The Nature of Legal Personality

The strategic advantage of the use of corporate form for those wishing to carry on business is inexhaustible. It obviously provides an important advantage of clothing or conferring the business with some sophistication and complexity. The foremost advantage of carrying on business through the use of corporate form include the concept of corporate personality which simply means that the company or corporation once formed or registered or incorporated ,the corporation or company becomes a legal entity separate and distinct from its members. The second or another important advantage is that the company enjoys limited liability. The concept of limited liability can be said to flow directly from the concept of corporate personality as already mentioned. The concept of legal or corporate personality therefore means that the company once incorporated becomes capable of enjoying rights and of being subject to duties

which are not the same as those enjoyed or borne by its members. The company is an artificial personality or person and has its own life, existence, duties, obligations and liability, etc. different, separate and distinct from those of its members or shareholders.

The importance of separate legal entity of a company was established in the case of Salomon v. Salomon & Co. Ltd., (1897) A.C22 .S sold his boot business to a newly formed company for £30,000. His wife, one daughter and four sons took up one share each of £1 each. S took 23000 shares of £ 1 each and £ 10000 debentures in the company. The debentures gave S a charge over 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 £ 6000 and its liabilities amounted to £ 17000 of which £ 10000 were 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. It was held that the company 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.

According to the Salomon [1] case, by incorporation, the company acquires separate legal Personality and the company is recognised as a legal person separate from its members. As a consequence, the company can make contracts, can sue and be sued, can own property, the company continues in existence despite changes of membership, and the shareholders can delegate management to directors. This principle may be referred to as “the veil of incorporation” The effect of this principle is that there is a fictional veil between the company and its members.

At times to prevent fraud or improper conduct on the part of the company, it is necessary to lift the corporate veil and look at the persons behind the company who are the real beneficiaries of the corporate fiction.

The corporate veil can be lifted under various circumstances such as for protection of revenue, prevention of fraud or improper conduct, determination of the character of a company whether it is enemy, where the company is a mere cloak or sham, when company is avoiding legal obligations, avoiding welfare legislation or neglecting in protecting public policies etc..

THE FORMATION OF COMPANY

Procedure of registration

I t should be ascertained from the Registrar of Companies, the State, in which the registered office of the company is to be situate after the name of the company is approved. The duly stamped documents that are to be filed with the Registrar along with necessary fees are as follows:

Memorandum of association

Articles of Association (where required)

The Agreement, if any entered into in case the company enters into with any individual

A list of Directors and their written consent as to act as directors and to take up qualification shares.

A declaration duly signed by an advocate of the Supreme Court or High Court or by any Director, manager or Secretary named in the Articles, stating that all necessary formalities regarding registration have been complied with.

The Registrar after being satisfied as to the compliance of the statutory requirements for the formation of the company, registers the filed documents and issues a “certificate of incorporation”. This certificate is the conclusive proof or evidence that all requirements have been satisfied with in respect of registration and that the validity of the certificate cannot be disputed on any grounds whatsoever.

Memorandum of Association

Memorandum of Association is a very fundamental and an important document for the incorporation of a company. It informs the perspective share holders, the purpose or the field in which their money is to be invested by the company. The outsiders dealing with the company shall know with certainty as to what the objects of the company are and as to whether the contractual relation into which they contemplate to enter with the company is within the objects of the company.

The memorandum should be printed, divided into paragraphs numbered consecutively and signed by 7(2 if it is a private company) subscribers. It should contain firstly the name of the company with a mention of “public limited” or “private limited” as the case may be. Secondly, the name of the State should be mentioned in which the registered office of the company is to be established. Thirdly, the objects of the company to be laid down classified into the main objects and the other objects. Fourthly, the liability clause should be clearly pointed out stating the nature of liability that the members incur. Lastly, it must inform the amount of nominal capital of the company and the number of value of shares into which it is divided.

The memorandum should be concluded with an “association clause” stating that the subscribers desire to form a company and agree to take shares in the capital of the company.

Alteration of Memorandum of Association

Alterations only to the extent necessary for simple and fair working of the company can be made. Such alterations should not be prejudicial to the members or creditors of the company and should not have the effect of increasing the liability of the members and the creditors.

Contents of the memorandum of association can be altered as under:

Change of name:

The change in the name of the company can be initiated by passing a special resolution in a General Meeting of the members of the company and after obtaining Central Government approval. An application is to be made to the Registrar of Companies for availability of new name. After passing a special resolution Central Government approval is to be obtained. Reasons for effecting a change in sufficient details are to be mentioned in the applicants for change of name.

No approval of Central Government is required where the only change in the name of the company is addition or deletion of the word Private because of conversion of a public company into a private company or vice versa. The Registrar shall issue a fresh certificate of incorporation with necessary alterations embodied therein in case of a changed name.

