i

ASSIGNMENT: CORPORATE LAW-I

NAME: ADNAN YOUSUF

BA. LL.B 6th SEMESTER (REGULAR)

ROLL NO. 02

ADVANTAGES AND DISADVANTAGES OF COMPANY

SUBMITTED TO Dr. Qazi Usman Sir

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CONTENTS:

1. MEANING OF COMPANY

2. ADVANTAGES OF COMPANY

3. A COMPANY AND LLP

4. DISADVANTAGES OF A COMPANY

5. REFERENCES

INTRODUCTION

The term company, in its general sense, can be defined as a group of persons, associated together
to achieve some common objective. In its legal sense, the term company, as per the Companies
iii

Act, 2013, under section 2(20), is defined as “a company incorporated under the Companies Act
2013 or any previous company law.”
The term only emphasises on the registration and the formation of the company and does not
further look into its meaning, nature and characteristics. Therefore, the legal meaning to the term
company can be summed up as; Any association, under the Companies Act, 2013 or any previous
Companies Act shall be termed as a company. The misconception that it is a fictitious person is
not true. It in reality is an artificial or a legal person, recognised by law, once it is registered and it
owes similar rights and duties that a natural person has. In V Javali v Mahajan Borewell, it was
held that a company can be held liable for a statutory violation like an individual, but it cannot be
imprisoned. Thus, any violation, as stated under the Companies Act attracts penalty and not
imprisonment of the company.

1. MEANING OF COMPANY
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The word ‘company’ is derived from the Latin word Com meaning with or together; panis
meaning bread, and it originally referred to an association of persons who took their meals
together. In the leisurely past, merchants took advantage of festive gatherings, to discuss business
matters. Nowadays, the company form of organization has assumed great importance. In popular
parlance, a company denotes an association of like minded persons formed for the purpose of
carrying on some business or undertaking. A company is a corporate body and a legal person
having status and personality distinct and separate from the members constituting it. It is called a
body corporate because the persons composing it are made into one body by incorporating it
according to the law and clothing it with legal personality. The word ‘corporation’ is derived from
the Latin term ‘corpus’ which means ‘body’. Accordingly, ‘corporation’ is a legal person created
by a process other than natural birth. It is, for this reason, sometimes called artificial legal person.
As a legal person, a corporate is capable of enjoying many rights and incurring many liabilities of
a natural person.

An incorporated company owes its existence either to a Special Act of Parliament or to company
law. Public corporations like Life Insurance Corporation of India, SBI etc., have been brought
into existence through special Acts of Parliament, whereas companies like Tata Steel Ltd.,
Reliance Industries Limited have been formed under the Company law i.e. Companies Act, 1956
which is replaced by the Companies Act, 2013. In the legal sense, a company is an association of
both natural and artificial persons and is incorporated under the existing law of a country.
In terms of the Companies Act, 2013 , a “company” means a company incorporated under this Act
or under any previous company law1.
In common law, a company is a “legal person” or “legal entity” separate from, and capable of
surviving beyond the lives of its members. A company is rather a legal device for the attainment
of social and economic end. It is, therefore, a combined political, social, economic and legal
institution. Thus, the term company has been described in many ways. “It is a means of
cooperation and organisation in the conduct of an enterprise”. It is “an intricate, centralised,
economic and administrative structure run by professional managers who hire capital from the
investor(s)”.
Lord Justice Lindley has defined a company as “an association of many persons who contribute
money or money’s worth to a common stock and employ it in some trade or business and who
share the profit and loss arising therefrom. The common stock so contributed is denoted in money
and is the capital of the company. The persons who contributed in it or form it, or to whom it
belongs, are members. The proportion of capital to which each member is entitled is his “share”.
The shares are always transferable although the right to transfer them may be restricted.”

2. NATURE AND CHARACTERISTICS OF A COMPANY

1
Section 2(20)
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Since a corporate body (i.e. a company) is the creation of law, it is not a human being, it is an
artificial juridical person (i.e. created by law) and it is clothed with many rights, obligations,
powers and duties prescribed by law.
The most striking characteristics of a company are discussed below:

(i) Corporate personality

A company incorporated under the Act is vested with a corporate personality so it bears its own
name, acts under name, has a seal of its own and its assets are separate and distinct from those of
its members. It is a different ‘person’ from the members who compose it. Therefore it is capable
of owning property, incurring debts, borrowing money, having a bank account, employing people,
entering into contracts and suing or being sued in the same manner as an individual. Its members
are its owners however they can be its creditors simultaneously. A shareholder cannot be held
liable for the acts of the company even if he holds virtually the entire share capital.
The shareholders are not the agents of the company and so they cannot bind it by their acts. The
company does not hold its property as an agent or trustee for its members and they cannot sue to
enforce its rights, nor can they be sued in respect of its liabilities. Thus, ‘incorporation’ is the act
of forming a legal corporation as a juristic person. A juristic person is in law also conferred with
rights and obligations and is dealt in accordance with law. In other words, the entity acts like a
natural person but only through a designated person, whose acts are processed within the ambit of
law2.

