Company and its Characteristics.

Literally the word company means a group of persons

associated for any common object such as business, charity,
sports, and research, etc. Almost every partnership firm
having two or more partners may, therefore, style itself a
‘company’ e.g., ‘Rameshwar Dass Jamuna Dass & Company’.
But this company is not a company in the legal sense of the
word. The word “& Company” here simply indicates that
there are other persons in their association besides
Rameshwar Dass and Jamuna Dass.

We shall be using the word company in our text strictly in

legal sense, i.e., accompany incorporated or registered
under the Companies Act, usually having the world ‘Limited’
as part of its name e.g., ‘The Kohinoor Mill Co. Ltd.,
Bombay’, ‘Kelvinator of India Ltd., Delhi’,’ The Alkali &
Chemicals Corporation of India Ltd., Calcutta’, etc. It must,
however, be noted that although a company can be
registered for any object, trading as well as non-trading, this
book deals mainly with secretarial practice relating to
companies or corporations formed for purposes of trade or
commerce.

Characteristics :
An examination of the above definitions reveals the following
essential characteristics of a company:

1. Incorporated association :
A company must necessarily be incorporated or registered
under the prevalent Companies Act. Registration creates a
joint stock company and it is compulsory 3 for all associations
or partnerships, having a membership of more than ten in
banking and more than twenty in any other trading activity,
formed for carrying on a business with the object of earning
profits.
02. Artificial legal person :
A company is an artificial legal person in .he sense that on
the one hand, it is created by a process other than natural
birth and does not possess the physical attributes of a
natural person, and on the other hand, it is clothed with
many of the rights of a natural person. It is invisible,
intangible immortal (law alone can dissolve it) and exists
only in the eyes or law. It has no body, no soul, no
conscience, neither it is subject to the imbecilities of the
body. It is because of these physical disabilities that a
company is called an artificial person. But it cannot be
treated as a fictitious entity because it really exists.

As a rule, a company may acquire and dispose of property, it

may enter into contracts through the agency of natural
persons, may be fined for the contravention of the provisions
of the Companies Act. Thus, for most legal purposes a
company is a. legal person just like a natural person, who
has rights and duties at law. In short, it may be said,
therefore, that a company being an artificial legal person can
do every thing like a natural person, except of course that, it
cannot take oath, cannot appears in its own person in the
court (must be represented by counsel), cannot be sent to
jail, cannot practice a learned profession like law or
medicine, nor can it marry or divorce.

3. Independent legal entity:

A company is a legal person having a juristic personality
entirely distinct from and independent of the individual
persons who are for the time being its members (Kathiawar
Industries Ltd. vs. C.G of Evacuee Property). It has the right
to own and transfer the title to property in any way it likes.
No member can either individually or jointly claim any
ownership rights in the assets of the company during its
existence or in its winding up (Mrs B.F. Gaidar vs. The
Commissioner of Income-Tax). It can sue and be sued in its
own name by its members as well as outsiders. Creditors of
the company are creditors of the company alone and they
cannot directly proceed against the members personally.

A company is not merely the sum total of its component

members, but it is something superadded to them. In
mathematical language it may be defined as n + 1th person,
where n stands for the total number of members and the 1th
person for the company itself. Even if a shareholder owns
virtually the whole of its shares, the company is a separate
legal entity in the eyes of law as distinguished from such a
shareholder. This principle was judicially recognized by the
House of Lords in the famous case of Salomon vs. Salomon &
Co. Ltd.
In this case, Mr. Salomon, who carried on a prosperous
business as a leather merchant, sold his business for the sum
of £30,000 to ‘Salomon & Co. Ltd. which consisted of
Salomon himself, his wife and daughter and his four sons.
The purchase consideration was paid by the company by
allotment of 20,000 fully paid £1 shares and £10,000 in
debentures conferring a floating a charge over all the
company’s assets, to Mr. Salomon. One share of £1 each was
subscribed for in cash by the remaining six members of his
family.

