A company is a voluntary association of persons formed for the purpose of carrying on some business for profit, incorporated under the Companies Act, registered with the Registrar of Companies, having a separate legal existence from its members, perpetual succession, and a common seal (now optional). It is an artificial person created by law.
Legal Framework
| Provision | Subject |
|---|---|
| S.2(20) | "Company" defined (incorporated under this Act or any previous company law) |
| S.3 | Formation of company (7+ for public; 2+ for private; 1 for OPC) |
| S.4 | Memorandum of Association |
| S.7 | Incorporation of company (certificate of incorporation) |
| S.9 | Effect of registration (body corporate with perpetual succession) |
| S.34-35 | Liability for misstatement in prospectus |
| S.2(68) | Private company defined |
| S.2(71) | Public company defined |
| S.2(62) | One Person Company defined |
Definition
| Source | Definition |
|---|---|
| S.2(20) Companies Act, 2013 | "Company means a company incorporated under this Act or under any previous company law" |
| Lord Lindley | "A company is an association of many persons who contribute money or money's worth to a common stock and employ it in some trade or business and who share the profit and loss arising therefrom" |
| Chief Justice Marshall | "A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law" |
| Haney | "A company is an artificial person created by law, having separate entity, with perpetual succession and a common seal" |
Essential Characteristics
| Characteristic | Content | Section |
|---|---|---|
| Separate legal entity | Company is a person distinct from its members | S.9 (effect of registration: "body corporate") |
| Perpetual succession | Company continues despite death/exit of members | S.9 ("perpetual succession") |
| Common seal | Optional official signature of company (Companies Amendment Act, 2015) | S.9, S.22 (seal optional post-2015) |
| Limited liability | Members liable only to the extent of unpaid shares/guarantee amount | S.2(21) limited by shares; S.2(22) limited by guarantee |
| Transferability of shares | Shares freely transferable (public company); restricted (private) | S.44 (shares are movable property, transferable) |
| Separate property | Company owns property in its OWN name not members' property | Consequence of separate entity (Salomon) |
| Can sue and be sued | Company can be a plaintiff or defendant in its own name | S.9: body corporate |
| Artificial person | Created by law; acts through agents/directors; no physical existence | Juristic person separate from natural persons |
Why: The separate legal entity doctrine is the FOUNDATION of company law. Without it, there is no distinction between a company and a partnership. The entire structure limited liability, perpetual succession, transferable shares, corporate property flows from the single principle that the company is a DIFFERENT PERSON from its members.
Corporate Personality The Salomon Principle
Salomon v. Salomon & Co. (1897) the most important case in company law:
| Element | Content |
|---|---|
| Facts | Aron Salomon incorporated his boot business as a company. He held 20,001 of 20,007 shares. Company failed. Unsecured creditors (owed £7,000) argued Salomon should pay personally. |
| Issue | Is a one-man company truly separate from its sole shareholder? |
| Held | YES the company is a separate legal person. Its debts are ITS debts, not Salomon's. Even if one person holds virtually all shares, incorporation creates a distinct entity. |
| Principle | Upon valid incorporation, the company's legal personality is absolute regardless of number of shareholders or degree of control. |
Consequences of Separate Personality
| Consequence | Meaning | Example |
|---|---|---|
| Members ≠ Company | Members don't own company property; company doesn't owe members' debts | Member's personal creditors cannot attach company assets |
| Company can contract with members | No prohibition on contracts between company and its shareholders/directors | Company can sell goods to its director (subject to S.188 disclosure) |
| Company can sue members | If a member wrongs the company, company can sue | Company sues director for breach of fiduciary duty |
| Crime by company | Company can be prosecuted for offences (through officers in default) | S.447: fraud by company attracts prosecution |
| Company nationality | Company has domicile (place of registration) independent of members' nationality | Indian-registered company is "Indian" even if all shareholders are foreign |
Illustrations
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Salomon's principle (why your savings are safe): You buy 100 shares of Reliance Industries for Rs.2,50,000. Reliance has debts of Rs.3,00,000 crore. If Reliance goes bankrupt, can creditors take YOUR house, car, or savings? NO Reliance is a SEPARATE PERSON. Its debts are ITS debts. Your maximum loss = Rs.2,50,000 (your shares become worthless). This is LIMITED LIABILITY a direct consequence of separate legal entity. Without Salomon's principle, no ordinary person would ever invest in shares (risk of losing everything you own for company debts you didn't create).
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Perpetual succession (the company outlives everyone): East India Company was incorporated in 1600. Its original shareholders are dead for 400 years. Yet the company continued trading until it was dissolved by statute in 1874. Members came and went; the company remained. In India: Tata Sons was founded in 1868. Jamsetji Tata died in 1904. The company is still operating in 2026 158 years later. No natural person lives that long. Perpetual succession means the company is IMMORTAL (until dissolved by law or wound up).
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Separate property (the key practical consequence): A, B, and C form ABC Pvt Ltd. They transfer a building to the company. The building is NOW the company's property not A's, B's, or C's. If A goes personally bankrupt, A's creditors CANNOT touch the building (it belongs to the company, not to A). Conversely, if the company goes bankrupt, company's creditors CAN sell the building (it's the company's asset). The wall between members' property and company's property is absolute breach it only through "lifting the veil."
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Company can contract with its own members: Director D wants to buy a flat from XYZ Pvt Ltd (a real estate company of which D is a director). Can the company sell to D? YES the company and D are DIFFERENT persons. D buying from the company is like any stranger buying from the company. But: S.188 requires disclosure and board/shareholder approval for "related party transactions" to prevent self-dealing. The transaction is POSSIBLE but REGULATED.
