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Unit 2: Meaning and Nature of a Company

Notes
£1000 is deposited with the Alliance Bank, Regent Street, shewing our sincerity in the
matter.
During the last epidemic of influenza many thousand carbolic smoke balls were sold as
preventives against this disease, and in no ascertained case was the disease contracted by
those using the carbolic smoke ball.
One carbolic smoke ball will last a family several months, making it the cheapest remedy
in the world at the price, 10s. post free. The ball can be refilled at a cost of 5s. Address:
“Carbolic Smoke Ball Company, “27, Princes Street, Hanover Square, London.”
Mrs. Louisa Elizabeth Carlill saw the advertisement, bought one of the balls and used
three times daily for nearly two months until she contracted the flu on January 17, 1892.
She claimed £100 from the Carbolic Smoke Ball Company. They ignored two letters from
her husband, who had trained as a solicitor. On a third request for her reward, they replied
with an anonymous letter that if it is used properly the company had complete confidence
in the smoke ball’s efficacy, but “to protect themselves against all fraudulent claims” they
would need her to come to their office to use the ball each day and checked by the secretary.

Mrs. Carlill brought a claim to court. The barristers representing her argued that the
advertisement and her reliance on it was a contract between her and the company, and so
they ought to pay. The company argued it was not a serious contract.

Question:
Do you agree to what the company says? Justify. (Hint: summarize this case in your
words).

Practical Exercise

1. Akash and Suman have been carrying on business in partnership as building contractors
in a small town for some years. They carry out most of the work themselves and only
occasionally employ labour. They have no plans to enlarge the area of their operations.
It has been suggested to them that they ought to trade as a company registered under the
Companies Act, 1956. They ask your advice on: what are the alleged advantages of trading
as a company as compared to partnership? Are there any disadvantages of trading as a
company?
2. Two joint Hindu families carry on a business together as joint owners. The first family
consists of three brothers and their respective sons, being twelve in number. The second
family consists of the father, four major sons and two minor sons. Is the business illegal?
(Hint: The business is not illegal. The minors are not to be counted. There are only twenty
major persons – the maximum number of members fixed for an association for carrying
on a non-banking business without being incorporated s.11)

3. The directors of a public limited company accepted a bill of exchange on behalf of their
company. But the word ‘Ltd.,’ was omitted from the name of the company at the time of
acceptance of the bill of exchange. Who can be held liable for the payment of the bill?
(Hint: The directors can be held personally liable, if the company refuses to pay.)

2.5 Summary

The Companies Act empowers the Central Government to inspect the books of accounts
of a company, to direct special audit, to order investigation into the affairs of a company
and to launch prosecution for violation of the Companies Act, 1956.

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