HSNC University, Mumbai

D.M. Harish School of Law

Assignment for
Internal Continuous Assessment- 2024 -25

Subject: Company Law

Topic: Essential Characteristics of

Corporate Entities: An in-depth Analysis

Submitted by: Het Ashok Doshi

Program: LL. B.
Roll No.: DMSYLLB002
Semester: IV
Submitted to: Mr Bhanu Advani

Signature of the Faculty

 Essential Characteristics of Corporate Entities: An in-depth Analysis
Table of Contents

Sr. No. Topic Pg. No.

I. Introduction 3

II. Definition 3

III. Essential Characteristics of Corporate Entities

1. Incorporated Association 4
2. Separate Legal Personality 4
3. Artificial Person 4
4. Perpetual Succession 5
5. Limited Liability 5
6. Separate Property 6
7. Transferability of Shares 6
8. Capacity to Sue and Be Sued 6
9. Common Seal 7

IV. Case Laws

1) Saloman v. Saloman &Co. Ltd. 7
2) Bacha F. Guzdar v. CIT, Bombay 8

V. Conclusion 8

VI. Reference 8

VII. Plagiarism Report 9

2
 I. Introduction

A corporate entity is a business structure created specifically to perform tasks such as

conducting business or owning property. Although it may include a director, officer,
shareholder, or an individual, it is a legal entity in its own right.
Businesses around the world use corporate structures.

In India, Company Law has evolved through the years according to the changing needs
of the society and way of doing business. Major developments in the company law
began with the East India Company coming to India as traders and the changes in the
scenario in Pre and Post- Independence. The present codified form of Company Law is
based on the English Common Law.

At the end of 1950, the Government of Independent India constituted a committee

chaired by H.C. Bhaba to look at the overall issue of revising the Companies Act of
1913. The Companies Act of 19561 was passed largely on the suggestions of the Bhaba
Committee. The Amendments Acts to this principal Act introduced major changes over
the years.

Under the direction of Dr. J. J. Irani, a committee was established tasked with advising
the government on the proposed adjustments to The Companies Act, 1956, in an effort
to create a more straightforward compact law that can adapt to developments in both
the domestic and international scenario. The committee report headed by Dr. J. J. Irani
served as the foundation for the Companies Act of 20132.

In the present times Companies are created under the 2013 Act. The said act has also
gone through amendments.

II. Definition
Company means a company incorporated under this Act or under any previous
Company Law.3

Under common law, a company is a legal entity that exists independently of its
members and is capable of surviving past their deaths. It is a legal device to attain
socio-economic goals.

A company is a person, artificial, invisible, intangible, and existing only in the contemplation of
the law. Being a mere creature of law, it possesses only those properties which the character of
its creation of its creation confers upon it either expressly or as incidental to its very existence. 4

Generally speaking, a company refers to a group of individuals with similar goals who
of their own free will come together to conduct lawful business. A company is a legal
entity and an artificial person created under the law which has a persona distinct from
its members.
1
Act No. 1 of 1956, Acts of Parliament, 1956, (India).
2
Act No. 18 of 2013, Acts of Parliament, 2013, (India).
3
The Companies Act, 2013, § 2(20), No. 18, Acts of Parliament, 2013 (India).
4
Definition of Company by Chief Justice Marshall of USA

3
III. Essential Characteristics Of A Company

A company being a creation of law is a body corporate. It is not a human being but being an
artificial juridical person enjoys many rights, powers but is also bound by duties and
obligations, laid down by the law.

Discussed below are the essential characteristics of a Company:-

1) Incorporated Association

For a company which has been incorporated under the Companies Act, registration is
mandatory. A company may be established for any legal purpose. The minimum number of
members for the purpose of incorporation of a Public Company is 7 whereas the minimum
required number of members for incorporation of a Private Company is 2. The Companies
Act of 2013 authorizes the formation of a one-person company.5

2) Corporate Personality / Separate Legal Entity

A company constituted under the Companies Act obtains the distinction of being a separate
legal entity from the individuals who formed it. It has its own name and performs functions
under it. A company is capable of owning property and being the owner of the property it has
rights to enjoy and dispose the same. The property possessed by a company is distinct from
its members' personal holdings. It has the ability to incur debts, borrow money, sue or be
sued, hire people, maintain a bank account, and enters into contracts in the same way as an
individual (natural person) would.

