UNIT 1 JOINT STOCK COMPANY
Meaning- Kinds Of Companies- Formation-Incorporation-Memorandum Of Association -
Contents And Alteration - Doctrine Of Ultra Vires - Articles Of Association- Contents -
Distinction Between The Two - Doctrine Of Indoor Management-Prospectus-Contents -
Prospectus-Statements Of Lieu Of Prospectus.
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COMPANY MEANING
A company means an association of individual formed for some common purpose. But it
is a voluntary association of persons. It has capital divisible into parts, known as shares, an
artificial person created by a process of law and it has a perpetual succession and a common seal.
Definition
According to Prof. Lindley, company is defined as, “An association of many persons who
contribute money or money’s worth to a common stock, and employ it in some common trade or
business (i.e., for a common purpose), and who share the profit or loss (as the case may be) arising
therefore. The common stock so contributed is denoted in money and it 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. Shares are always transferable although the right to
transfer them is often more or less restricted”.
Characteristics of a Company
1. Separate Legal Entity
A company formed and registered under the companies act is a distinct legal entity. It is a
creation of law and is sometimes called artificial person having invisible and intangible. It is a
fiction of law with legal, but no natural or physical existence.
Case of Salomon Vs Salomon Co Ltd: S Sold his boots business to a newly formed company for
$30, 000. His wife, one daughter and four sons took up one share of $ 1 each. S took 23, 000 shares
of $ 1 each and $ 10, 000 debentures in the company. The debentures gave S a chargeover the
assets of the company as the consideration for the transfer of the business. Subsequently when the
company was wound up, its assets were found to be worth $6, 000 and its liabilities amounted to
$ 17, 000 of which $ 10, 000 were due to S (secured by debentures) and $ 7, 000 due to unsecured
creditors.
The unsecured creditors claimed that S and the company were one and the same person
and that the company was a mere agent for S and hence they should be paid in priority to S. Held,
the company was, in the eyes of the law, a separate person independent from S and was not his
agent. S, though virtually the holder of all the shares in the company, was also a secured creditor
and was entitled to repayment in priority to the unsecured creditors.
2. Perpetual Succession
A company is an artificial person, as such it never dies. Its life does not depend on the life
of its members. It may not affected by insolvency, mental disorder or retirement of its
1
,members. It is created by law and can be put an end to only by the process of law. Even the
earthquake, flood or hydrogen bomb cannot destroy it. It continues to exist even if all its human
members are dead. Unlike a natural person a company never dies. It is an entity with a perpetual
succession. Its existence is not affected by the death, lunacy and insolvency of its members.
3. Limited Liability
In a company limited by shares, the liability of members is limited to the unpaid value of
the shares. If the face value of a share in a company is Rs.10 and a member has already paid Rs.7
per share, he can be called upto to pay not more than Rs.3 per share during the lifetime of the
company.
In a company limited by guarantee, the liability of members is limited to such amount as
the members may undertake to contribute to the assets of the company in the event of its being
wound up.
4. Common seal
A company is a juristic person with a perpetual succession and a common seal. Since the
company has no physical existence, it must act through its agents and all such contracts entered
into by its agents must be under the seal of the company. The common seal acts as the official
signature of the company. Every company mush has a seal with its name engraved on it.
5. Transferability of shares
The capital of a company is divided into parts, called shares. These shares are, subject to
certain conditions, freely transferable so that no shareholder is permanently or necessarily wedded
to the company. When the joint stock companies were established, the great object was that the
shares should be capable of being easily transferred.
6. Capacity to sue and be sued
A company can sue and be sued in its corporate name. It may also inflict or suffer wrongs.
It can in fact do or have done to it most of the things which may be done by or to a human being.
On incorporation, a company acquires separate and independent legal personality. As a legal
person, it can sue and be sued in its name.
7. Separate Property
A company, as already observed, is a legal person distinct from its members. It is therefore
capable of owing, enjoying and disposing of property in its own name. Although, the capital and
assets of the company are contributed by its shareholders, they are not the privateand joint
owners of the property of the company. The property of the company is not the property of the
shareholders; it is the property of the company.
LIFTING THE CORPORATE VEIL
A company is a legal person distinct from its members. This principle may be referred to as
‘the veil of incorporation’. The effect of this principle is that there is a veil between the company
and its members i.e., the company has a corporate personality which is distinct from its members.
