The Characteristics of a Company

Both cases are named here without citations and without facts, and that is deliberate. No law report carrying either could be opened from where this book was written, and the house rule is that a citation is attached only to a report that has been read. See authorities/cases.json. In an Indian answer the authority is section 9, and the cases are named as the decisions that established the propositions.

2. Perpetual succession

Section 9 gives the company perpetual succession. Members die, sell out, go bankrupt or disappear; the company does not notice. It ends only when it is wound up or its name is struck off, both of which are formal legal processes with their own chapters.

Section 3A shows what happens when membership falls too low, and it is the closest the Act comes to an exception. If the number of members falls below seven in a public company or below two in a private company, and the company carries on business for more than six months in that state, then every member during that time who is aware of it becomes severally liable for the whole of the debts contracted during that period. Note carefully what that does and does not do: the company does not cease to exist, and its perpetual succession is untouched. What is lost is the members' limited liability.

3. Limited liability

This is not automatic, and saying that it is loses marks. A company may be limited by shares, limited by guarantee, or unlimited, under section 3(2), and only the first two have limited liability at all.

• In a company limited by shares, section 2(22), the liability is limited to the amount, if any, unpaid on the shares held by the member. A member whose shares are fully paid can be called on for nothing.
• In a company limited by guarantee, section 2(21), the liability is limited to the amount each member has undertaken by the memorandum to contribute to the assets in the event of winding up. Notice that this money is payable only on winding up, which is what makes guarantee companies suitable for clubs and charities that do not want capital from their members while they are running.
• In an unlimited company there is no limit at all.

4. Transferability of shares

Section 44 is short and does a great deal of work:

The shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company.

Three consequences. First, a share is movable property, so it moves like goods rather than like land. Second, it is transferable, which is what lets an investor exit without the company being disturbed. Third, transfer is in the manner provided by the articles, which is how a private company restricts transfer while remaining a company, under section 2(68).

Section 45 adds that every share in a company having a share capital must be distinguished by its distinctive number, unless it is held in a depository, that is, in electronic form. In practice almost all listed shares are now held that way, so the proviso has swallowed a good deal of the rule.

5. Capacity to contract, to own and to sue

Section 9 gives the company power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name. It does all of this through human beings, because it has no hands, and section 22 is where the Act says how.

Under section 22(1), a bill of exchange, hundi or promissory note is deemed to have been made, accepted, drawn or endorsed on behalf of the company if it is done in the name of, or on behalf of, or on account of the company by any person acting under its authority, express or implied.

Under section 22(2), the company may by writing under its common seal, if any, authorise a person as its attorney to execute deeds on its behalf, in or outside India. The proviso is the modern part: where the company does not have a common seal, the authorisation is made by two directors, or by a director and the Company Secretary where one has been appointed.

The common seal: the characteristic that was removed

Read the words of section 22(2) again. "Under its common seal, if any." That phrase was substituted by the Companies (Amendment) Act 2015. The same Act omitted the words "and a common seal" from section 9, with effect from 29 May 2015, and made the same change in section 46(1) so that a share certificate is one "issued under the common seal, if any, of the company".

So a company may keep a seal and many do, but a company without one is a perfectly ordinary company, and everything a seal used to be required for can now be done by two directors, or a director and the Company Secretary.

Say this in an answer and you will stand out, because the old list of characteristics ran "separate legal entity, perpetual succession, limited liability, common seal, transferability of shares" and that fourth item has been wrong since 2015.

A worked example

Mrs Karve holds ninety-eight of the hundred shares of Kolhapur Looms Private Limited, is its managing director, and draws a salary from it. The company owns a weaving shed, its looms, and a lorry.

Who owns the shed? The company, not Mrs Karve. Under section 9 the members are a body corporate with power to acquire, hold and dispose of property, and what she owns is ninety-eight shares, which are an interest in the company and not a slice of the shed. If she insures the shed in her own name she insures property that is not hers.

She dies. The company does not. Perpetual succession under section 9 means her shares pass to her legal representative and the company carries on without a pause, keeping its name, its contracts and its licences. Had this been a partnership, her death would have affected the firm itself.

Only one member left. Suppose her executor is the only member for eight months. The company continues to exist, but section 3A provides that where the number of members falls below two in a private company and the business is carried on for more than six months while it is so reduced, every person who is a member during that time and knows of it is severally liable for the whole of the debts contracted after those six months. So the separate personality survives; the limited liability does not.