Incorporation refers to the act of forming a corporation as a juridical person. A juristic person
has rights and obligations under the law and is treated accordingly. A company is like a
natural person, except that the activities are carried out by persons appointed in accordance
with the law.

The principle of separate legal entity was explained and emphasized in the famous case of
Saloman v. Saloman & Co. Ltd.6

3) Artificial Person

A company is a legal entity that functions like an individual. It is not a human being, yet it
operates through humans. As these persons are the sole representatives of the Company, their
duty, within the scope of the authority vested in them, is to act in the name and on behalf of
the Company and bind the Company, not themselves. It is regarded a legal person capable of
entering into contracts, owning property in its own name, and suing and being sued by others.
It is referred to as an artificial person since it is invisible and intangible, exists only in the
contemplation of law, and is capable of exercising rights and being subject to duties.

5
The Companies Act, 2013, § 3(1), No. 18, Acts of Parliament, 2013, (India).
6
[1896] UKHL 1, [1897] AC 22

4
 4) Perpetual Succession

Since a Company is not a human being but an artificial person it cannot be incapacitated by
illness. A company will never die a natural death but winding up as of a company is done as
prescribed by relevant laws. It is very clear that a company has a separate legal personality
from those who form it; it will not be affected by the death or departure of those persons. The
company will remain unchanged even if all of its members change.
Because of perpetual succession, the company's members may occasionally change, but this
has no bearing on its ability to continue operating. In simple words, members may come and
go but the company can go on forever.

How does the membership in a company change?

 When a shareholder sells or transfers his shares in the company to another person,
there will be a change in the membership of a company as a new shareholder is born.
 When a shareholder dies, his shares will be transferred to his legal representatives,
thus bringing a change in the membership of a company.
 When a member no longer continues to be a member under some provisions of the
Companies Act, there will be a change in the members of a company.

To conclude, perpetual succession is that ability of a company to continue to exist when the
old members go out and the new come in.

5) Limited Liability
One of the main advantages of conducting business through a company is that the
members of the company have limited liability i.e. they are held accountable only to
contribute towards payment of debts to a limited extent. The company is a separate
legal entity and owns its own assets and therefore is responsible for its liabilities too.
Types of Company based on limited liability are of two types:

 Company limited by shares

 Company limited by guarantee

In a company limited by guarantee, the liability of each member shall be determined by

the guarantee amount, i.e. he will be held liable to contribute up to the amount
guaranteed by him and that too only when the company goes into liquidation. .
In a company limited by shares, the shareholder’s liability is only to the extent of the
nominal value of the shares held by them.
Exception to limited liability is that in an unlimited company, the liability of the
members is unlimited.

5
 6) Separate Property

Since a company is a separate legal entity from the members forming it, it is capable of owning
property in its own name. As the company owns the property it has the capability to enjoy and dispose
the same. The company is the real person in which all its property is vested and by which it is
controlled, managed and disposed of. No member can claim to be the owner of the company’s
property during its existence of at the time of winding up. A member does not even have an insurable
interest in the property of the company.

In India, the principle of separate property was best laid down by the Supreme Court in
Bacha F. Gazdar v. CIT, Bombay.7

7) Transferability of Shares

The capital of the company is divided into parts called shares. The shares held by the members of the
company are movable property and can be transferred from one person to another as provided by the
Articles of Association (AOA).8

In public company, the shares are freely transferable. The right to transfer shares is statutory and
cannot be taken away by any provisions in the articles but they have to be transferred in the manner
specified in the AOA.

In case of a private company, the AOA shall restrict the right of a member to transfer shares.

Shares are now easily transferable through Electronic mode through Depository Participants in the
dematerialized form instead of physical form.

8) Capacity to Sue and Be Sued

A company is a corporate body, thus it can sue or be sued in its own name. A company can bring legal
action against a person or another company i.e. sues them. All legal proceedings initiated by a
company must be instituted in its own name.

When does the right of a company to sue arise?