But over a period, the abuses of this corporate personality became apparent. Thus it became
necessary for the court to break through or lift the corporate veil or crack the shell of corporate
2
, personality and look at the persons behind the company who are the real beneficiaries of the
corporate fiction.
The corporate veil is lifted in the following cases;
Determination of the character
Where company is a mere cloak or sham
Where the company is acting as an agent of the shareholders
Protection of revenue
Statutory exception
1. Number of members below statutory minimum
Sec.45, if a company carries on business for more than 6 months after the number of its
members has been reduced below 7 in case of a public company or 2 in case of private company,
every person who knows this fact and is a member during the time that the company so carries on
business after the six months, is severally liable for the whole of the debts of the company
contracted during that time, i.e., after six months. It may be noted that in such a case the continuing
members (i.e., those who continue to be members after six months).
a. Can be sued and not those who have withdrawn from the membership;
b. Shall be liable only if they are aware of the fact of the member falling below the
statutory minimum.
2. Failure to refund application money
Sec.69 (5), the directors of a company are jointly and severally liable to repay the
application money with interest if the company fails to refund the application money of those
applicants who have not been allotted shares, within 130 days of the date of issue of the prospectus.
3. Misdescription of company’s name
Sec.147 (4) where an officer or agent of a company does any act or enters into a contract
without fully or properly mentioning the company's name and the address of its registered office,
he shall be personally liable. Thus where a bill of exchange, hundi or promissory note is signed
by an officer of a company or any other person on its behalf, without mentioning this fact that he
is signing on behalf of the company; he is personally liable to the holder of the instrument unless
the company has already paid the amount.
4. Fraudulent Trading
Sometimes in the course of the winding up of a company it may appear that some business
of the company has been carried on with intent to defraud creditors of the company, or any other
person or for any fraudulent purpose. In such a case, the court may declare that any persons who
were knowingly parties to the carrying on of the business in this way are personally liable without
any limitations of liability for all or any of the debts or other liabilities of the company as the court
may direct. The court may do so on the application of the official liquidator, or the liquidator or
any creditor or contributory of the company.
5. Holding and Subsidiary Companies
3
Meaning- Kinds Of Companies- Formation-Incorporation-Memorandum Of Association -
Contents And Alteration - Doctrine Of Ultra Vires - Articles Of Association- Contents -
Distinction Between The Two - Doctrine Of Indoor Management-Prospectus-Contents -
Prospectus-Statements Of Lieu Of Prospectus.
-----------------------------------------------------------------------------------------------------------------------
COMPANY MEANING
A company means an association of individual formed for some common purpose. But it
is a voluntary association of persons. It has capital divisible into parts, known as shares, an
artificial person created by a process of law and it has a perpetual succession and a common seal.
Definition
According to Prof. Lindley, company is defined as, “An association of many persons who
contribute money or money’s worth to a common stock, and employ it in some common trade or
business (i.e., for a common purpose), and who share the profit or loss (as the case may be) arising
therefore. The common stock so contributed is denoted in money and it 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. Shares are always transferable although the right to
transfer them is often more or less restricted”.
Characteristics of a Company
1. Separate Legal Entity
A company formed and registered under the companies act is a distinct legal entity. It is a
creation of law and is sometimes called artificial person having invisible and intangible. It is a
fiction of law with legal, but no natural or physical existence.
Case of Salomon Vs Salomon Co Ltd: S Sold his boots business to a newly formed company for
$30, 000. His wife, one daughter and four sons took up one share of $ 1 each. S took 23, 000 shares
of $ 1 each and $ 10, 000 debentures in the company. The debentures gave S a chargeover the
assets of the company as the consideration for the transfer of the business. Subsequently when the
company was wound up, its assets were found to be worth $6, 000 and its liabilities amounted to
$ 17, 000 of which $ 10, 000 were due to S (secured by debentures) and $ 7, 000 due to unsecured
creditors.
The unsecured creditors claimed that S and the company were one and the same person
and that the company was a mere agent for S and hence they should be paid in priority to S. Held,
the company was, in the eyes of the law, a separate person independent from S and was not his
agent. S, though virtually the holder of all the shares in the company, was also a secured creditor
and was entitled to repayment in priority to the unsecured creditors.