Salomon was the managing director of the company and as

he held virtually the whole of its stock, he had absolute
control over the company. Only a year later, the company
became insolvent and winding up commenced. On winding
up the statement of affairs visa roughly like this: Assets:
£6,000; Liabilities: Salomon as debenture-holder—£10,000
and unsecured creditors £7,000. Thus, its assets were
running short of its liabilities by £11,000. The unsecured
creditors claimed priority over the debenture-holder (Mr.
Salomon) on the ground that a person cannot owe to himself
and that Salomon and the company were one and the same
person.

They further contended that the company was a mere “alias”

or agent for Salomon, the business was solely his, conducted
solely for him and by him and the company was a mere
sham, and fraud, hence Salomon was liable to indemnify the
company against its trading debts. But the House of Lords
held that the existence of a company is quite independent
and distinct from its members and that the company’s assets
must be applied in payment of the debentures first in-
priority to unsecured creditors.

Lord Macnaghten observed in this case: “The company is at

law a different person altogether from the subscribers to the
Memorandum; and though it may be that after incorporation
the business is precisely the same as it was before, and the,
same persons are managers, and the same hands receive the
profits, the company is not in law the agent of the
subscribers or trustee for them. Nor are the subscribers, as
members liable, in any shape or form, except to the extent
and m the manner provided by the Act.”

Although a company is a legal person having nationality and

a domicile, it is not a citizen (State Trading Corporation of
India Ltd. vs. Commercial Tax Officer). A company cannot,
therefore, claim the protection of those fundamental rights
which are expressly guaranteed to citizens only, e.g., the
right of franchise. But still they are sufficiently protected
under the constitution. For instance, their freedom of trade
or commerce cannot be curtailed, there can be no
compulsory acquisition of their property, and no unjust
discrimination in any matter whatsoever can be done against
them. The company has the right to challenge a law if the
law happens to violate fundamental rights of citizens
(Prithivi Cotton Mills vs. Broach Borough Municipality).
4. Perpetual existence :
A company is a stable form of business organisation. Its life
does not depend upon the death, insolvency or retirement of
any or all shareholder(s) or director(s). Law creates it and
law alone can dissolve it. Members may come and go but the
company can go on for ever. “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.” 9 The company may
be compared with a flowing river where the water keeps on
changing continuously, still the identity of the river remains
the same, Thus, a company has a perpetual existence,
irrespective of changes in its membership.
5. Common seal :
As was pointed out earlier, a company being an artificial
person has no body similar to natural person and as such it
cannot sign documents for itself. It acts through natural
persons who are called its directors. But having a legal
personality, it can be found by only those documents which
bear its signature. Therefore, the law has provided for the
use of a common seal, with the name of the company
engraved on it, as a substitute for its signature. Any docu-
ment bearing the gammon seal of the company will be
legally-binding on the company.

A company may have its own regulations in its Articles of

Association for the manner of affixing the common seal to a
document. If the Articles are silent, the provisions of Table-A
(the model set of articles appended to the Companies Act)
will apply. As per regulation 84 of Table-A, the seal of the
company shall not be affixed to any instrument except by the
authority of a resolution of the Board or a Committee of the
Board authorised by it in that behalf, and except, in the
presence of at least two directors and of the secretary or
such other person as the Board may appoint for the purpose,
and those two directors and the secretary or other person
aforesaid shall sign every instrument to which the seal of the
company is so affixed in their presence. Under its common
seal a company may, in writing, appoint any person as its
attorney to execute deeds on its behalf.

