Page 189 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes Introduction

The Companies Act, 1956 defines the word ‘company’ as a company formed and registered
under the Act or an existing company formed and registered under any of the previous company
laws (s.3). This definition does not bring out the meaning and nature of the company into a clear
perspective. Also s.12 permits the formation of different types of companies. These may be
(i) companies limited by shares, (ii) companies limited by guarantee and (iii) unlimited companies.
The vast majority of companies in India are with limited liability by shares. Therefore, it is
advisable to define the term ‘company’ keeping in mind this type of company. However, a brief
description of other types of companies will be given later.
7.1 Concept of a Company

A company, in its ordinary, non-technical sense, means a body of individuals associated for a
common objective, which may be to carry on business for gain or to engage in some human
activity for the benefit of the society. Accordingly, the word ‘company’ is employed to represent
associations formed to carry on some business for profit or to promote art, science, education or
to fulfil some charitable purpose. This body of individuals may be incorporated or
unincorporated.

An Unincorporated Association: An unincorporated association enjoys the advantage of having
a large number of members, who contribute sums of money to a common pool for running a
business undertaking. A partnership firm is an example of an unincorporated association.

An Incorporated Association: An association of individuals may be incorporated according to
the law of the land. For example, Reliance Industries Limited is an incorporated association
formed under the Companies Act, 1956. An incorporated association is a legal person, separate
and distinct from its individual members. Where an association is incorporated, it becomes a
body corporate acquiring a legal entity or personality. Since it is created under the provisions of
law, it is known as legal or artificial person as opposed to a natural person.

Notes The word ‘Company’ is colloquially applied to both unincorporated associations
(such as a partnership firm) and incorporated associations (such as a company incorporated
under the Companies Act, 1956). However, the Indian legal system regards partnership
firms and partnership law distinct from the companies and the company law.
Legal Person: Any entity, recognised by the law as capable of rights and duties is a ‘person’. The
law, while regulating rights and duties of persons, divides them into: (i) natural persons; and
(ii) artificial persons.
Natural persons are human beings of different degrees of capacity, and sometimes acting for
themselves and at other times through agents or as agents. An artificial person is created and
devised by laws for the purpose of the society and is known as ‘company’. Such artificial persons
possess rights and owe obligations almost similar to those of natural persons, but have no
physical existence.
Body Corporate or Corporation: Section 2(7) provides that a ‘Body Corporate’ or ‘Corporation’
includes a company incorporated outside India. However, it does not include (i) a corporation
sole; (ii) a cooperative society registered under any law relating to cooperative societies; and

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