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Unit 2: Meaning and Nature of a Company

2.2 Characteristics of Company Notes

On the basis of the above observations, we may spell out the following characteristic features of
a company.

2.2.1 Incorporated Association

A company must be incorporated or registered under the Companies Act. Minimum numbers
required for the purpose is 7, in case of a public company and 2, in case of a private company
(s.12). It may also be mentioned that as per s.11, an association of more than 10 persons, in case
of banking business and 20 in case of any other business, if not registered as a company under
the Companies Act, or under any other law for the time being in force, becomes an illegal
association.

2.2.2 Artificial Person

A company is created with the sanction of law and is not itself a human being, it is therefore,
called artificial; and since it is clothed with certain rights and obligations, it is called a person.
A company is accordingly, an artificial person.

2.2.3 Separate Legal Entity

Unlike partnership, company is distinct from the persons who constitute it. Section 34 (2) says
that on registration, the association of persons becomes a body corporate by the name contained
in the memorandum. Lord Macnaghten in the famous case of Salomon v. Salomon & Co. Ltd.
(1897) AC 22 observed that:
A company is at law a different person altogether from the subscribers…..; and though it may be
that after incorporation the business is precisely the same as it was before and the same persons
are managers and the same hands receive the profits, the company is at law not the agent of the
subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form,
except to the extent and in the manner provided by the Act.
The facts of the famous Salomon’s case were as follows:

Salomon carried on business as a leather merchant. He sold his business for a sum of £30,000 to
a company formed by him along with his wife, a daughter and four sons. The purchase
consideration was satisfied by allotment of 20,000 shares of £1 each and issue of debentures
worth £10,000 secured by floating charge on the company’s assets in favour of Mr Salomon. All
the other shareholders subscribed for one share of £1 each. Mr Salomon was also the managing
director of the company. The company almost immediately ran into difficulties and eventually
became insolvent and winding up commenced. At the time of winding up, the total assets of the
company amounted to £6,050; its liabilities were £10,000 secured by the debentures issued to
Mr Salomon and £8,000 owing to unsecured trade creditors. The unsecured sundry creditors
claimed the whole of the company’s assets, viz. £6,050 on the ground that the company was a
mere alias or agent for Salomon.
Held: The contention of the trade creditors could not be maintained because the company being
in law a person quite distinct from its members, could not be regarded as an ‘alias’ or agent or
trustee for Salomon. Also the company’s assets must be applied in payment of the debentures as
a secured creditor is entitled to payment out of the assets on which his debt is secured in priority
to unsecured creditors.

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