ARTIFICIAL PERSON<\/strong><\/p>\n\n\n\nIt is an artificial person in the eyes of the law which is created through the process provided in the Companies Act 2013 or any other previous Act. It is not considered as natural like human being.<\/p>\n\n\n\n
SEPARATE LEGAL ENTITY<\/strong><\/p>\n\n\n\nThe joint stock company has its separate legal entity from its members. It has its own existence in the eyes of the law. As a separate entity it can<\/p>\n\n\n\n
Enter into contracts with other parties in its own name.<\/li> Sue others and be sued by others.<\/li> Sell or purchase property in its own name.<\/li><\/ul>\n\n\n\nThe company work independently of its members. It is not bound by the acts of its members.<\/p>\n\n\n\n
PERPETUAL SUCCESSION<\/strong><\/p>\n\n\n\nThe company is a separate legal entity. Thus it enjoys the perpetual succession which means it remains unaffected by the death, insolvency and lunacy of the stakeholders. The company comes into the existence only by the act of law and may end only by law. It is rightly said:<\/p>\n\n\n\n
\u201cMEMBERS MAY COME, MEMBERS MAY GO<\/em><\/strong><\/p>\n\n\n\nTHE COMPANY GOES ON FOREVER\u201d<\/em><\/strong><\/p>\n\n\n\nTRANSFERABILITY OF SHARES<\/strong><\/p>\n\n\n\nThe members of the companies enjoy the distinct feature of Transferability of shares. Any member is free to transfer their share of interest without any permission. However, by mentioning in the Articles of Association, the companies can put some restrictions or conditions but transfer of shares cannot be stopped at all.<\/p>\n\n\n\n
LIMITED LIABILITY<\/strong><\/p>\n\n\n\nIn case of companies, the liability of the members is limited upto the amount of unpaid value of shares. The companies may be:<\/p>\n\n\n\n
Limited by guarantee<\/li> Limited by the shares<\/li><\/ul>\n\n\n\nIn case of companies limited by guarantee, the shareholders have to pay only that amount which is guaranteed by them in the Memorandum of Association.<\/p>\n\n\n\n
In case of companies limited by shares, the liability of shareholders is only upto the amount of unpaid value of shares.<\/p>\n\n\n\n
There is also a kind of Unlimited Companies, but these are not prevalent in India. <\/p>\n\n\n\n
COMMON SEAL<\/strong><\/p>\n\n\n\nA company is an artificial person. It cannot be considered as natural like human being. But the company has the right and the power to enter into the contracts. The companies can do so by having its common seal. The common seal is a stamp with the name of the company engraved on it. The seal of the company is affixed on the documents which require the approval. The two directors must witness the affixation of the seal.<\/p>\n\n\n\n
According to the Companies (Amendment) Act, 2015, the use of the common seal is made optional.<\/p>\n\n\n\n
SEPARATION OF OWNERSHIP AND MANAGEMENT<\/strong><\/p>\n\n\n\nThe ownership and management of the companies are in different hands. The shareholders are the owners of the companies. But they are scattered worldwide, that is why they appoint their representatives to manage the work of the companies. These elected representatives are known as the Board of Directors.<\/p>\n\n\n\n
GOVERNING ACT<\/strong><\/p>\n\n\n\nThe company form of business is governed under the Companies Act 2013 or under any previous Act.<\/p>\n\n\n\n
REGISTRATION<\/strong><\/p>\n\n\n\nThe registration is compulsory in all the cases under the Companies Act 2013. The companies must get the Certificate of Incorporation and Certificate of Commencement to start its business. <\/p>\n\n\n\n
PUBLICATION OF ACCOUNTS<\/strong><\/p>\n\n\n\nThe publication of accounts for the companies is compulsory. The company has to file its annual statements with the Registrar of Companies at the end of the financial year. The annual statements are to be inspected by the Registrar.<\/p>\n\n\n\n\n\n\n\n
QUESTION: \u201cA company is an artificial person, created by law with a perpetual succession and a common seal.\u201d Explain this statement.<\/h3>\n\n\n\n Answer:<\/strong><\/p>\n\n\n\nL H Haney has defined the company as an artificial person, created by the law with a perpetual succession and the common seal.<\/p>\n\n\n\n
This definition of company given by Prof. Haney is the most scientific and appropriate one.<\/p>\n\n\n\n
Company as an artificial person: <\/strong>Company is an artificial person created by the law. It is called an \u2018artificial person\u2019 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. <\/p>\n\n\n\nIt 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.<\/p>\n\n\n\n
Created by law: <\/strong>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. <\/p>\n\n\n\nA 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\u2019s actions even if they hold nearly all of the share capital. Shareholders are not the company\u2019s agents and therefore cannot bind the company by their actions.<\/p>\n\n\n\n