6. Limited liability:
The liability of the members for the debts of the company is
limited to the amount unpaid on their shares howsoever
heavy losses the company might have suffered. For example,
if a shareholder buys 100 shares of Rs 10 each and pays Rs 5
on each share, he has paid up Rs 500 and can be made to
pay another Rs 500, but he cannot be made to pay more than
Rs 1,000 in all. No shareholder can be called upon to pay
more than the nominal or face value of shares held by him,
in case of a company with limited liability. (Later we shall
see that the Act also provides for the creation of a company
limited by guarantee and a company with ‘unlimited
liability’, but companies with ‘limited liability’ are most
popular.) Thus, by virtue of this characteristic the personal
property of the shareholder cannot be seized for the debts of
the company, if he holds a fully paid-up share.
7. Transferability of shares :
The shares of a public company are freely transferable and
members can dispose of their shares whenever they like
without seeking any permission from the company or the
other members. In a private company, however, some
restriction on the right to transfer is essential in its articles
as per Sec. 3 (1) (iii) of the Act. Although restriction un the
right to transfer may also be placed in the case of a public
company in certain cases, e.g., in case of partly paid shares,
but absolute right of the members to transfer shares cannot
be restricted and any provision in the articles to that effect
shall be void.

It may, “however, be noted here that a company possesses

the above mentioned characteristics by virtue of its
incorporation or registration under the Companies Act.
Although a partnership—the main alternative to the
company as a form of business organisation, may also be
registered under the Indian Partnership Act, 1932, yet it
does not possess any of these characteristics.
Salient features

The entire act has been divided into 29 chapters.

COMPANIES ACT 1956 COMPANIES ACT 2013

13 Parts 29 Chapters

658 Sections 470 Sections

15 Schedules 7 Schedules

Share and Share Capital

The capital of the company can be divided into different

units with definite value called shares. Holders of these
shares are called shareholders or members of the company.
There are two types of shares which a company may issue
(1) Preference Shares (2) Equity Shares.

(1) Preferences Shares

Shares which enjoy the preferential rights as to dividend and
repayment of capital in the event of winding up of the
company over the equity shares are called preference
shares. The holder of preference shares will get a fixed rate
of dividend. Preference Share holder does not have any
voting rights but if he is not been paid for a period of 2 yrs
then he gets the voting rights.

Preference shares may be:

(a) Cumulative Preference Share
If the company does no earn adequate profit in any year,
dividends on preference shares may not be paid for that
year. But if the preference shares are cumulative such
unpaid dividends on these shares go on accumulating and
become payable out of the profits of the company, in
subsequent years. Only after such arrears have been paid
off, any dividend can be paid to the holder of quality shares.
Thus a cumulative preference shareholder is sure to receive
dividend on his shares for all the years out of the earnings of
the company.

(b) Non-cumulative Preference Shares

The holders of non-cumulative preference shares no doubt
will get a preferential right in getting a fixed dividend it is
distributed to quality shareholders. The fixed dividend is to
be paid only out of the divisible profits but if in a particular
year there is no profit as to distribute it among the
shareholders, the non-cumulative preference shareholders,
will not get any dividend for that year and they cannot claim
it in the next year during which period there might be
profits. If it is not paid, it cannot be carried forward. These
shares will be treated on the same footing as other
preference shareholders as regards payment of capital in
concerned.

(c) Redeemable Preference Shares

Capital raised by issuing shares, is not to be repaid to the
shareholders (except buy back of shares in certain
conditions) but capital raised through the issue of
redeemable preference shares is to be paid back by the
raised thought the issue of redeemable preference shares is
to be paid back to the company to such shareholders after
the expiry of a stipulated period, whether the company is
wound up or not. As per section (80) 5a, a company after the
commencement of the Companies (Amendment) Act, 1988
cannot issue any preference shares which are irredeemable
or redeemable after the expiry of a period of 10 years from
the date of its issue. It means a company can issue
redeemable preference share which are redeemable within
10 years from the date of their issue.

(d) Participating or Non-participating Preference

Shares
The preference shares which are entitled to a share in the
surplus profit of the company in addition to the fixed rate of
preference dividend are known as participating preference
shares. After the payment of the dividend a part of surplus is
distributed as dividend among the quality shareholders at a
particulate rate. The balance may be shared both by equity
shareholders at a particular rate. The balance may be shared
both by equity and participating preference shares. Thus
participating preference shareholders obtain return on their
capital in two forms (i) fixed dividend (ii) share in excess of
profits. Those preference shares which do not carry the right
of share in excess profits are known as non-participating
preference shares.

