Page 191 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes 7.2 Features of a Company

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

7.2.1 Incorporated Association

A company must be incorporated or registered under the Companies Act. Minimum number
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.

7.2.2 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.

7.2.3 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.
(1877) 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 in the Act.

7.2.4 Limited Liability

The company being a separate person, its members are not as such liable for its debts. Hence, in
the case of a company limited by shares, the liability of members is limited to the nominal value
of shares held by them. Thus, if the shares are fully paid up, their liability will be nil. However,
companies may be formed with unlimited liability of members or members may guarantee a
particular amount. In such cases, liability of the members shall not be limited to the nominal or
face value of the shares held by them. In case of unlimited liability companies, members shall
continue to be liable till each paisa has been paid off. In case of companies limited by guarantee,
the liability of each member shall be determined by the guarantee amount, i.e., he shall be liable
to contribute up to the amount guaranteed by him.

Unlimited Liability of a Member of a Limited Liability Company

In the following cases, a shareholder or member shall lose the privilege of limited liability:
1. Where members of the company are reduced below the statutory minimum, viz., 7 in case
of a public company and 2 in case of a private company and the company carries on the
business for more than 6 months while the members are so reduced, every person who is
a member during the time that it so carries on business after those 6 months and is aware

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