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, \u2018incorporation\u2019 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.<\/p>\n\n\n\n
Perpetual Succession: <\/strong>A company can end by winding up, and other factors like the death of a person or retirement will not affect the company\u2019s 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\u2019s 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. <\/p>\n\n\n\nThus, 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\u2019s meeting, but the company survived. All this will not affect the company\u2019s existence.<\/p>\n\n\n\n
Common Seal: <\/strong>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.<\/p>\n\n\n\nWhen 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.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
As per the companies (Amendment) Act, 2015, now for a company to have a common seal is not mandatory.<\/p>\n\n\n\n
Conclusion: <\/strong>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.<\/p>\n\n\n\n\n\n\n\nQUESTION: What is corporate veil? When it can be lifted?<\/h3>\n\n\n\n Answer:<\/p>\n\n\n\n
CORPORATE VEIL:<\/strong><\/p>\n\n\n\nThe Corporate Veil is a shield that protects the members from the action of the company. In simple terms, if a company violates any law or incurs any liability, then the members cannot be held liable. Thus, shareholders enjoy protection from the acts of the company.<\/p>\n\n\n\n
Case Law:<\/strong> Salomon vs. Salomon and Co Ltd. Fact of the case: In this case, Salomon incorporated a company named \u201cSalomon & Co. Ltd.\u201d, with seven subscribers consisting of himself, his wife, four sons and one daughter. Salomon was a shareholder as well as a secured creditor. There were other unsecured creditors as well. Later on, the company incurred losses and decides to wind up. At the time of winding up, the unsecured creditors claimed that they should be paid before Salomon (as a secured creditor) as it was his company.<\/p>\n\n\n\nHeld:<\/strong> This case clearly established that company has its own existence and as a result, a shareholder cannot be held liable for the acts of the company even though he holds virtually the entire share capital. The whole law of a corporation is in fact based on the principle of the separate legal entity.<\/p>\n\n\n\nThe separate legal entity of a company is a statutory privilege that must be used for legitimate purposes only but with advantages comes the disadvantages as well. Thus, the Doctrine of lifting up of or piercing of Corporate Veil was introduced to hold the members liable in case of fraudulent or dishonest use of the separate legal entity.<\/p>\n\n\n\n
LIFTING UP OF THE CORPORATE VEIL<\/strong><\/p>\n\n\n\nThe company, being an artificial person, does not perform any function by itself-its functions are performed by its directors. If the directors of a company defraud the company or any third party, or do an act which goes against the Companies Act, the law permits, on the orders of the National Company Law Tribunal, to lift the corporate veil and make the directors or members guilty of misconduct and face the wrath of law. In situations when, under the provisions of law and recognising the separate entity of the company, the court directs the lifting of the corporate veil and hold the directors or functionaries of the company liable for their actions, it is called ‘piercing the corporate veil’.<\/p>\n\n\n\n
According to Prof. Gover,<\/strong> “Where the law disregards the corporate entity and pays regard instead to the individual members behind the legal facade, it is known as lifting the veil of corporate personality.”<\/p>\n\n\n\nCases where the court has ordered lifting up of veil-<\/p>\n\n\n\n
In case the Company commits a Fraud.<\/li> Where the company do not have a physical presence, it is just on instruments.<\/li> If the company has an enemy character because of its association with the enemy country.<\/li> If the criminal activities are being hidden behind the company\u2019s name. <\/li><\/ul>\n\n\n\nFurther, the lifting of the corporate veil can be Statutory Lifting or Judicial Lifting. <\/p>\n\n\n\n
Statutory Lifting<\/strong>: If the company violates the Companies Act, 2013 and the act provides for the lifting of the veil for the same, then it is termed\u00a0to be Statutory Lifting. The circumstances are as follows:<\/p>\n\n\n\nlifting up of corporate veil<\/figcaption><\/figure>\n\n\n\nReduction of the number of members below statutory limits:<\/strong> If, at any time, the number of members in a public company is reduced to less than seven, or it is reduced to less than two in a private company, and the company carries on its business for more than six months, every individual member of the company who is aware of this fact shall be individually liable for the total debts of the company, and can be sued for the realization of such debts.