(2) Equity Shares

Equity shares will get dividend and repayment of capital
after meeting the claims of preference shareholders. There
will be no fixed rate of dividend to be paid to the equity
shareholders and this rate may vary from year to year. This
rate of dividend is determined by directors and in case of
larger profits, it may even be more than the rate attached to
preference shares. Such shareholders may go without any
dividend if no profit is made.

Share Capital And its types

Meaning:
The Joint Stock Company is a big form of business organization. The amount
required by the company for its business activities is raised by the issue of
shares. The amount so raised is called ‘Share Capital’ (or capital) of the
company. It may be noted that a company limited by shares will have share
capital. A company limited by guarantee or an unlimited company may not
have any share capital. The persons who buy the shares of company are
called ‘Shareholders’.

Types of Share Capital:

(i) Authorized, registered or nominal capital:
This is the amount of capital with which the company intends to get itself
registered. This is the amount of share capital which a company is authorized
to issue. Nominal capital is divided into shares of a fixed amount. It must be
set out in the memorandum of association. It can be increased or decreased
by following the prescribed procedure.

(ii) Issued capital:

It is that part of the nominal capital which is actually issued by the company
for public subscription. A company need not issue the entire authorized capital
at once. It goes on raising the capital as and when the need for additional
funds is felt.

The difference between the nominal and the issued capital is known as
‘unissued capital’, which can be issued to the public at a later date. Where the
whole of authorized capital is offered to the public, the authorized and issued
capital will be the same. Issued Capital cannot be more than the authorized
capital. Issued capital includes the shares allotted to public, vendors,
signatories to memorandum of association etc.

(iii) Subscribed capital:

It is that amount of the nominal value of shares which have actually been
taken up by the public. It is that part of the nominal capital which has actually
been taken up by shareholders who have agreed to give consideration in kind
or in cash for shares issued to them. Where shares issued for subscription are
wholly subscribed for, issued capital would mean the same thing as
‘subscribed capital’. That part of issued capital which is not subscribed by the
public is called ‘Unsubscribed Capital’. Subscribed capital cannot be more
than issued capital.

Example:
A company was incorporated with capital f 9, 00,000 divided in to Rs.90,000
equity shares of f Rs. 10 each. It issued, 70,000 shares to the public.

The public subscribed for:

(a) 50,000 shares

(b) 70,000 shares

(c) 75,000 shares.

Apart from the above 5,000 shares are issued to vendor as fully paid. What
will be amount of different capitals?

Solution:
Authorized Capital Since the company is incorporated i.e. registered with
capital of Rs.9,00,000 divided into shares of Rs.10 each. Therefore, the
authorized capital is Rs. 9,00,000 (90,000 shares of Rs .10 each).

Issued Capital:
The company issued 70,000 shares of Rs. 10 each to public which means
Capital of Rs. 7, 00,000 (i.e. 70,000 shares x 10 each). It also issued 5,000
shares of Rs. 10 each fully paid to vendor which means capital of Rs .50, 000.

Total Issued capital = Rs. 7, 50,000

Unissued Capital:
It is that part of authorized capital which has not been issued. In this case out
of total authorized capital of Rs. 9, 00,000, Rs 7, 50,000 capital has been
issued. The balance left Rs 1, 50,000 is unissued capital.

Subscribed capital:
(a) Public has subscribed for 50,000 shares of Rs 10 each. Therefore,
subscribed capital is Rs. 5, 00,000.

Unsubscribed Capital:
In this case it will be the difference between the shares issued to the public
and shares subscribed by the public. This difference is Rs 2,00,000 i.e. Rs
7,00,000— Rs 5,00,000, it is unsubscribed capital.