(ii) Company as an artificial person

A Company is an artificial person created by law. It is not a human being but it acts through
human beings. It is considered as a legal person which can enter into contracts, possess properties
in its own name, sue and can be sued by others etc. It is called an artificial person since it is
invisible, intangible, existing only in the contemplation of law. It is capable of enjoying rights and
being subject to duties.his states that a company is independent and separate from its members,
and the members cannot be held liable for the acts of the company, even when a particular
member owns majority of shares. This was held in the case of Salomon v Salomon & Co. Ltd.
3
. Salomon transferred his business of boot making, initially run as a sole proprietorship, to a
company (Salomon Ltd.), incorporated with members comprising of himself and his family. The
price for such transfer was paid to Salomon by way of shares, and debentures having a floating
charge (security against debt) on the assets of the company. Later, when the company’s business
failed and it went into liquidation, Salomon’s right of recovery (secured through floating charge)
against the debentures stood prior to the claims of unsecured creditors, who would, thus, have
recovered nothing from the liquidation proceeds. The claims of certain unsecured creditors in the
liquidation process of Salomon Ltd., where Salomon was the majority shareholder, was sought to
be made personally liable for the company’s debt. Hence, the issue was whether, regardless of the

2
Shiromani Gurdwara Prabandhak Committee v. Shri Sam Nath Dass AIR 2000 SCW 139
3
(1897) AC 22
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separate legal identity of a company, a shareholder/controller could be held liable for its debt,
over and above the capital contribution, so as to expose such member to unlimited personal
liability. The House of Lords held that, as the company was duly incorporated, it is an
independent person with its rights and liabilities appropriate to itself, thus, making Salomon &
Co. Ltd liable, and not Salomon..

(iii) Limited Liability

The privilege of limited liability for business debts is one of the principal advantages of doing
business under the corporate form of organisation.” The company, being a separate person, is the
owner of its assets and bound by its liabilities. The liability of a member as shareholder, extends
to the contribution to the capital of the company up to the nominal value of the shares held and
not paid by him. Members, even as a whole, are neither the owners of the company’s
undertakings, nor liable for its debts. In other words, a shareholder is liable to pay the balance, if
any, due on the shares held by him, when called upon to pay and nothing more, even if the
liabilities of the company far exceed its assets. This means that the liability of a member is
limited.
For example, if A holds shares of the total nominal value of 1,000 and has already paid Rs.500/-
(or 50% of the value) as part payment at the time of allotment, he cannot be called upon to pay
more than Rs. 500/-, the amount remaining unpaid on his shares. If he holds fully-paid shares, he
has no further liability to pay even if the company is declared insolvent. In the case of a company
limited by guarantee, the liability of members is limited to a specified amount of the guarantee
mentioned in the memorandum.
Buckley, J. in Re. London and Globe Finance Corporation, (1903) 1 Ch.D. 728 at 731, has
observed: ‘The statutes relating to limited liability have probably done more than any legislation
of the last fifty years to further the commercial prosperity of the country. They have, to the
advantage of the investor as well as of the public, allowed and encouraged aggregation of small
sums into large capitals which have been employed in undertakings of “great public utility largely
increasing the wealth of the country”.
Exceptions to the principle of limited liability
• Members are severally liable in certain cases- if at any time the number of members of a
company is reduced, in the case of a public company, below seven, in the case of a private
company, below two, and the company carries on business for more than six months while the
number of members is so reduced, every person who is a member of the company during the time
that it so carries on business after those six months and is cognisant of the fact that it is carrying
on business with less than seven members or two members, as the case may be, shall be severally
liable for the payment of the whole debts of the company contracted during that time, and may be
severally sued therefor.[Section 3A]
• When the company is incorporated as an Unlimited Company under Section 3(2)(c) of the Act
• Where a company has been got incorporated by furnishing any false or incorrect information or
representation or by suppressing any material fact or information in any of the documents or
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declaration filed or made for incorporating such company or by any fraudulent action, the
Tribunal may, on an application made to it, on being satisfied that the situation so warrants, direct
that liability of the members of such company shall be unlimited.4

