INTRODUCTION
Companies are not a new concept; they have existed for a long time. However, the large partnerships that led to modern business companies first appeared in England during the commercial revolution. The term ‘company’ is derived from the Latin words ‘COM’ (meaning ‘with’ or ‘together’) and ‘PANIS’ (meaning ‘bread’)[1]. This signifies a group of people coming together to share meals. Historically, merchants would gather to discuss business over meals, leading to the formation of companies. In general, a company refers to a group of individuals who unite for a common purpose. Section 2(20) of the Companies Act 2013[2] Defines a company as an entity incorporated under this Act or any previous Company Law.
FEATURES
Corporate personality – The company is a separate legal entity. It’s an outstanding feature; from the incorporation under the Companies Act, the Company has been granted a corporate personality, which means it has its own name, assets, and official seal, making it separate from its founders. In the Salomon v. Salomon and Co Ltd[3] Case, Salomon had a shoe business. There was a substantial surplus of assets over liabilities in this business. He incorporated a company with his wife, 4 sons & one daughter called Saloman & Co.Ltd. His shoe business was transformed into a company. In return, he took 20,000 shares of £1 each, £10,000 worth of debentures. The company faced losses & went into liquidation within a year. Saloman was a secured creditor, so after paying off him, nothing would be left for unsecured creditors.[4].
Then, an unsecured creditor argued that, though the company was incorporated under the Act, the Company never had an independent existence; it was Saloman who was the Managing director, and the business was solely his own, which was conducted by him & him, so this is opposite to the meaning of Companies Act. However, the court held that Saloman & Company Limited is fulfilling all legal requirements. It is a Separate legal entity & distinct from who it was formed it.[5].
Company as an artificial person – A company is an artificial legal entity that comes into existence upon incorporation under the Act. Though it doesn’t have fundamental rights, unlike humans. Even a company can not be a citizen. Section 2(1)(f) of the Citizenship Act, 1995[6] Says that a citizen means a person who is not included under any organisation, company or group of individuals. In UBI v. Khadar International Construction and other [7], the Court gave a wider meaning of company where it says the company can sue another natural person, though it is an artificial person.
Company has nationality and residence– when a company will incorporate in company law of any nation, from there that company becomes company of that nation. That company needed to bonded by law of land. Company laws may differ from one nation to another nation. So companies recognize that nation, all over the world. It can also establish branches.
Limited liability- The company is a separate entity, and as such, it owns all profits, losses, and assets[8]. However, shareholders are only responsible extended up to how much they contributed to the company. During the registration of a company, when members exercise their choice with limited liability, it means member’s liability will become limited or restricted to the nominal value of shares taken by them. Even no member is born to contribute nothing more than the normal value of shares held by them.
Exception from limited liability- Under these conditions, the members of the company are liable for their acts.
- Section 2(92): An unlimited company is a company where members have no limit on their liability[9].
- Section 339(1): If a company is wound up and it is found that its business was carried out to defraud creditors or for fraudulent purposes, the Tribunal can hold directors, managers, or officers personally liable for the company’s debts without any limit[10].
- Section 35: If a prospectus contains misleading information and someone suffers a loss by investing based on it, the company, directors, promoters, and others responsible must compensate for the loss. If fraud is proven, they will be personally liable without limitation[11].
- Section 75(1): If a company fails to repay deposits and it is proven that they were accepted fraudulently, the officers responsible will be personally liable for the losses without any limit[12].
- Section 224(5): If an inspector’s report finds fraud in a company where someone has benefited unfairly, the Central Government can ask the Tribunal to recover the gains and hold the responsible persons personally liable without limitation[13].
Perpetual succession –A company continues to exist despite changes in ownership or the death of its members[14]. It simply means the company remains permanent despite any alterations or changes that happen to the company’s activities or affairs. So the company can wind up only by compulsory or voluntary. In T/9 Meat suppliers ( Guldford ) limited Re.[15] Case, all members of the company died in a bomb blast. So court declared that the company continues.