<\/li>Establishing the relationship of holding and subsidiary company:<\/strong> When the management of one company is controlled by another, the company controlling the management is called the ‘holding company’ and the one whose management is controlled is called the ‘subsidiary’. The subsidiary company retains its separate entity, and the holding company cannot be held liable for the actions of the subsidiary merely because it has originated the subsidiary and has control on its management. The subsidiary company cannot be deemed to be the inheritance or property of the holding company. The law provides that the corporate veil may be lifted to determine whether there exists a relationship of a holding and a subsidiary company between the two. Every holding company shall attach to its balance sheet:a copy of the balance sheet of the subsidiary,<\/li> a copy of its Profit and Loss Account.<\/li> a copy of the report of its Board of Directors, and<\/li> copy of the report of its auditors<\/li><\/ul><\/li> Investigating the affairs of the company:<\/strong> If the management of the company is not satisfactory, or it is following fraudulent and oppressive policies towards some or all its members, the inspector appointed to investigate the affairs of the company is empowered by law to investigate the affairs of another related company or companies under the same management or group. As per section 219- the ‘corporate veil’ or legal facade may be lifted to ascertain which company or companies are being managed by the holding company.<\/li>Investigating fraudulent trading:<\/strong> If, in the course of winding up a company, it is revealed that the company has been carrying on its business with the intent to defraud its creditors or any other persons, or for any fraudulent purpose, the Tribunal may set aside the leg corporate veil of the company and hold the persons responsible for the fraudulent activities personally liable for the debts and liabilities of the company.<\/li>Non-disclosure of company’s name (Under Section 12): <\/strong>If the name of the company and the address of registered office has not been properly and clearly written or affixed on any document contract, the persons actually responsible for such act shall be personally liable for the consequences of such act even if the contract is in the name of the company. For example, if company’s functionary signs a promissory note on behalf of the company without dead affixing the company’s name on it, he shall be held personally responsible for the promissor note.<\/li>Investigating company’s ownership<\/strong> (Under Section 216)<\/strong>: The Central Government may appoint one or mor inspectors to investigate who are the persons who actually control or materially influence the policy of the company.<\/li>Non-return of application money<\/strong> (Under Section 39)<\/strong>: One liability of a company is that it must forthwith return all moneys received from the applicants of shares who are not allotted the shares they had applied for. If any such money is not repaid within 130 days of the issue of prospectus to applicants who have not been allotted any shares, the directors of the company shall be individually and severally held liable.<\/li>Mis-statement in prospectus (Under Section 35):<\/strong> If there is a mis-statement in the prospectus of a company inviting the public to subscribe for shares or debentures, then every director, promoter or the person who has issued the prospectus is personally held liable.<\/li><\/ol>\n\n\n\nJudicial Lifting: <\/strong>If the company violates the Companies Act, 2013 and the act\u00a0does not provide for the lifting of the veil then the judges can\u00a0order the lifting of the veil which is known as Judicial Lifting. The circumstances of judicial lifting are as follows:<\/p>\n\n\n\nlifting up of corporate veil<\/figcaption><\/figure>\n\n\n\nProtection of Revenue:<\/strong> If a company or companies are formed only for the purpose of evading the payment of tax-be it income tax, sales tax, wealth tax, death tax, etc.-the law empowers the Tribunal to pierce the veil of corporate entity. If it is revealed that the company was formed for the purpose of evading the payment of taxes, the court can pierce the corporate veil, and make the members liable for the responsibilities of the company.<\/li>Prevention of Fraud and Improper Conduct:<\/strong> If a company conducts its affairs in fraudulent and improper manner, the Tribunal is empowered to ignore the separate entity of the company, and may treat the company and its members as one entity.<\/li>Determination of Enemy Character of a Company:<\/strong> The Tribunal lifts the corporate veil to determine the enemy character of a company and examine the real promoters of the company. If the company’s management constitutes hostile aliens, or Indian nationals operating under the direction of hostile aliens, the Tribunal can lift the corporate veil and have a look at the company’s real ‘face’.
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