Effects of change of name: The change of name shall not affect any rights or obligations of the company or render defective any legal proceedings by or against it. Any legal proceedings which might have been continued or commenced by or against the company by its former name may be continued by or against the company in its new name. The alteration effected is only in the name and not in the identity of the company. The change of name does not affect the entity of the company or its continuity as the same entity with the same rights privileges and liabilities as before. A change of name does not bring into existence a new company. Nothing authorizes the company to commence a legal proceeding in its former name at a time when it had acquired its new name.

Change in the registered office of the company:

Change in the registered office of the company from one place to another, in the same city, in a particular State can be effected by an ordinary Board resolution. Intimation of change is to be filed with the Registrar within 30 days of the change.

Change in the registered office of the company from one city to another city in the same State, requires a special resolution and confirmation by the Regional Director under section 17 A inserted by Companies (Amendment) Act 2000, with effect from 01.03.2001. Confirmation of Regional Director is required only when registered office is changed by the company from the jurisdiction of one Registrar of Companies to the jurisdiction of another Registrar of Companies within the same state. Intimation of the change is to be filed the Registrar within 30 days of the change.

Change in the registered office of the company from one State to another State in India pursuant to Section 17 of the Act involves alteration of memorandum of association of the company. A special resolution is therefore required to alter the provisions of its memorandum, so as to change the place of its registered office from one State to another. Petition is to be filed with Company Law Board for confirmation of the change. The alteration of the provisions of memorandum relating to the change of the place of its registered office from one state to another shall not take effect unless it is confirmed by the Company Law Board on the Petition.

Companies (Amendment) Act, 2002 confers the power upon the Central Government instead of Company law Board to confirm alteration of Memorandum of Association of a company regarding change of registered office from one state to another.

Articles of Association

Articles of Association are the duties, rights and powers of the governing body as between themselves and the company at large and the rules and regulations according to which the business of the company is to be carried on.

Unlimited Companies, Companies limited by guarantee and Private companies limited by shares must have their own Articles. If a Public company does not have its own Articles, it may adopt Table A given in Schedule I to the Act.

Articles should be printed, divided into paragraphs an signed by each subscriber of the Memorandum in presence of at least one attesting witness.

Alteration of Articles

The Articles of Association may be changed by the company passing a special resolution in a general meeting and such power of the company to alter its Articles cannot be restricted by any contract. The alteration must not be in contravention of the provisions to the Act. It should not be an attempt to do something which the Act forbids or something which is illegal. The power of alteration of articles is subject to the conditions contained in the Memorandum of Association. It must be for the benefit of the company and must not in any way increase the liability of members or which results in expulsion of a member.

Pre-incorporation contracts

The contracts usually entered into by the promoters of a company to acquire some property or right for the company which is yet to be incorporated are called the pre-incorporation contracts. They are also called the preliminary contracts. Legally two consenting parties are required to a contract whereas the company before its incorporation, is a non-entity. The promoters cannot, therefore, act as an agent for a company which has not yet come into existence. Moreover the company is not liable for acts of promoters done before its incorporation and company is no way bound by a pre-incorporation contract even where it takes benefit of the same

Promoters.

Promoters play the key role in formation of a company. A promoter is the one who undertakes to form a company and does the necessary field work required to the successful incorporation and running of the company .The promoters are the first persons who conceive the idea of forming a company keeping in tune with a decided object and then achieving the same. After the incorporation of the company they hand over the management of the company to its directors who are often the promoters themselves, under a different name. It must be noted that the lawyers, accountants and secretaries who act in a professional capacity to assist in the formation of the company are not deemed to be promoters. They are only acting on behalf of their client, i.e the promoter, who wants to form the company.

The duties and liabilities of promoters

The duties and liabilities of a promoter are:

i) The promoter shares a fiduciary relationship to the company and must observe utmost good faith in any transaction entered on behalf of the company.

ii) The promoter is responsible to provide account for any profit made from any property acquired in the course of his duty to the company.

iii) The transaction between the promoter and the company can be rescinded by the company-except where after full disclosure by the promoter, such transaction is ratified on behalf of the company by either an independent board of directors (i.e, independent of the promoter) or a general meeting at which such promoter cannot vote.

iv) There is no limitation period for a company to sue a promoter under this section but the court may give relief from liability to he promoter if it deems it equitable to do so.

v) He is not entitled to remuneration either for services rendered as a promoter but may be paid in form of commission on shares sold, or by selling his own property to the company at profit upon disclosure of the same etc.

Different types of Companies

Companies can be classified into various kinds such as:

A) Unlimited companies-

Unlimited company does not have any limit on the liability of its members. These types of companies are rarely formed now. The disadvantage of an unlimited company is that its members are liable for all its trade debts without any limit. The advantage of an unlimited company is that it need not have any share capital and if it has a share capital then it may increase or reduce its capital without any restriction.