Recall Check
- What is the effect of incorporation under S.9?
- State the Salomon principle and its significance.
- Name five characteristics of a company.
Key Cases
Salomon v. Salomon & Co. (1897) Salomon-v-Salomon-1897 Issue: Whether a validly incorporated company is a separate legal entity from its sole beneficial shareholder. Rule: Upon incorporation, the company is a distinct legal person. Its liabilities are its own not attributable to shareholders regardless of their degree of control. Held: The company is not the agent or trustee of Salomon. Salomon is not personally liable for company's debts. Separate legal personality is absolute upon valid incorporation.
Daimler Co. Ltd v. Continental Tyre (1916) Daimler-v-Continental-Tyre-1916 Issue: Whether a company registered in England but controlled by German shareholders was an "enemy" company during WWI. Rule: A company has nationality based on registration; but in exceptional circumstances (wartime), courts may look at the persons controlling it. Held: Although the company was English-registered (separate entity), the court looked at who CONTROLLED it (German shareholders) to determine enemy character. Early instance of "lifting the veil" for public policy.
Distinctions
| Aspect | Company (Incorporated) | Unincorporated Association |
|---|---|---|
| Legal personality | Separate juristic person | No separate personality (members collectively) |
| Liability | Limited (to extent of shares/guarantee) | Unlimited (members personally liable) |
| Property | Company owns in its own name | Held in trust by members/committee |
| Perpetual succession | Yes (continues despite member changes) | Dissolution on member exit (unless rules provide otherwise) |
| Sue/Be sued | In own name | In representative capacity or members jointly |
| Creation | By registration under Companies Act | By agreement/rules |
| Transferability | Shares transferable | Membership not transferable (generally) |
| Example | Infosys Ltd, Tata Motors Ltd | Clubs, societies, trade unions |
Flashcards
Q: How does S.2(20) define "company"? A: "Company means a company incorporated under this Act or under any previous company law."
Q: What is the Salomon principle? A: Upon valid incorporation, the company is a legal person SEPARATE from its members. Its debts are its own shareholders are not personally liable. One-man company is still a separate entity.
Q: What is "perpetual succession"? A: The company continues to exist regardless of changes in membership (death, transfer of shares, exit of members). Only dissolution/winding up ends it.
Q: What is "limited liability"? A: Members are liable for company debts only to the extent of unpaid amount on their shares (limited by shares) or guarantee amount (limited by guarantee). Personal assets are protected.
Q: Name the essential characteristics of a company. A: Separate legal entity, perpetual succession, limited liability, transferability of shares, separate property, can sue/be sued, artificial person, common seal (optional post-2015).
Q: What is the effect of registration under S.9? A: The company becomes a "body corporate" with perpetual succession capable of holding property, suing, being sued, and having a common seal.
Q: Can a company contract with its own members? A: Yes they are separate persons. But related party transactions (S.188) require disclosure and approval to prevent self-dealing.
Exam Scenario
A holds 99% shares in Alpha Pvt Ltd. A also serves as its sole director. Alpha Pvt Ltd takes a loan of Rs.50 lakhs from Bank B. The company defaults. Bank B argues: "A IS the company he should pay personally since he controls everything." Advise.
Under the Salomon principle (Salomon v. Salomon & Co., 1897), Alpha Pvt Ltd is a SEPARATE legal person from A regardless of A holding 99% shares or being the sole director. The company's debt (Rs.50 lakhs) is the COMPANY's liability, not A's personal liability.
Bank B's argument fails on established law: (1) S.9 Companies Act: upon incorporation, the company becomes a body corporate distinct from members. (2) Salomon (affirmed in India in Lee v. Lee's Air Farming (1961) and Macaura v. Northern Assurance (1925)): one-man control does not destroy separate personality. (3) A's maximum liability = unpaid amount on his shares (limited liability principle).
Exception: Bank B could succeed ONLY if it proves grounds for "lifting the corporate veil" (a) fraud (company formed to defraud creditors S.7(7)), (b) sham/facade (company has no independent existence; mere alter ego), (c) statutory provision (personal liability of director under specific sections like S.447 fraud). Mere dominance/control is NOT sufficient to pierce the veil.
Advice to Bank B: Unless fraud or sham is proved, A is NOT personally liable. Bank B should recover from company assets. For future lending: take personal guarantee from A (contractual route to attach personal liability).
Illustrations
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Death of all members: A private company has two members, Ravi and Suresh. Both die in a road accident. The company does not die. Their legal heirs inherit the shares and the company continues to exist with new membership. The contracts signed by the company remain enforceable.
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Member suing own company: Asha holds 99% shares in XYZ Pvt Ltd. She lends Rs.5 lakh to XYZ Pvt Ltd personally. If the company defaults, Asha can sue XYZ Pvt Ltd for recovery because Asha-the-creditor is legally distinct from XYZ Pvt Ltd-the-debtor, even though Asha-the-member virtually owns the company.
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Company suing its member: TCS Ltd employs Rahul as a software engineer. Rahul is also a shareholder holding 100 shares. If Rahul breaches his employment contract, TCS can sue Rahul. His status as shareholder gives him no immunity from the company's claim against him.
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Property belongs to company, not members: Tata Sons owns the Bombay House building. No individual Tata family member can claim personal ownership of Bombay House merely because they hold shares in Tata Sons. If all Tata family members sold their shares tomorrow, Bombay House would still belong to Tata Sons.
Recall Check
- What is the statutory provision that creates corporate personality upon incorporation?
- Can a member of a company enter into a contract with the same company? What legal principle allows this?
- If all members of a company die simultaneously, what happens to the company's contracts and property?