Characteristics of a Company

In the contemporary business landscape, understanding the characteristics of a company is crucial for entrepreneurs, investors and legal professionals. A company, in its basic sense, is an entity that is distinct from the individuals who manage or operate it.

This article aims to provide a detailed exploration of the characteristics of a company, primarily focusing on its legal structure, operational dynamics and implications under the Companies Act, 2013, in India.

Definition and Legal Framework of a Company

The Companies Act, 2013, a pivotal legal document in India, defines a company under Section 2(20) as “a company incorporated under this Act or under any previous company law.” This definition, though concise, serves as the foundation for understanding the broader aspects of a company’s characteristics.

Incorporation and Legal Status of a Company

The most fundamental characteristic of a company is its incorporation. A company comes into existence only after it is registered under the Companies Act. This process of incorporation endows the company with its legal status, distinguishing it from other forms of business organisations such as partnerships or sole proprietorships.

Important Characteristics of a Company

The characteristics of a company are:

Voluntary Association

A company is typically a voluntary association formed by individuals or a group of individuals with a shared objective. In most cases, this objective is profit-making. However, there are exceptions, such as Section 8 companies in India, which are not primarily profit-oriented.

Instead, these companies are formed for promoting charitable, scientific or educational objectives. This characteristic highlights the flexibility of the company structure, making it suitable for various purposes.

Artificial Person Created by Law

Perhaps one of the most fundamental characteristics of a company is that it is an artificial person created by law. This means that a company is considered a legal person in the eyes of the law, capable of engaging in various legal activities.

As a legal entity, a company can enter into contracts, own property in its name and sue or be sued by others. This characteristic is pivotal in allowing companies to operate independently and engage in a wide range of business activities.

Union Bank of India vs. Khader International Constructions and others

The significance of a company being treated as an artificial person is exemplified in legal cases like Union Bank of India vs. Khader International Constructions. In this case, the Supreme Court of India held that the term ‘person,’ as mentioned in Order 33, Rule 1 of the Civil Procedure Code, 1908, includes any company.

Therefore, a company has the legal capacity to file a suit as an indigent (poor) person, emphasising its status as a legal entity.

Not a Citizen

While a company is recognised as a legal person, it is important to note that it is not a citizen. Unlike individuals who have citizenship status, a company does not possess citizenship rights. Instead, it can only act through natural persons who represent and manage its affairs.

However, certain fundamental rights provided by the Indian Constitution to protect individuals, such as the right to equality (Article 14), are also applicable to companies. This distinction ensures that companies have specific legal rights while acknowledging their non-citizen status.

Separate Legal Entity

One of the defining characteristics of a company is its status as a separate legal entity. When a company is incorporated under the Companies Act, it is treated as a distinct person independent of its members or shareholders.

This separation means that the company is responsible for its own actions, obligations and liabilities. Consequently, the company can enter into contracts, own property and incur debts in its own name.

Salomon vs. Salomon

The principle of a company’s separate legal entity is exemplified in the landmark case of Salomon vs. Salomon. In this case, Mr. Salomon had a personal business in leather and shoe manufacturing. He later created a company and sold his previous business to this company.

While he held the majority of the company’s shares, the court ruled that the company was a separate entity from Mr. Salomon. This distinction protected Mr. Salomon from being personally liable for the company’s debts, reinforcing the concept of separate legal personality.

Limited Liability

A critical feature of companies is the concept of limited liability, which provides a shield for shareholders against personal liability for the company’s debts and obligations. This limited liability can take two forms:

a. Company Limited by Guarantee: In this type of company, the liability of shareholders is limited to a specific amount guaranteed by them in the memorandum of association. Shareholders are obligated to contribute this amount only in the event of the company’s winding-up or if the company incurs losses.

b. Company Limited by Shares: In companies limited by shares, shareholders’ liability is limited to the extent of the unpaid money on the shares they hold. In other words, shareholders are responsible for paying the outstanding amounts on their shares, but their personal assets are protected beyond this commitment.

Perpetual Succession

Companies possess the unique characteristic of perpetual succession. Perpetual succession means that a company’s existence is not influenced by the death, insolvency or departure of its members or shareholders.