2. Perpetual Succession
A company is an artificial person, as such it never dies. Its life does not depend on the life
of its members. It may not affected by insolvency, mental disorder or retirement of its
1
,members. It is created by law and can be put an end to only by the process of law. Even the
earthquake, flood or hydrogen bomb cannot destroy it. It continues to exist even if all its human
members are dead. Unlike a natural person a company never dies. It is an entity with a perpetual
succession. Its existence is not affected by the death, lunacy and insolvency of its members.
3. Limited Liability
In a company limited by shares, the liability of members is limited to the unpaid value of
the shares. If the face value of a share in a company is Rs.10 and a member has already paid Rs.7
per share, he can be called upto to pay not more than Rs.3 per share during the lifetime of the
company.
In a company limited by guarantee, the liability of members is limited to such amount as
the members may undertake to contribute to the assets of the company in the event of its being
wound up.
4. Common seal
A company is a juristic person with a perpetual succession and a common seal. Since the
company has no physical existence, it must act through its agents and all such contracts entered
into by its agents must be under the seal of the company. The common seal acts as the official
signature of the company. Every company mush has a seal with its name engraved on it.
5. Transferability of shares
The capital of a company is divided into parts, called shares. These shares are, subject to
certain conditions, freely transferable so that no shareholder is permanently or necessarily wedded
to the company. When the joint stock companies were established, the great object was that the
shares should be capable of being easily transferred.
6. Capacity to sue and be sued
A company can sue and be sued in its corporate name. It may also inflict or suffer wrongs.
It can in fact do or have done to it most of the things which may be done by or to a human being.
On incorporation, a company acquires separate and independent legal personality. As a legal
person, it can sue and be sued in its name.
7. Separate Property
A company, as already observed, is a legal person distinct from its members. It is therefore
capable of owing, enjoying and disposing of property in its own name. Although, the capital and
assets of the company are contributed by its shareholders, they are not the privateand joint
owners of the property of the company. The property of the company is not the property of the
shareholders; it is the property of the company.
LIFTING THE CORPORATE VEIL
A company is a legal person distinct from its members. This principle may be referred to as
‘the veil of incorporation’. The effect of this principle is that there is a veil between the company
and its members i.e., the company has a corporate personality which is distinct from its members.
But over a period, the abuses of this corporate personality became apparent. Thus it became
necessary for the court to break through or lift the corporate veil or crack the shell of corporate
2
, personality and look at the persons behind the company who are the real beneficiaries of the
corporate fiction.
The corporate veil is lifted in the following cases;
Determination of the character
Where company is a mere cloak or sham
Where the company is acting as an agent of the shareholders
Protection of revenue
Statutory exception
1. Number of members below statutory minimum
Sec.45, if a company carries on business for more than 6 months after the number of its
members has been reduced below 7 in case of a public company or 2 in case of private company,
every person who knows this fact and is a member during the time that the company so carries on
business after the six months, is severally liable for the whole of the debts of the company
contracted during that time, i.e., after six months. It may be noted that in such a case the continuing
members (i.e., those who continue to be members after six months).
a. Can be sued and not those who have withdrawn from the membership;
b. Shall be liable only if they are aware of the fact of the member falling below the
statutory minimum.
2. Failure to refund application money
Sec.69 (5), the directors of a company are jointly and severally liable to repay the
application money with interest if the company fails to refund the application money of those
applicants who have not been allotted shares, within 130 days of the date of issue of the prospectus.
3. Misdescription of company’s name
Sec.147 (4) where an officer or agent of a company does any act or enters into a contract
without fully or properly mentioning the company's name and the address of its registered office,
he shall be personally liable. Thus where a bill of exchange, hundi or promissory note is signed
by an officer of a company or any other person on its behalf, without mentioning this fact that he
is signing on behalf of the company; he is personally liable to the holder of the instrument unless
the company has already paid the amount.
4. Fraudulent Trading
Sometimes in the course of the winding up of a company it may appear that some business
of the company has been carried on with intent to defraud creditors of the company, or any other
person or for any fraudulent purpose. In such a case, the court may declare that any persons who
were knowingly parties to the carrying on of the business in this way are personally liable without
any limitations of liability for all or any of the debts or other liabilities of the company as the court
may direct. The court may do so on the application of the official liquidator, or the liquidator or
any creditor or contributory of the company.
5. Holding and Subsidiary Companies
3