B) Guarantee Companies-

The liability of the members of a guarantee company is limited by a fixed sum as specified in the memorandum beyond which they cannot be called upon to contribute. A guarantee company need not have any share capital. If it has a share capital, it is subject to the same restriction as to reductions as the capital of a company limited by shares. It can also not purchase its own shares.

C) Private Companies-

A private company is the most suitable form of carrying family or small scale businesses as the minimum number of members required to form private company is only two. It is normally called a “close corporation” There is a restriction to the right to transfer its shares in order to preserve the private character of the company. The number of its members should not exceed 50. Moreover, it prohibits any invitation to the public to subscribe for any shares or debentures of the company.

D) Foreign Companies-

A foreign company means a company incorporated outside India but has place of business in India.

E) Government Companies

Any company in which not less than fifty one percent of the paid up share capital is held by the share by the Central Government or by any State Government or partly by Central Government and partly by State Government.

F) Holding Companies and Subsidiary Companies

A company is known as the holding company of another company if it has control over that other company. A company is known as a subsidiary of another company when control is exercised by the latter(holding company) over the former called a subsidiary company.

SHARES

A share in a company is the expression of a proprietary relationship owing to which the shareholder is the proportionate owner of the company but he does not own the company’s assets which belong to the company as a separate and independent legal entity.

Types of shares

Under Companies Act, 1956, a company can issue two types of shares such as:

(i) Preference shares

Preference shares , with reference to any company limited by shares are those which have a preferential right to be paid dividend during the lifetime of the company and also have a preferential right to the return of capital when the company goes into liquidation.

(ii) Equity shares

Equity shares , with reference to any company limited by shares are the ones which are not preference shares. When equity shares are issued at a discount or for consideration other than cash , they are called “sweat equity shares”

Application and allotment of shares

A prospective shareholder through an “application” offers a company to take its shares. The company accepts that offer by making “allotment” of shares. Allotment results in a binding contract between the company and the applicant. No allotment shall be made by a company until and unless the minimum amount stated in the prospectus has been subscribed for. Also the sum payable on application of such amount has been paid to and received by the company. The amount payable on application on each share shall not be less than 5% of the nominal amount of the share. The amount received from applicants for shares shall be deposited in a scheduled bank until the certificate to commence business has been obtained. Every company, intending to offer shares to the public for subscription by the issue of a prospectus, shall before such issue make an application to one or more recognised stock exchanges for permission for listing of its shares.

Calls on shares

A company may call on shares so as to demand on its shareholders to pay the whole or part of the balance remaining unpaid on each share. Such calls can be made anytime during the lifetime of the company or during its winding up. Before making a call, a resolution of the board of the directors must have been passed at a meeting of the board. Such calls must be for the benefit of the company ,made in an uniform basis, well in advance and in accordance with the Articles.

Transfer of shares

Shares being movable property are transferable in the manner prescribed in the Act and the Articles of the company. Such transfers are not registered by the company unless a proper transfer deed duly stamped and executed and signed by both the transferor and the transferee is produced before the company. Every transfer deed shall be in a prescribed form. It is then stamped and the date on which the instrument is presented is endorsed thereon by the Registrar of Companies. A forged transfer is a nullity. It does not pass any legal title to the transferee.

Surrender and Forfeiture of Shares

A shareholder surrenders his shares by voluntarily giving up the shares in favour of the company. However if the company accepts such shares then a possibility arises that the company ens up in purchasing its own shares. But such surrender is valid if the company has called for partly paid shares in order to forfeit them or if the surrendered shares are fully paid ones can be exchanged for new shares. Shares can thus be forfeited by the company if a shareholder is unable to pay the call on his shares which effects in cessation of both membership and liability of the person in the company.

Issue of shares at a premium or at a discount

A company issuing shares at a premium means giving the value of any advantage measurable in terms of money which is conferred on the company and which is over and above the cash payment on the shares issued by the company.

A company cannot issue shares at a discount unless a resolution has been passed by the company and sanction has been given by the Central Government. Moreover to give a discount the company must have worked for a minimum of one year.

SHARE CAPITAL

Prospectus

Prospectus is a written document issued by a company for inviting deposits or offers for subscription of shares or debentures from the public. Such prospectus has to be signed by the proposed directors of the company or by their agents authorised in writting and has to be delivered to the Registrar for registration before publishing it. Such publicationn should be made within 90 days of the date on which a copy thereof has been delevered for registration.

The object for registration of the prospectus is to keep an authenticated record of terms and conditions of issue of shares and also to point out the responsibilities of the persons as committed in it.

A prospectus issued bt a financial institution or bank for one or more issues of the shares specified in that prospectus is called a “shelf prospectus”. There is no requirement for a company filing a shelf prospectus with the Registrar to file prospectus afresh everytime it wants to offer shares to public within a period for which such shelf prospectus will remain valid.