Separate Legal Entity

On incorporation under law, a company becomes a separate legal entity as compared to its members. The company is different and distinct from its members in law. It has its own name and its own seal, its assets and liabilities are separate and distinct from those of its members. It is capable of owning property, incurring debt, borrowing money, having a bank account, employing people, entering into contracts and suing and being sued separately. The importance of the separate entity of the company was however firmly established in the following case.

Salomon v. Salomon & co. Ltd.(1897) A.C. 22 . S sold his boots business to a newly formed company for £ 30,000. His wife, one daughter and four sons took up one share of £ 1 each. S took 23,000 shares of £1 each and £ 10,000 debentures in the company. The debentures gave S a charge over the assets of the company as the consideration for the transfer of the business. Subsequently when the company was wound up, its assets were found to the worth £ 6,000 and its liabilities amounted to £ 17,000 of which £ 10,000 were due to S (secured by debentures) and £ 7,000 due to unsecured creditors, the unsecured creditors claimed that S and the company were one and the same person and that the company was a mere agent for S and was hence they should be paid in priority to S. Held, the company was, in the eyes of the law, a separate person independent from S and was not his agent. S, though virtually the holder of all the shares in the company, was also a secured creditor and was entitled to repayment in priority to the unsecured creditors.

2. Limited Liability

The liability of the members of the company is limited to contribution to the assets of the company up to the face value of shares held by him. A member is liable to pay only the uncalled money due on shares held by him when called upon to pay and nothing more, even if liabilities of the company far exceeds its assets. On the other hand, partners of a partnership firm have unlimited liability i.e. if the assets of the firm are not adequate to pay the liabilities of the firm, the creditors can force the partners to make good the deficit from their personal assets. This cannot be done in case of a company once the members have paid all their dues towards the shares held by them in the company. For example, if the face value of the share in a company is Rs. 10 and a member has already paid Rs. 5 per share, he can be called upon to pay not more than Rs. 5 per share during the lifetime of the company.

3. Perpetual Succession

A company does not die or cease to exist unless it is specifically wound up or the task for which it was formed has been completed. Membership of a company may keep on changing from time to time but that does not affect life of the company. Death or insolvency of member does not affect the existence of the company.

4. Separate Property

A company is a distinct legal entity. The company’s property is its own. A member cannot claim to be owner of the company’s property during the existence of the company.

5.  Transferability of Shares

Shares in a company are freely transferable, subject to certain conditions, such that no shareholder is permanently or necessarily wedded to a company. When a member transfers his shares to another person, the transferee steps into the shoes of the transferor and acquires all the rights of the transferor in respect of those shares.

6. Common Seal

A company is a artificial person and does not have a physical presence. Therefore, it acts through its Board of Directors for carrying out its activities and entering into various agreements. Such contracts must be under the seal of the company. The common seal is the official signature of the company. The name of the company must be engraved on the common seal. Any document not bearing the seal of the company may not be accepted as authentic and may not have any legal force.

7. Capacity to sue and Being Sued

A company can sue or be sued in its own name as distinct from its members.

8. Separate Management

A company is administered and managed by its managerial personnel i.e. the Board of Directors. The shareholders are simply the holders of the shares in the company and need not be necessarily the managers of the company.