• Further under section 339(1), where in the course of winding up it appears that any business of
the company has been carried on with an intent to defraud creditors of the company or any other
persons or for any fraudulent purpose, the Tribunal may declare the persons who were knowingly
parties to the carrying on of the business in the manner aforesaid as personally liable, without
limitation of liability, for all or any of the debts/liabilities of the company.[Section 339]
• Under Section 35(3), where it is proved that a prospectus has been issued with intent to defraud
the applicants for the securities of a company or any other person or for any fraudulent purpose,
every person who was a director at the time of issue of the prospectus or has been named as a
director in the prospectus or every person who has authorised the issue of prospectus or every
promoter or a person referred to as an expert in the prospectus shall be personally responsible,
without any limitation of liability, for all or any of the losses or damages that may have been
incurred by any person who subscribed to the securities on the basis of such prospectus.
• As per section 75(1), where a company fails to repay the deposit or part thereof or any interest
thereon referred to in section 74 within the time specified or such further time as may be allowed
by the Tribunal and it is proved that the deposits had been accepted with intent to defraud the
depositors or for any fraudulent purpose, every officer of the company who was responsible for
the acceptance of such deposit shall, without prejudice to other liabilities, also be personally
responsible, without any limitation of liability, for all or any of the losses or damages that may
have been incurred by the
depositors.
• Section 224(5) states that where the report made by an inspector states that fraud has taken place
in a company and due to such fraud any director, key managerial personnel, other officer of the
company or any other person or entity, has taken undue advantage or benefit, whether in the form
of any asset, property or cash or in any other manner, the Central Government may file an
application before the Tribunal for appropriate orders with regard to disgorgement of such asset,
property, or cash, and also for holding such director, key managerial personnel, officer or other
person liable personally withoutany limitation of liability.

(vi) Perpetual Succession

An incorporated company never dies, except when it is wound up as per law. A company, being a
separate legal person is unaffected by death or departure of any member and it remains the same
entity, despite total change in the membership. Perpetual succession, means that the membership
of a company may keep changing from time to time, but that shall not affect its continuity.
The membership of an incorporated company may change either because one shareholder has

4
Section 7(7)(b)
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sold/transferred his shares to another or his shares devolve on his legal representatives on his
death or he ceases to be a member under some other provisions of the Companies Act. Thus,
perpetual succession denotes the ability of a company to maintain its existence by the succession
of new individuals who step into the shoes of those who cease to be members of the company.
Professor L.C.B. Gower rightly mentions, “Members may come and go, but the company can go
on forever. During the war all the members of one private company, while in general meeting,
were killed by a bomb, but the company survived — not even a hydrogen bomb could have
destroyed it”.

(vii) Separate Property

A company being a legal person and entirely distinct from its members, is capable of owning,
enjoying and disposing of property in its own name. The company is the real person in which all
its property is vested, and by which it is controlled, managed and disposed off. Their Lordships of
the Madras High Court in R.F. Perumal v. H. John Deavin 5,held that “no member can claim
himself to be the owner of the company’s property during its existence or in its winding-up”. A
member does not even have an insurable interest in the property of the company.

(viii) Transferability of Shares

The capital of a company is divided into parts, called shares. The shares are said to be movable
property and, subject to certain conditions, freely transferable, so that no shareholder is
permanently or necessarily wedded to a company. When the joint stock companies were
established, the object was that their shares should be capable of being easily transferred. Section
44 of the Companies Act, 2013 enunciates the principle by providing that the shares held by the
members are movable property and can be transferred from one person to another in the manner
provided by the articles. If the articles do not provide anything for the transfer of shares and the
Regulations contained in Table “F” in Schedule I to the Companies Act, 2013, are also expressly
excluded, the transfer of shares will be governed by the general law relating to transfer of
movable property. A member may sell his shares in the open market and realise the money
invested by him. This provides liquidity to a member (as he can freely sell his shares) and ensures
stability to the company (as the member is not withdrawing his money from the company). The
Stock Exchanges provide adequate facilities for the sale and purchase of shares. Further, as of
now, in most of the listed companies, the shares are also transferable through Electronic mode i.e.
through Depository Participants in dematerialised form instead of physical transfers. However
there are restrictions with respect to transferability of shares of a Private Limited Company.