Her salary. She is both the controlling member and an employee, and the two relationships are separate because the company is a different person from her. Her employment contract is with the company.

Her liability for a debt. The company owes a yarn supplier four lakh rupees and cannot pay. Her shares are fully paid, so under section 2(22) nothing further can be required of her, and the supplier has no claim against her personally. Had the company been limited by guarantee under section 2(21), she would have been liable for the amount she undertook by the memorandum to contribute in the event of winding up, and no more; had it been an unlimited company under section 3(2), there would have been no limit at all.

Selling out. She agrees to transfer sixty shares to her nephew. Under section 44 the shares are movable property transferable in the manner provided by the articles, and this being a private company the articles will restrict the transfer, so the transfer takes effect only as the articles allow. The shares she keeps carry distinctive numbers under section 45, unless they are held in a depository.

Signing for the company. The lorry is bought on a promissory note signed "for and on behalf of Kolhapur Looms Private Limited" by Mrs Karve as managing director. Under section 22(1) the note is deemed to have been made on behalf of the company, so the company is liable on it and she is not.

And the seal. The company has never had a common seal. That does not matter. Section 22(2) says "under its common seal, if any", the words having been substituted by the Companies (Amendment) Act, 2015, and a deed may instead be executed by two directors, or by a director and the company secretary where one is appointed. A student who lists the common seal among the characteristics of a company is describing the law as it stood before 2015.

Distinctions that carry marks

What this does NOT mean

It does not mean a company can do anything a human can. It cannot marry, cannot be imprisoned, and cannot take an oath. Where the Act punishes an offence with imprisonment, the punishment falls on the officer in default, not on the company.

It does not mean limited liability protects a member who behaves badly. Sections 3A, 7(6) and 339 all make individuals personally liable in defined circumstances, and they are the subject of the next chapter.

It does not mean a share gives you a share of the assets. It gives you a bundle of rights against the company: to vote, to dividends when declared, and to a share in the surplus on winding up after everybody else is paid.

Quick revision

• Source of nearly all of them: section 9.
• Separate personality: the company owns its property; a member does not, so he cannot insure it (Macaura). A member may also be an employee (Lee's Air Farming).
• Perpetual succession: section 9. Section 3A is the exception that removes limited liability, not existence, after six months below seven or two members.
• Limited liability: section 3(2) with sections 2(21) and 2(22). Not automatic; an unlimited company has none.
• Transferability: section 44, shares are movable property transferable as the articles provide. Section 45, distinctive numbers, except in a depository.
• Contracting: section 22. No seal needed; two directors, or a director and the Company Secretary.
• The common seal is NOT a characteristic since 29 May 2015.

Test yourself

1. List the characteristics of a company and give the section for each. Separate legal personality, perpetual succession, and the power to hold property, contract and sue, all from section 9; limited liability from section 3(2) with sections 2(21) and 2(22); transferability from section 44.

2. Ravi owns all the shares in a company that owns a godown. He insures the godown in his own name. It burns down. Can he claim? No. The godown belongs to the company under section 9, and Ravi owns shares, not the godown, so he has no insurable interest in it. This is the point for which Macaura is cited.

3. A private company's membership falls to one, and it trades for eight months. What follows? Section 3A applies. Every person who was a member during the period after the first six months, and who was aware that the company was carrying on business with fewer than two members, becomes severally liable for the whole of the debts contracted during that time. The company continues to exist.

4. Does every company have a common seal? No. The words "and a common seal" were omitted from section 9 by the Companies (Amendment) Act 2015 with effect from 29 May 2015. Sections 22(2) and 46(1) now read "common seal, if any", and the proviso to section 22(2) lets two directors, or a director and the Company Secretary, authorise an attorney where there is no seal.

5. Distinguish a share from a debenture. A shareholder is a member and an owner, gets a dividend only out of profits, votes under section 47, and is paid last on winding up. A debenture holder is a creditor, gets interest whether or not there are profits, does not vote, and is paid before members. Both are movable property under section 44.

6. Are shares freely transferable in every company? No. Section 44 makes them transferable in the manner provided by the articles, and section 2(68) requires a private company's articles to restrict the right to transfer its shares.