Unlike other forms of business entities, a company’s life is not tied to the lives of its owners. It can continue to operate indefinitely unless legally dissolved through the process of winding up.

Transferability of Shares

Under the Companies Act, there are three main types of companies: public companies, private companies and One Person Companies (OPCs). The transferability of shares varies among these categories.

Public Company: Public companies allow for the free transfer of shares from one person to another. Shareholders in a public company can buy and sell their shares without significant restrictions.

Private Company: In contrast, private companies impose restrictions on the right to transfer shares. These restrictions are typically outlined in the company’s articles of association and may involve conditions regarding to whom shares can be transferred and for what consideration.

One Person Company (OPC): OPCs, as the name suggests, are designed for single-person ownership. In OPCs, share transferability is not allowed, as there is only one shareholder.

Separate Property

Another crucial aspect of a company’s characteristics is its possession of separate property. Since a company is considered a distinct legal entity, it can own, enjoy and dispose of properties in its own name. This separation of property is significant in protecting the company’s assets and ensuring that they are distinct from the personal assets of its shareholders.

RF Perumal vs. H. John Deavin

The case of RF Perumal vs. H. John Deavin underscores the principle that no member can claim ownership of the company’s property during its existence or liquidation. In this case, it was established that a company cannot have an insurable interest in its property, reinforcing the concept of separate property ownership.

Capacity to Sue and Be Sued

As a separate legal entity, a company has the capacity to sue and be sued in its own name. This legal capacity extends to various scenarios, including the company’s right to initiate legal actions against others and its susceptibility to legal actions brought by third parties. Additionally, a company can sue its own members when necessary.

Case Law: Abdul Haq vs. Das Mal

The case of Abdul Haq vs. Das Mal is an illustrative example of a company’s capacity to sue. In this case, an employee sued the directors of the company for unpaid salary. The court ruled that the remedy for such a claim lies against the company itself and not against its directors or members. This emphasises the distinct legal personality of a company.

Contractual Rights

Companies possess the capacity to enter into contracts in their own name. This contractual right enables companies to engage in various business transactions, including agreements with suppliers, customers, employees and other entities.

When a company enters into a contract, it does so as a separate legal entity and the contract is binding on the company itself.

Limitation of Action

A significant characteristic of companies is the limitation of their actions by the contents of their Memorandum of Association. The Memorandum of Association defines the company’s powers and objectives, serving as a guiding document for its activities.

Any actions taken by a company beyond the scope of its Memorandum of Association are considered ultra vires and, therefore, void. This limitation ensures that a company operates within the legal framework defined by its objectives.

Separate Management

In contrast to some other forms of business structures, such as partnerships or sole proprietorships, members of a company can derive profits from their ownership without being actively involved in the day-to-day management of the company.

This separation of ownership and management allows for flexibility in how a company is structured and operated. Shareholders can focus on their investments without having to take on managerial responsibilities.

Termination of Existence

A key aspect of a company’s characteristics is its mode of termination. A company is created by law, conducts its affairs within the bounds of the law and can only be terminated through the legal process of winding up.

This termination process involves settling the company’s affairs, distributing assets to creditors and shareholders and ultimately dissolving the company. The existence of a company can be terminated, but only through the prescribed legal procedures.

Implications and Challenges

The concept of a company as a separate legal entity has far-reaching implications. It facilitates raising capital, ensures management efficiency and provides a mechanism for easy transferability of ownership.

However, it also poses challenges, such as the potential for misuse of the corporate structure for fraudulent purposes. This has led to the development of the doctrine of “lifting the corporate veil,” where under certain circumstances, the courts look beyond the company’s separate personality to hold the shareholders or directors personally liable.

Conclusion

Understanding the characteristics of a company is essential for navigating the corporate world. The separate legal entity status, limited liability, perpetual succession and transferability of shares are the pillars that support the company structure. These features provide the company with the flexibility to grow and adapt, while also ensuring a framework of accountability and regulation. As the business environment evolves, so does corporate law, reflecting the dynamic nature of companies and their role in the economy.