5
A.I.R. 1960 Mad. 43
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(ix) Capacity to Sue and Be Sued

A company being a body corporate, can sue and be sued in its own name. To sue, means to
institute legal proceedings against (a person) or to bring a suit in a court of law. All legal
proceedings against the company are to be instituted in its name. Similarly, the company may
bring an action against anyone in its own name. A company’s right to sue arises when some loss
is caused to the company, i.e. to the property or the personality of the company. Hence, the
company is entitled to sue for damages in libel or slander as the case may be6. A company, as a
person distinct from its members, may even sue one of its own members.
A company has a right to seek damages where a defamatory material published about it, affects its
business. Where video cassettes were prepared by the workmen of a company showing, their
struggle against the company’s management, it was held to be not actionable unless shown that
the contents of the cassette would be defamatory. The court did not restrain the exhibition of the
cassette.7. The company is not liable for contempt committed by its officer.8

(x) Contractual Rights

A company, being a legal entity different from its members, can enter into contracts for the
conduct of the business in its own name. A shareholder cannot enforce a contract made by his
company; he is neither a party to the contract, nor be entitled to the benefit derived from of it, as a
company is not a trustee for its shareholders. Likewise, a shareholder cannot be sued on contracts
made by his company. The distinction between a company and its members is not confined to the
rules of privity but permeates the whole law of contract. Thus, if a director fails to disclose a
breach of his duties towards his company, and in consequence a shareholder is induced to enter
into a contract with the director on behalf of the company which he would not have entered into
had there been disclosure, the shareholder cannot rescind the contract. Similarly, a member of a
company cannot sue in respect of torts committed against the company, nor can he be sued for
torts committed by the company. Therefore, the company as a legal person can take action to
enforce its legal rights or be sued for breach of its legal duties. Its rights and duties are distinct
from those of its constituent members
.
(xi) Limitation of Action

A company cannot go beyond the power stated in its Memorandum of Association. The
Memorandum of Association of the company regulates the powers and fixes the objects of the
company and provides the edifice upon which the entire structure of the company rests. The
actions and objects of the company are limited within the scope of its Memorandum of
Association. In order to enable it to carry out its actions without such restrictions and limitations

6
Floating Services Ltd. v. MV San Fransceco Dipaloa (2004) 52 SCL 762 (Guj)
7
TVS Employees Federation v TVS and Sons Ltd., (1996) 87 Com Cases 37
8
Lalit Surajmal Kanodia v. Office Tiger Database Systems India (P) Ltd(2006) 129 Com Cases 192 Mad.
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in most cases, sufficient powers are granted in the Memorandum of Association. But once the
powers have been laid down, it cannot go beyond such powers unless the Memorandum of
Association, itself altered prior to doing so.

(xii) Separate Management

As already noted, the members may derive profits without being burdened with the management
of the company. They do not have effective and intimate control over its working and they elect
their representatives as Directors on the Board of Directors of the company to conduct corporate
functions through managerial personnel employed by them. In other words, the company is
administered and managed by its managerial personnel.

(xiv) Termination of Existence

A company, being an artificial juridical person, does not die a natural death. It is created by law,
carries on its affairs according to law throughout its life and ultimately is effaced by law.
Generally, the existence of a company is terminated by means of winding up. However, to avoid
winding up, sometimes companies adopt strategies like reorganisation, reconstruction and
amalgamation.

(xv) Easier access to Capital

Raising capital is easier for a corporation, since a corporation can issue shares of stock. This may
make it easier for your business to grow and develop. If the in the market for a bank loan, that’s
another reason to incorporate, since n most cases, banks prefer and easily lend money to
incorporated business ventures.

3. DISTINCTION BETWEEN LIMITED LIABILITY PARTNERSHIP (LLP) AND A

COMPANY

LLP is an alternative corporate business form that gives the benefits of limited liability of a
company and the flexibility of a partnership. LLP can continue its existence irrespective of
changes in partners. It is capable of entering into contracts and holding property in its own name.
LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is
limited to their agreed contribution in the LLP.
Further, no partner is liable on account of the independent or un-authorized actions of other
partners, thus individual partners are shielded from joint liability created by another partner’s
wrongful business decisions or Misconduct Mutual rights and duties of the partners within a LLP
are governed by an agreement between the partners or between the partners and the LLP as the
case may be. The LLP, however, is not relieved of the liability for its other obligations as a
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separate entity. Since LLP contains elements of both ‘a corporate structure’ as well as ‘a
partnership firm structure’ LLP is called a hybrid between a company and a partnership.
LLP is a body corporate and a legal entity separate from its partners, having perpetual succession.
LLP form is a form of business model which :
(i) is organized and operates on the basis of an agreement.
(ii) provides flexibility without imposing detailed legal and procedural requirements
(iii) enables professional/technical expertise and initiative to combine with financial risk taking
capacity in an innovative and efficient manner.