Separate property- the company has its property; it should not used for the personal benefit of members of the company. In Bacha F Guzdar vs Commissioner of Income-Tax[16], Bacha F. Guzdar was a shareholder in two tea companies, Patrakola Tea Company Ltd. and Bishnath Tea Company Ltd. He received dividends amounting to Rupees 2750. Guzdar filed a suit refusing to pay income tax accruing on the dividend income. He claimed exemption to the extent of 60% on the ground that the income received as dividends was from engaging in agricultural activities. The issue was Can dividend to income be exempt from tax on the ground that it was received as a result of agricultural activities?
The Supreme Court in Bacha F Guzdar v. Commissioner of Income Tax stated that Guzdar must demonstrate that the income derived falls within the definition of agricultural income. The Court rejected Guzdar’s contention, stating that for income to be considered agricultural, there must be a direct association with land as defined in the Income Tax Act. The court held that tax exemption to the extent of 60% is available only to companies and not shareholders. Shareholders are separate entities from the company and a share is a right to participate in the company’s affairs, while the company is a going concern. Therefore, shareholders cannot claim tax exemption on the ground that the company is engaged in agricultural activities[17].
Company can sue and be sued -A company, as an artificial person, has the legal capacity to sue and be sued. When a company can sue means when another person or a company harms the finances of a company and impacts the company’s activity[18].
CONCLUSION
The Companies Act, 2013 gives companies a distinct identity, shaping how they operate and are governed. One of the most important aspects is that a company exists as a separate legal entity, meaning it can own property, enter contracts, and be held accountable—completely independent of its founders or shareholders. Being an “artificial person,” a company has rights and responsibilities but doesn’t have fundamental human rights like citizenship. Its nationality and residence are based on where it is incorporated, and it must follow that country’s laws.
A major advantage for shareholders is limited liability, ensuring they are only responsible for the amount they invest. However, in cases of fraud or misconduct, the law holds individuals accountable. Perpetual succession means a company continues to exist even if its members change or pass away, ensuring stability and continuity. Additionally, a company can own property in its name, and its assets remain separate from those of its shareholders. It can also sue or be sued, reinforcing accountability in business dealings.
These features are essential for corporate governance, fostering trust, legal compliance, and ethical operations. They help companies build investor confidence, ensure financial stability, and create a foundation for responsible business growth in the modern economy.
Author(s) Name: Sowjanya.M (KLE Law college, Bengaluru)
References:
[1] Momchil Kyurkchiev, ‘Just learned that the word “company” is derived…’ (LinkedIn, 2024) https://www.linkedin.com/posts/momchilkyurkchiev_just-learned-that-the-word-company-is-derived-activity-7158861811281190912-1r8W accessed 11 April 2025
[2] Companies Act 2013, s 2(20)
[3] Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22
[4] Avtar Singh, Company Law, (17th Ed, EBC, 2018) , pg no.6
[5] Avtar Singh, Company Law, (17th Ed, EBC, 2018) , pg no.6
[6] Citizenship Act 1995, s 2(1)(f)
[7] UBI v. Khadar International Construction and other 2001 (5) SCC 22, 2001 AIR SCW 2045
[8] G.K. Kapoor and Sanjay Dhamija, Company Law and practice, ( 24th Ed, Taxmann, 2019) pg no. 14
[9] Companies Act 2013, s 2(92)
[10] Companies Act 2013, s 339(1)
[11] Companies Act 2013, s 35
[12] Companies Act 2013, s 75(1)
[13] Companies Act 2013, s 224 (5)
[14] G.K. Kapoor and Sanjay Dhamija, Company Law and practice, ( 24th Ed, Taxmann, 2019) pg no.16
[15]K/9 Meat Suppliers (Guildford) Ltd Re [1966] 1 WLR 1112
[16] Bacha F Guzdar v Commissioner of Income Tax (1952)54BOMLR595
[17] Bacha F Guzdar v Commissioner of Income Tax (1952)54 BOMLR 595 (Indian Kanoon) https://indiankanoon.org/doc/1873699/ accessed 11 April 2025
[18] Awdhesh Kumar, ‘Meaning of “Capacity to sue and be sued” of a company’ (Tilak Marg, 28 March 2015) https://tilakmarg.com/notes/meaning-of-capacity-to-sue-and-be-sued-of-a-company/ accessed 11 April 2025