The right of a company to sue arises when it suffers any loss in person or property. When the name or
reputation of the company is tarnished it has the right to sue for defamation (libel or slander).

A company, which is a distinct person from its members, can even sue its members.

A company can be sued for any wrong doing but the company is not liable for any wrongdoing of any
of its officers acting in personal capacity.

9) Common Seal
7
A.I.R. 1955 S.C. 74
8
The Companies Act, 2013, § 44, No. 18, Acts of Parliament, 2013, (India).

6
A company being an artificial person and having no body of its own is represented by natural
persons called the directors. Since the company cannot sign the documents on its own.
Therefore the law has provided for the use of a common seal, with the name of the company
engraved on it as a substitute for signature.

Any document bearing the seal of the company becomes binding on the company. A
company may have its own regulations as per the AOA of affixing the seal.

In case the company does not have a common seal, the authorization shall be made by 2
directors or by a Director and a Company Secretary, whenever a company has appointed a
company secretary.

IV. Case Laws

1) Saloman V. Saloman & Co. Ltd. [1896] UKHL 1, [1897] AC 22

Facts

Aaron Saloman was a prosperous leather merchant. He converted his sole proprietorship into a limited
company, named Saloman & Co. Ltd. The company formed consisted of Saloman himself, his wife,
and 5 of his children as shareholders, all of whom subscribed to 1 share each so that actual cash paid
as capital was £ 7.
Saloman sold his business to the company formed by him for the sum of £ 38,782. The company’s
nominal capital was £ 40,000 in £ 1 shares. In part payment of the purchase money for the business
sold to the company, debentures of the amount of £ 10,000 secured by a floating charge on the assets
of the company were issued to Saloman, who also applied for and received an allotment of 20,000 £ 1
fully paid shares. The remaining £ 8,782 was paid by Saloman in cash. Saloman was the MD and 2 of
his sons were other directors.

Soon the company ran into difficulties and the debenture holders appointed a receiver and the
company went into liquidation. The total assets of the company were £ 6,000, its liabilities were
£ 10,000 secured by debentures, £ 8,000 owing to unsecured creditors. The unsecured creditors
claimed priority over debenture holder on the ground that the company and Saloman were one and the
same.

Issues

1) Whether Salomon Co. Ltd was a legally incorporated company?

2) Whether Mr. Salomon was personally liable to pay the debts of the company?

Decision

The House of Lords, unanimously held that, company had been validly incorporated, since the Act
only required 7 members holding at least 1 share each. It held that the existence of the company is
quite independent and distinct from its members and that the assets of the company must be utilized in
payment of the payment of the debentures first in priority to unsecured creditors.

2) Bacha F. Guzdar v. The Commissioner Income Tax, Bombay,

7
 A.I.R. 1955 S.C. 749

This case dealt with the concept of Income Tax provisions applicable on the company
engaged in the agricultural sector. The case highlighted that company and shareholder are
two separate legal entities and the same provisions of Income Tax are not applicable to the
shareholder.

The Supreme Court held that, though the income of a tea company is entitled to be exempted
from income-tax up to 60 % being partly agricultural, the same income when received by a
shareholder in the form of dividend cannot be regarded as agricultural income for the
assessment of income-tax.

It was also observed by the Apex court that a shareholder does not, as is erroneously believed
by some people, become the part owner of the company or its property; he is only given
certain rights by law.

The court refused to identify the shareholders with the company and reiterated the distinct
personality of the company.

V. Conclusion

A company is an association of persons (no longer valid as the Companies Act, 2013
permits establishment of a one person company) who contribute money worth to a common
stock and employed in some trade or business and who share the profits and loss arising. The
persons who form the company are called its members. The proportion of capital to which
each member is entitled is his share. The shares are always transferable although the right of
transfer is restricted.

VI. Reference

1) https://www.taxmann.com
2) https://egyankosh.ac.in/bitstream/123456789/67937/1/Unit-1.pdf
3) Lesson 1 - Company Law - Introduction to Company, ICSI.

9
Bacha F. Gazdar v. The Commissioner Income Tax, Bombay: https://main.sci.gov.in/jonew/judis/877.pdf

8
9