INTRODUCTION
The word “company” stems from the Latin word (“com”, which means “with” or “together”; “panis,” which means “bread”)[1]. According to Section 2(20) of the Companies Act 2013, a company is any association of persons incorporated under the current or prior Companies Act[2]. A company is a legal person constituted by legislation with a “separate legal identity” and “perpetual succession.” A company under common law means a ‘legal person’ or ‘legal entity’ distinct from its members with the ability to live beyond its members’ lifetimes[3]. In this blog, we will look at the concept of perpetual succession, an integral component of a company’s characteristics. We will also look at cases where courts have recognised a company’s perpetual succession and made a decision keeping it in mind.
WHAT EXACTLY IS PERPETUAL SUCCESSION?
Perpetual succession is a legal notion that relates to an enterprise’s permanent or continuing operation despite alterations to management, leadership, or personnel. Simply said, the firm keeps functioning and operating even when essential persons, such as investors or executives, leave due to unforeseeable events such as death, resignation, or the selling of rights. According to the Companies Act[4], ‘Members may join and leave, but the corporation may carry on forever.’ The bankruptcy of a shareholder, or even all of the shareholders of an entity, does not terminate the enterprise’s existence. At any time, the shareholders can leave, but the corporation remains the same institution with the same rights, privileges, assets, and belongings. The business only comes to an end when it is wound up (closed down) following the rules of the Companies Act of 2013. Certain corporations have been in operation for decades; their shareholders have changed, and their promoters passed away, but the organisation still exists. A few examples are listed below:
- Dabur, an Indian global conglomerate consumer products corporation, began its operation in 1884 and has been in existence ever since; an excellent example of perpetual succession.
- The East India Company, which was created in 1600 and operated for nearly 250 years, can be termed a well-known example of this concept.
- Another example is the Aditya Birla Group, which was established in 1857 and has been in business for nearly 170 years.
- Google can be another example since the company has continued functioning long after the original owners resigned from management positions.
ADVANTAGES OF PERPETUAL SUCCESSION
- Perpetual succession preserves the company’s continued existence, which implies it may continue to exist even when its creators or stockholders die. It makes it simpler for companies to attract funding since lenders are more inclined to put money into a firm that will be there for an extensive period.
- It guarantees that the enterprise can continue functioning efficiently even if the founders, executives, or shareholders change. This consistency gives investors, workers, and remaining shareholders comfort.
- Organisations with perpetual succession can participate in long-term strategic thinking and formulation with the confidence that the business will last. It allows for improved planning and engagement.
- The firm’s ownership may get readily transferred, and it is not dependent on the lives of its leaders or shareholders, enabling the enterprise to continue functioning no matter who controls it. Stocks are readily purchased and traded in, thereby making it simple for shareholders to join or quit the enterprise. This flexibility in transferring ownership encourages capitalisation of the market and liquidity.
- Organisations might evolve and conform to circumstantial alterations, shifts in marketplace dynamics, and technological advancement while retaining their statutory and operational identities.
- Organisations can implement succession planning to ensure skilled personnel can advance into critical roles without affecting business. It is especially vital for family-run enterprises and other closely owned entities.
- It frequently includes limited liability for founders or shareholders. It shields their possessions from the company’s creditors and commitments, lowering the risk of financial loss.
A FEW CASES OF PERPETUAL SUCCESSION
In Re Noel Tedman Holdings Pty Ltd,[5] the only shareholders in the firm were a couple. They were also directors of the corporation. They were killed in an accident, leaving behind a baby. The firm continued to operate after they died. The main issue was that because the members and executives had passed away, the shares could not be passed to the baby per the deceased’s will. The Court, therefore, permitted the deceased’s agent to choose the firm’s directors, who might enable the ownership interest to be transferred to the kid.
Even when all of the shareholders of a private corporation fell victim to a bomb during the war, the firm survived. A bomb cannot destroy the company. It was held in the case of Meat Suppliers (Guildford) Ltd[6] that the lawful heirs of the dead owners would become members under the aforementioned conditions.
In Gopalpur Tea Co. Ltd. v. Penhok Tea Co, Ltd.[7], the Court noted that even though an entity’s entire undertaking got acquired under an Act purporting to eliminate all rights to bring an action against the firm, neither the corporation nor anybody’s claim against it got extinguished. Until and unless an enterprise is formally dissolved, it will have perpetual succession, and its continued operation will not be influenced by its shareholders’ financial situation or life.
In Punjab National Bank v. Lakshmi Industrial & Trading Co (P) Ltd[8], an enterprise’s credit guarantors could not seek relief from the liability just because the company’s administration, including the managing director, had changed altogether. These alterations were impactless on the firm’s operations or commercial or contractual agreements. In this particular instance, the Allahabad High Court ruled that perpetual succession implies that the members of an enterprise may change from time to time, but this does not impact the business’s continuation.
IMPACT OF PERPETUAL SUCCESSION ON EMPLOYEES:
- Workers may have more professional advancement prospects and development in a stable corporation. Long-term planning might involve the internal development of skills and promotion.
- Employee Benefits: Organisations with perpetual succession are more inclined to provide attractive employment perks, such as pension schemes and other long-term perks since they value talent retention.
- Job Security: Perpetual Succession frequently correlates to increased job security. They may be sure the company will continue to operate, alleviating fears about unexpected cutbacks or the company winding up.
- Perpetual succession can contribute to the development of a well-founded and long-lasting organisational culture. Workers may sense a closer connection to the principles and objectives of the company.
CONCLUSION
As a result, we can conclude that perpetual succession is a distinguishing feature of corporations, providing them with a legal personality distinct from their shareholders and allowing them to continue functioning even after alterations to ownership or management. This attribute has significant consequences for the firms’ durability, stability, and administration, making it a critical aspect of their continued prosperity.
Authors Name: Aanchal Agarwal (New Law College, Bharati VidyaPeeth University, Pune)
Reference(s):
[1] Pratibha Bansal, ‘Overview of Features, Types and Incorporation of a Company under the Companies Act 2013’ (iPleaders, 11 June 2019) <https://blog.ipleaders.in/overview-companies-companies-act-2013/> accessed 2 January 2024
[2]The Companies Act 2013, s 2(20)
[3]Bansal(n 1)
[4]The Companies Act 2013
[5]In Re Noel Tedman Holdings (Civil Engineering) Pty Ltd [1967] QSC QD R 561
[6]K/9 Meat Suppliers (Guildford) Ltd Re [1966] 1 WLR 1112
[7]Gopalpur Tea Co Ltd v Penhok Tea Co Ltd [1982] 52 Comp Out 238
[8]Punjab National Bank v Lakshmi Industrial & Trading Co (P) Ltd ALL 9-41/2000
