B.A. LL.B. (Five Years) Sem 6 Company Law 2014 Dec Question Paper with Solutions

For full marks, cover: Part A, defining a company: the statutory definition (section 2(20) of the Companies Act 2013), why it says little, and the judicial idea of an artificial person (Dartmouth College, Salomon, Tata Engineering); Part B, the features that follow from incorporation (section 9): separate person, perpetual succession, limited liability, transferable shares, its own property, capacity to sue, the seal now optional, management by a Board; Part C, the advantages, set against the sole trader and the partnership firm, each explained with an authority where one fits (Lee, Bacha F. Guzdar); Part D, the costs and limits (formalities, disclosure, lifting the veil, Macaura); a table.

Part A: defining a company

The statutory definition. Section 2(20) of the Companies Act 2013 says that "company" means a company incorporated under this Act or under any previous company law. The definition tells us how a company is born, by registration, but not what it is.

So a company may be described as an association of persons registered under the Companies Act, which becomes a body corporate distinct from its members. It has perpetual succession, and its capital is usually divided into transferable shares held with limited liability.

Part B: the features that follow from incorporation

Section 9 provides that, from the date of incorporation, the subscribers and all who later become members form a body corporate. It can hold property, contract and sue and be sued in its own name. From this flow the features:

1. A separate legal person, distinct from its members.
2. Perpetual succession: it continues whatever happens to its members.
3. Limited liability: in a company limited by shares, members are liable only for the amount unpaid on their shares (section 2(22)).
4. Transferable shares: shares are movable property, transferable as the articles provide (section 44).
5. Its own property, owned by the company itself and not by the members.
6. Capacity to sue and be sued in its own name.

3. Perpetual succession. A sole proprietorship ends with the owner's death, and a firm may be dissolved by a partner's death or insolvency. A company carries on regardless. Its contracts, licences and goodwill survive changes of membership.

4. Its own property, safe from members' affairs. The company owns its assets. In Bacha F. Guzdar v. Commissioner of Income-Tax, Bombay, AIR 1955 SC 74, the Supreme Court held that a shareholder has no interest in the company's assets, only a right to share in profits when distributed. So a member's personal creditors cannot seize the company's property.

5. Transferable shares. A partner cannot bring in a new partner without the others' consent. A shareholder may sell his shares, and the business is not disturbed. Shares of listed companies can be traded on a stock exchange.

6. Capital on a large scale. A sole trader is limited to his own money and loans; a partnership to a limited number of partners. A public company may raise capital from the public through a prospectus, from any number of investors.

7. Borrowing power. A company can issue debentures and give a floating charge over its stock and book debts while still trading with them. It can raise long-term loans that a sole trader could not.

1. Formality and cost. Incorporation needs registration, and the company must keep accounts, hold meetings and file returns.
2. Disclosure. Much of its affairs becomes public.
3. Separateness cuts both ways. In Macaura v. Northern Assurance Co. Ltd., [1925] AC 619, a man who held all the shares of a timber company had insured the timber in his own name. When it burned, he could not recover: the timber was the company's, not his.
4. The veil may be lifted. Where the company is used for fraud or to evade the law, the court will look through it to the persons behind.

Company, firm and sole trader compared