Page 129 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Corporate Legal Framework

Notes 5. Separate property: Shareholders are not, in the eyes of the law, part owners of the
undertaking. In India, this principle of separate property was best laid down by the
Supreme Court in Bacha F. Guzdar v. The Commissioner of Income-tax, Bombay (Supra).
The Supreme Court held that a shareholder is not the part owner of the company or its
property, he is only given certain rights by law, e.g., to vote or attend meetings, to receive
dividends. Similarly, in R.F. Perumal v. H. John, it was observed that no member can claim
himself to be owner of the company’s property during its existence or on its winding up. In
still another case, it was observed that even where a shareholder held almost entire share
capital, he did not even have an insurable interest in the property of the company. It was
the case of Macaure v. Northern Assurance Co. Ltd. and the facts were as follows:
‘Macaure’ held all except one share of a timber company. He had also advanced substantial
amount to the company. He insured the company’s timber in his personal name. On

timber being destroyed by fire his claim was rejected for want of insurable interest. The
Court applying principle of separate legal entity held that the insurance company was not
liable.
6. Transferability of shares: Since business is separate from its members in a company form
of organisation, it facilitates the transfer of member’s interests. The shares of a company
are transferable in the manner provided in the Articles of the company (s.82). However, in
a private company, certain restrictions are placed on such transfer of shares but the right to
transfer is not taken away absolutely.
7. Perpetual existence: A company being an artificial person cannot be incapacitated by

illness and it does not have an allotted span of life. The death, insolvency or retirement of
its members leaves the company unaffected. Members may come and go but the company
can go forever. The saying “King is dead, long live the King” very aptly applies to the
company form of organisation.

8. Common seal: A company being an artificial person is not bestowed with a body of natural
being. Therefore, it has to work through its directors, officers and other employees. But, it

can be held bound by only those documents which bear its signature. Common seal is the

official signature of a company.
9. Company may sue and be sued in its own name: Another fallout of separate legal entity
is that the company, if aggrieved by some wrong done to it may sue or be sued in its
own name. In Rajendra Nath Dutta v. Shibendra Nath Mukherjee (1982) (52 Comp. Cas. 293
Cal.), a lease deed was executed by the directors of the company without the seal of the

company and later a suit was filed by the directors and not the company to avoid the lease
on the ground that a new term had been fraudulently included in the lease deed by the

defendants. Held that a director or managing director could not file a suit, unless it was
by the company in order to avoid any deed which admittedly was executed by one of the
directors and admittedly also the company accepted the rent. The case as made out in the
plaint was not made out by the company but by some of the directors of the company and
the company was not even a plaintiff. If the company was aggrieved, it was the company

which was to file the suit and not the directors. Therefore, the suit was not maintainable.
Company Distinguished from Partnership

Distinction between partnership and the company incorporated under the Companies Act, 1959,
is as follows:

1. Legal status: A partnership firm has no existence apart from its members. A company is a
separate legal entity distinct from its members.
2. Mutual agency: Partnership is founded on the idea of mutual agency – every partner
is an agent of the rest of the partners. A member of a company is not an agent of other
members.

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