QUESTION: “A company is an artificial person, created by law with a perpetual succession and a common seal.” Explain this statement.
Answer:
L H Haney has defined the company as an artificial person, created by the law with a perpetual succession and the common seal.
This definition of company given by Prof. Haney is the most scientific and appropriate one.
Company as an artificial person: Company is an artificial person created by the law. It is called an ‘artificial person’ because its birth is not a natural birth. It is invisible, intangible and immortal artificial person that has an identity only in the eyes of the law. It has no body, no soul and suffers no pain and enjoy no personally appearance in a court of the law.
It cannot get married or become a professional like a doctor or a lawyer. But it cannot be treated as a fictional person’ or a ‘fictitious entity’ because it really does exist. Like a natural person, a company can buy and sell properties, make agreements or enter into contracts and employ people on its payroll. It can also be penalised if it does not abide by law. In other words, it can be said that a company, though lifeless, enjoys the privileges of a living person.
Created by law: A company is established by law, and can exist till such time as it is recognised by law. Under the Companies Act, it is necessary for a company that is formed to be registered, i.e., it needs to be incorporated. Any association or institution which is established with the objective of earning a profit, and which has more than 10 members in the case of banking and 20 members in case of any other business activity needs, by law, to be registered.
A legally established company has a corporate personality, conducts transactions in its own name, has its own seal, and its assets are separate from those of its members. Therefore, it can own property, incur debts, borrow money, have bank accounts, hire people, enter into different contracts, and sue or be sued in the same manner as individuals. Its members are its owners, but they can also be its creditors. Shareholders cannot be liable for the company’s actions even if they hold nearly all of the share capital. Shareholders are not the company’s agents and therefore cannot bind the company by their actions.
The company does not hold its assets as an agent or fiduciary for its members, and they cannot exercise their rights or be sued for accountability. Therefore, ‘incorporation’ is the act of establishing a legal entity as a juristic person. Juristic persons are defined by law; they have obligations and other actions under the law. In other words, a company is like a natural person but can only carry out its actions within the law through a designated person.
Perpetual Succession: A company can end by winding up, and other factors like the death of a person or retirement will not affect the company’s existence. Perpetual Succession means that the membership of the company may change from time to time, but this does not affect its continuity. A company’s membership may change because a shareholder has sold/transferred his shares to another person, or his shares are transferred to his legal representative after his death, or because he has lost his ceases to be a member under some other provisions of the Companies Act.
Thus, perpetual succession refers to the ability of a company to maintain its existence through the succession of new individuals who step into the shoes of those who cease to be members of the company. An example could be that, during the war, all members of a private company were bombed at a shareholder’s meeting, but the company survived. All this will not affect the company’s existence.
Common Seal: A company is an artificial person and, as such, it cannot put its signature on documents. That is why it is mandatory under law that every company must have a common seal with its name engraved upon it. The common seal is the symbol of the company’s identity and is as good as a signature. Common seal means the metallic seal of a company which can be affixed only with the approval of the Board of directors of the company. It is the signature of the company to any document on which it is affixed and binds the company for all obligations undertaken in the document.
When company puts its seal on a document, the company becomes bound by the contents of the document. On the other hand, a document written on behalf of the company but not bearing the company’s common seal is not binding on the company. The person or persons who have signed such document will be personally held responsible for it.
A company shall have only one common seal. The Act provides that from the date of incorporation mentioned in the certificate of incorporation, the company shall have a common seal. The Articles of Association provides the procedure relating to affixing of common seal.
As per the companies (Amendment) Act, 2015, now for a company to have a common seal is not mandatory.
Conclusion: The given statement is the essence of the company as a voluntary organisation. Company comes into existence by registration and enjoys the status of separate legal entity and conducts all its operations by using the common seal. The company enjoys the perpetual succession also. In the company, members may come, members may go but company goes on forever.