A basic difference between an LLP and a company lies in that the internal governance structure of
a company is regulated by statute (i.e. Companies Act) whereas for an LLP it would be by a
contractual agreement between partners. The management-ownership divide inherent in a
company is not there in a limited liability partnership. LLP have more flexibility as compared to a
company. LLP have lesser compliance requirements as compared to a company.

3. DISADVANTAGES OF A COMPANY

1. Cost –

The initial cost of incorporation includes the fee required to file your articles of incorporation,
potential attorney or accountant fees, or the cost of using an incorporation service to assist you
with completion and filing of the paperwork. There are also ongoing fees for maintaining a
corporation.

2. Double Taxation – Some types of corporations such as a C Corporation, have the potential to
result in “double taxation.” Double taxation occurs when a company is taxed once on profits, and
again on the dividends paid to shareholders.
3. Loss of Personal “Ownership” – If a corporation is a stock corporation, one person doesn’t
retain complete control of the entity. The corporation is governed by a board of directors who are
elected by shareholders.

4. Required Structure – When you form a corporation, you are required to follow all of the rules
outlined by the state in which you filed. This includes the management of the corporation,
operational requirements and the corporation’s accounting practices.

5. Ongoing Paperwork – Most corporations are required to file annual reports on the financial
status of the company. The ongoing paperwork also includes tax returns, accounting records,
meeting minutes and any required licenses and permits for conducting business.
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6. Difficulty Dissolving – While perpetual existence is a benefit of incorporating, it can also be a

disadvantage because it can require significant time and money to complete the necessary
procedures for dissolution.

7. Lifting of Corporate Veil – From the juristic point of view, a company is a legal person
distinct from its members. This principle may be referred to as the ‘Veil of incorporation’. The
courts, in general, consider themselves bound by this principle. The effect of this Principle is that
there is a fictional veil between the company and its members. That is, the company has a
corporate personality which is distinct from its members. But, in a number of circumstances, the
Court will pierce the corporate veil or will ignore the corporate veil to reach the person behind the
veil or to reveal the true form and character of the concerned company. The rationale behind this
is probably that the law will not allow the corporate form to be misused or abused. In those
circumstances in which the Court feels that the corporate form is being misused, it will rip
through the corporate veil and expose its true character and nature.
The separate personality of a company is a statutory privilege and it must be used for legitimate
business purposes only. Where a fraudulent and dishonest use is made of the legal entity, the
individuals concerned will not be allowed to take shelter behind the corporate personality. The
Court will break through the corporate shell and apply the principle/doctrine of what is called as
“lifting of or piercing the corporate veil”. The Court will look behind the corporate entity and take
action as though no entity separate from the members existed and make the members or the
controlling persons liable for debts and obligations of the company.
The corporate veil is lifted when in defence proceedings, such as for the evasion of tax, an entity
relies on its corporate personality as a shield to cover its wrong doings.9

However, the shareholders cannot ask for the lifting of the veil for their purposes. This was held
in Premlata Bhatia v. Union of India10 wherein the premises of a shop were allotted on a licence to
the individual licencee. She set up a wholly owned private company and transferred the premises
to that company without Government consent. She could not remove the illegality by saying that
she and her company were virtually the same person. Statutory Recognition of Lifting of
Corporate Veil
The Companies Act, 2013 itself contains some provisions which lift the corporate veil to reach the
real forces of action. Section 7(7) deals with punishment for incorporation of company by
furnishing false information; Section 251(1) deals with liability for making fraudulent application
for removal of name of company from the register of companies and Section 339 deals with
liability for fraudulent conduct of business during the course of winding up.

9
BSN (UK) Ltd. v. Janardan Mohandas Rajan Pillai [1996] 86 Com Cases 371 (Bom).
10
(2004) 58 CL 217 (Delhi)
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4. REFERENCES

1. Avtar Singh: Company Law, Eastern Book Company, Lucknow

2. J. P Sharma: Corporate Laws, Ane Books Pvt. Ltd, New Delhi.
3. S. Kannal & V.S Sowrirajan: Company Law Procedure, Taxman’s allied Services pvt. Ltd ,
New Delhi