Q.1a).What do you understand by the Company? Explain its nature advantages.
Ans. Meaning of the Company— The term ‘Company’ has been derived from the combination of two words, namely,’ com’ and `panis’. The word `corn’ means ‘together’ and ‘panis’ means ‘bread’. Thus, initially the word ‘company’ referred to an association of persons who took their meal together. The merchants in the leisurely past, took, advantage of these festive gatherings to discuss their business matters. Initially the word “company” did not have strictly and technical or legal meaning
Broadly speaking, the word company connotes two ideas in a legal sense-
(i) The members of the association are so numerous that it cannot aptly be described as a firm or a partnership;
(ii) A member may transfer his interest in the association without the consent of other member, such an association may be incorporated according to law whereupon it becomes a body corporate or what is usually called a corporation with perpetual succession and a common seal. It is then regarded as a legal person separate and distinct from its members.
Definition of Company-
The term company has been defined as under-
1. According to Sec. 2(20) of the Companies Act, 2013 ‘Comany’ means a company incorporated under this Act or under any previous company Law.
2. According to Lord J. Lindley, A company is an association of many persons who contribute money or money’s worth to a common stock and employ it for a common purpose. Tne common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share”. This definition gives an idea of the incorporated company and has been popularly accepted.
3. According to Lord Halsbury The term ‘company’ has been defined as a collection of many individuals united into one body under a special domination, having perpetual succession under an artificial form, and vested by the policy of law with the capacity of acting in several respects as an individual, particularly of taking and granting property, of contracting obligations, and of suing and being sued, of enjoying privileges and immunities in common, and of exercising a variety of political rights more or less extensive, according to the designs of its institution, or the power upon it, either at the time of its creation or at any subsequent period of its existence.
4. According to Graf Evans, “In common law, a company is a “legal person or legal entity’, separate from and capable of surviving beyond the lives of its members”.
5. According to J. James, “a company means, an association of persons united for a common object, such associate may be in the form of an ordinary firm or a Hindu Joint Family business or a society registered under the Societies Registrations Act or Provident Fund Society, or A Trade Union or a Company incorporated by legal Charter or by an Act of Parliament or by some Indian law or if may be a Company incorporated under an act relating to companies”.
6. According to Heney, “a joint stock company is a voluntary organization formed with the object of earning profit, whose capital is divisible into transferable shares and membership is necessary for its ownership”.
Thus, a company may be defined as an association of individuals formed generally for the purpose of some business or undertaking carried on in the name of the association, each member having the right of assigning his share to any other person, subject to the regulation of the company.
Nature and Advantages of a Company—
The nature and advantages of a company can best be understood by taking into account its following characteristic features-
1. Independent Corporate Existence—
By registration under the Companies Act, a company becomes vested with corporate personality, which is independent of, and distinct from, its members. A company is a legal person. The decision of the House of Lords in Solomon Vs. Solomon & Co. Ltd. (1897) AC 22 is a well known authority of this principle. In this case, One ‘S’ incorporated a company to take over his personal business of manufacturing boots and shoes. The seven subscribers to the memorandum were all the members of his own family, each taking only one share. The company’s board of directors was composed of S as the managing director, and his four sons. Through this board, S’s business was transferred to the company at an agreed price in payment of which S was allotted 20,000 shares off I each and debentures worth £10,000 creating a charge on the company’s assets. Within a year the company came to be wound up and the state of affairs was like this. Assets: £6,000; liabilities-1. Debenture Creditors f 10,000 2. Ordinary Creditors £7,000.
It was argued on behalf of unsecured creditors that, although incorporated under the Act, the company never had an independent existence. It was S himsel f trading under another name. But the House of Lords held that Solomon. & Co. must be regarded as a separate and independent person from S.
Thus, when the memorandum is duly signed and registered, the subscribers arc a body corporate capable forthwith of exercising all the functions of an incorporated individual. It is difficult to understand how a body corporate thus created by statute can lose its individuality by issuing the bulk of its capital to one person. The company is at law a different person altogether from the subscribers of the memorandum.
2. Limited Liability—
Limitation of liability is another major advantage of incorporation. The company, being a separate entity, leading its own business life, the members are not liable for its debts. If the liability of members, as is usual, is limited by shares, each member is bound to pay the nominal value of the shares held by him and his liability ends there.
3. Perpetual Succession—
According to Prof. Gower, “Members may come and go but the company can go on for ever, during the war all the members of private company, while in general meeting, were “killed by a bomb But the company survived not even a hydrogen bomb could have destroyed it. Thus, the death or insolvency of members does not affect the continued existence of the Company .The Company remains the same entity “in the like manner as the river Thames is still the same river, though the parts which compose it are changing every instant”.
4. Transferable Shares—
When joint stock companies were established the great object was that the shares should be capable of being easily transferred. S.44 of Company Act 2013 gives expression to this principle by providing that “the shares or other interest of any member shall be movable property by the articles of the company.” The unique . advantage of this is that a member may sell his shares in the open market and get back his money, without affecting the capital structure of the company S.III-A, as introduced into the Companies Act, 1956 by the Depositories Act .1996 specially declares that the shares of public companies shall be freely transferable.
5. Separate Property—
The property of an incorporated company is vested in the corporate body. The company is capable of holding and enjoying property in its own name. No member, not even all the members can claim ownership of any item of the companies’ assets. Thus, where a substantial share holder insured the company’s timber in his own name, he could not recover indemnity when the timber was burnt by the fire as he had no insurable interest in the company’s property.
6. A Company is a Legal Person—
Since a company is a person in the eye of law hence it can sue and be sued in its corporate name.
7. Company is Entitled to Collect Money from Public-
A company gets the privileges of collecting interest free money from the public for its business by making a public issue or through private placement of shares and other securities.
8. Professional Management-
The management of the company generally vests in the directors who decide the policy matters in the meetings of the Board of Directors. The tenure of director’s office is five years so as to ensure flexibility in management and eliminate the possibility of Board misusing its powers. With skilled professional managers supported by financial resources, companies are able to develop and carry on their business efficiently. In short, professional form of management of business disassociates the ‘ownership’ from control of business and , thus helps to promote efficiency. Besides, it provides flexibility and autonomy to business undertakings within the frame work of company law.
9. Permanence of Capital and Stability of the Company—
The provision contained in S.67 (1) of the Companies Act, 2013 prohibits a company with limited liability from purchasing its own shares subject to certain exceptions. This ensures permanence of capital raised by the company which in turn provides its stability and at the same time protection to creditors of the company to certain extent.
10. Protection to Investors Against Loss—
One of the advantages of incorporated company is that it affords an opportunity to even a common man with meagre resources to invest a little part of his income in the company’s capital through purchase of shares or debentures without being exposed to substantial loss in the event of failure of company’s business. The company too, on its part, can borrow money and raise its capital on debentures, which an ordinary trader cannot do. Any member of a company acting in good faith is as much entitled to take and hold company’s debentures as any outside creditors. Thus, incorporation of companies seeks to fulfill the desire of common men who do not intend to directly participate in the business because of the risk involved therein but wish to invest a part of their income in business ventures to earn profit.