Introduction to Concept of Company and Company Law
Introduction to the Concept of Company and Company Law
1. What is a Company?
A company is a legal entity formed by a group of individuals to carry on a business or commercial activity. It is recognized by law as a separate “person” distinct from its members (shareholders).
2. Key Characteristics of a Company
| Characteristic | Explanation |
|---|---|
| Separate Legal Entity | The company has an identity separate from its members. It can own property, sue and be sued in its own name. |
| Limited Liability | The liability of members is limited to the amount unpaid on their shares (in case of a company limited by shares). |
| Perpetual Succession | The company continues to exist regardless of changes in membership or directors. |
| Common Seal | The company uses a common seal as its official signature (though modern practice varies). |
| Transferability of Shares | Shares can be transferred, subject to restrictions in the Articles of Association. |
| Separation of Ownership and Management | Shareholders own the company, but the management is conducted by directors. |
3. Legal Definition under Companies Act, 2013
Section 2(20) defines a company as:
“a company incorporated under this Act or under any previous company law.”
It includes various types such as private limited companies, public limited companies, one-person companies, etc.
4. Why is the Concept of Separate Legal Entity Important?
This principle was established in the landmark English case:
Salomon v. Salomon & Co. Ltd. (1897) AC 22 (HL)
Facts: Mr. Salomon incorporated a company and was the majority shareholder and creditor. When the company became insolvent, creditors argued he was personally liable.
Held: The House of Lords held that the company is a separate legal person from Mr. Salomon. The company alone was liable for its debts.
Principle Established: The corporate veil separating the company from its members is inviolable except in exceptional cases.
This case is the foundation of modern company law worldwide, including India.
5. Purpose and Objects of Company Law
To regulate the formation, management, and dissolution of companies.
To protect interests of shareholders, creditors, employees, and the public.
To ensure corporate governance, accountability, and transparency.
To promote economic growth by providing a legal framework for business organizations.
6. Sources of Company Law in India
| Source | Description |
|---|---|
| Companies Act, 2013 | Main statute governing companies in India. |
| Rules and Regulations | Rules made under the Companies Act (e.g., Companies Rules, 2014). |
| Case Law/Judicial Precedents | Interpretations by courts shape company law principles. |
| SEBI Regulations | Regulate listed companies and securities market. |
| Other Statutes | Like Insolvency and Bankruptcy Code, Competition Act, etc. |
7. Types of Companies under the Companies Act, 2013
Private Company (Section 2(68))
Public Company (Section 2(71))
One Person Company (Section 2(62))
Government Company (Section 2(45))
Section 8 Company (non-profit companies)
8. Principles of Company Law
| Principle | Explanation |
|---|---|
| Corporate Personality | Company is a separate legal entity. |
| Limited Liability | Shareholders’ liability is limited. |
| Rule of Majority | Decisions are made by majority vote. |
| Doctrine of Ultra Vires | Acts beyond the company’s powers are void. |
| Indoor Management Rule | Outsiders can assume internal company rules are complied with. |
9. Important Case Laws
Salomon v. Salomon & Co. Ltd. (1897) — Separate legal entity.
Ashbury Railway Carriage & Iron Co. Ltd. v. Riche (1875) — Doctrine of Ultra Vires.
Royal British Bank v. Turquand (1856) — Doctrine of Indoor Management.
Tata Engineering and Locomotive Co. Ltd. v. State of Bihar, AIR 1965 SC 40 — Government company and scope of company law.
MacDougall v. Gardiner (1875) — Company as a legal person distinct from its members.
10. Significance of Company Law
Facilitates economic development by encouraging investment.
Protects stakeholders by regulating corporate conduct.
Ensures transparency and accountability in management.
Provides mechanisms for dispute resolution and winding up.
Conclusion
The concept of a company as a separate legal entity with limited liability is the cornerstone of company law. The Companies Act, 2013 provides a comprehensive framework governing companies’ incorporation, management, and dissolution to foster business growth while protecting various stakeholders. Landmark judicial decisions have played a crucial role in shaping the principles and application of company law in India.
RELATED Blog
0 comments