INTRODUCTION

The Companies Act, 2013 was enacted to consolidate and amend the law relating to the
companies to facilitate expansion and growth of our economy (previous one was the Companies
Act, 1956). The Companies Act, 2013 contains 470 sections and 7 schedules. The Act has
been divided into 29 chapters. A substantial part of this Act is in the form of Companies Rules.

Applicability of the Companies Act, 2013:

The provisions of the Act shall apply to-

✓ Companies incorporated under this Act or under any previous company law.
✓ Insurance companies (except where the provisions of the said Act are inconsistent with the
provisions of the Insurance Act, 1938 or the IRDA Act, 1999)
✓ Banking companies (except where the provisions of the said Act are inconsistent with the
provisions of the Banking Regulation Act, 1949)
✓ Companies engaged in the generation or supply of electricity (except where the provisions
of the above Act are inconsistent with the provisions of the Electricity Act, 2003)
✓ Any other company governed by any special Act for the time being in force.
✓ Such body corporate which are incorporated by any Act for time being in force, and as the
Central Government may by notification specify in this behalf.

COMPANY: MEANING AND ITS FEATURES

Meaning: According to Professor Haney, “A company is an incorporated association, which is

an artificial person created by law, having a separate entity, with a perpetual succession and
a common seal.” This definition sums up the meaning as well as the features of a company
succinctly.

However, as per Section 2(20) of the Companies Act, 2013, “Company means a company
incorporated under this Act or under any previous company law”.

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 Features of a Company (PLEASE)

Separate Legal Entity •Legally separate from the members

Perpetual succession • Change in members does not affect existence of Company

Limited Liability • Liability of Company is different from liability of members

• Company can act through human agency only

Artificial Juridicial Person
• Company can contract, sue and be sued in its own name

Common Seal • Official signature of a company

1. Separate Legal There are distinctive features between different forms of

Entity organisations and the most striking feature in the company form
of organisation vis- à-vis the other forms of business organisations
is that it has the character of being a separate legal entity. It comes
to have almost the same rights and powers as a human being. A
company can own property, have bank account, raise loans, incur
liabilities and enter into contracts.
(a) It is different from the subscribers to the memorandum of
association. Its existence is distinct and separate from that of its
members.
(b) Even members can contract with company, acquire right against
it or incur liability to it. For the debts of the company, only its
creditors can sue it and not its members.
(c) A company is capable of owning, enjoying and disposing of
property in its own name. Although the capital and assets are
contributed by the shareholders, the company becomes the
owner of its capital and assets.
A member does not even have an insurable interest in the property
of the company. The leading case on this point is of Macaura Vs.
Northern Assurance Co. Limited (1925):
Macaura (M) was the holder of nearly all (except one) shares of a
timber company. He was also a major creditor of the company. M
insured the company’s timber in his own name. The timber was lost
in a fire. M claimed insurance compensation. It was held that, the
insurance company was not liable to him as no shareholder has any
right to any item of property owned by the company. Hence in this
case, since the timber was to be insured in the company’s name, M
could not claim the compensation from insurance company.

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 2. Perpetual Members may die or change, but the company goes on till it is
Succession wound up as per this Act. Since a company is an artificial person
created by law, law alone can bring an end to its life. Its existence
is not affected by the death or insolvency of its members.
Note: Many companies in India are in existence for over 100 years.
There was a company which has 7 members and all of them died
in an aircraft. Despite this the company still exists.
3. Limited Liability The liability of a member depends upon the kind of company.
Company is a separate legal entity distinct from its members.
(i) Thus, in the case of a limited liability company, the liability of
the members of the company is limited to the extent of the
amount unpaid on the shares held by them.
(ii) In the case of a company limited by guarantee, the members are
liable only to the extent of the amount guaranteed by them and
that too only when the company goes into liquidation.
(iii)However, if it is an unlimited company, the liability of its
members is unlimited as well.
4. Artificial Legal 1. A company is an artificial person as it is created by a process
Person other than natural birth. It is legal or judicial as it is created by
law having all the rights of an individual.
2. Further, the company being a separate legal entity can own
property, have banking account, raise loans, incur liabilities and
enter into contracts. Even members can contract with company,
acquire right against it or incur liability to it. It can sue and be
sued in its own name. It can do everything which any natural
person can do except be sent to jail, take an oath, marry or
practice a profession.
3. As the company is an artificial person, it can act only through
some human agency, viz., directors. The directors act as its
agent, but they are not the “agents” of its members.
4. Thus, a company is called an artificial legal person.
5. Common Seal A company being an artificial person working through the agency
of human beings. Common seal is the official signature of a company,
which is affixed by the officers and employees of the company on
its every document. The common seal is a seal used by a corporation
as the symbol of its incorporation.
The Companies (Amendment) Act, 2015 has made the common
seal optional so as to provide an alternative mode of authorization
for companies who opt not to have a common seal.

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 This amendment provides that the documents which need to be
authenticated by a common seal will be required to be so done, only
if the company opts to have a common seal.
In case a company does not have a common seal, the authorization
shall be made by
- 2 directors or
- by a director and the Company Secretary, wherever the
company has appointed a Company Secretary.

CORPORATE VEIL THEORY

(i) Corporate Veil

Corporate Veil refers to a legal concept whereby the company is

identified separately from the members of the company.

If the company incurs any debts or contravenes any laws, the

corporate veil concept implies that members should not be liable
for those errors. Thus, the shareholders are protected from the acts of the company.

The Salomon Vs. Salomon and Co Ltd. laid down the foundation of the concept of corporate
veil or independent corporate personality.

In this case, the House of Lords laid down that a company is a person distinct and separate
from its members. In this case one Salomon incorporated a company named “Salomon & Co.
Ltd.”, with seven subscribers consisting of himself, his wife, four sons and one daughter. This
company took over the personal business assets of Salomon for £ 38,782 and in turn, Salomon
took 20,000 shares of £ 1 each, debentures worth £ 10,000 of the company with charge on
the company’s assets and the balance in cash. His wife, daughter and four sons took up one £
1 share each. Subsequently, the company went into liquidation due to general trade depression.
The unsecured creditors to the tune of £ 7,000 contended that Salomon could not be treated
as a secured creditor of the company, in respect of the debentures held by him, as he was the
managing director of one-man company, which was not different from Salomon and the cloak
of the company was a mere sham and fraud. It was held by Lord Mac Naughten:

“The Company is at law a different person altogether from the subscribers to the
memorandum, and even though after incorporation the business is precisely the same as it was
before and the same persons are managers, the company is not the agent of the subscribers.
And the subscribers, as members, are not liable except to the extent provided by the Act.”

Thus, this case clearly established that company has its own existence and as a result, a
shareholder cannot be held liable for the acts of the company even though he holds virtually
the entire share capital.

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