(b) Public has subscribed for 70,000 shares of Rs 10 each. Therefore,

subscribed capital is Rs 7, 00,000 since subscribed capital is equivalent to
issued capital, therefore, there is No unsubscribed capital.

(c) In this case public has subscribed for 75,000 shares of Rs 10 each. It is
important to note that subscribed capital cannot be more than the issued
capital. Hence, the subscribed capital in this case will be equivalent to issued
capital of Rs 7,00,000. There is no unsubscribed capital in this case.

(iv) Called up capital:

The amount due on the shares subscribed may be collected from the
shareholders in installments at different intervals. Called up capital is that
amount of the nominal value of shares subscribed for which the company has
asked its shareholders to pay by means of calls or otherwise.
If 10,000 shares of Rs 100 each have been subscribed by the public, and the
company has asked the shareholders to pay Rs 10 on application, Rs. 20 on
allotment and Rs 30 on first call, then the called up capital of the company
would be Rs. 6, 00,000 (i.e. 10,000 x 60). The remaining amount i.e. Rs. 40
per share on 10,000 shares (i.e. Rs 4, 00,000) would be the uncalled capital
of the company.

(v) Paid up capital:

That part of the called up capital which is actually paid up by the members is
known as the paid up capital. In other words, paid up capital represents the
total payments made by the shareholders to the company in response to the
calls made by the company. Paid up capital of the company is calculated by
deducting the calls in arrears from the called up capital.

Paid up capital = Called up capital Less Calls-in-arrears:

If in the above example, out of 10,000 shares of Rs 100 each, on which Rs 60
has been called by the company from the shareholders, one shareholder,
holding 100 shares, fails to pay the first call of Rs 30 per share on his shares,
the paid up capital of the company would be Rs 6, 00,000— Rs 3,000 i.e. Rs
5, 97,000.

Debenture: Meaning, Types and Salient Features

A debenture is one of the capital market instruments which is used to raise medium or long term funds
from public. A debenture is essentially a debt instrument that acknowledges a loan to the company and is
executed under the common seal of the company. The debenture document, called Debenture deed
contains provisions as to payment, of interest and the repayment of principal amount and giving a charge
 on the assets of a such a company, which may give security for the payment over the some or all the
assets of the company. Issue of Debentures is one of the most common methods of raising the funds
available to the company. It is an important source of finance.

Salient Features of Debentures

The most salient features of Debentures are as follows:

 A debenture acknowledges a debt
 It is in the form of certificate issued under the seal of the company (called Debenture
Deed). It usually shows the amount & date of repayment of the loan.
 It has a rate of interest & date of interest payment.
 Debentures can be secured against the assets of the company or may be unsecured.
 Debentures are generally freely transferable by the debenture holder. Debenture holders
have no rights to vote in the company’s general meetings of shareholders, but they may
have separate meetings or votes e.g. on changes to the rights attached to the debentures.
 The interest paid to them is a charge against profit in the company’s financial statements.
Types of Debentures
The debentures can be divided into various types on the basis of security, performance, priority,
convertibility and Records. For more information on various types of debentures, please click here.
Issue of Debentures
Debentures can, be issued in three ways.
 At par: Debenture is said to have been issued at par when the amount collected for it is
equal to the nominal value of debentures. e.g. the issue of debentures of Rs. 100/- for Rs.
100/-
 At Discount: Debenture is said to have been issued at discount when the amount
collected is less than the nominal value, for e.g., issue of debentures of Rs. 100/- for Rs.
95/-. The difference of Rs. 5/- is the discount and is called discount on issue of
Debentures. This discount on issue of debentures is a capital loss.
 At Premium: When the price charged is more than its nominal value, a debentures is said
to be issued at a premium. e.g., issue of debentures of Rs. 100 each for Rs. 120, the
excess amount over the nominal value i.e., Rs. 20 is the premium on issue of debentures.
Premium received on issue of debentures is a capital gain. Please note that this Premium
on issue of debentures cannot be utilised for distribution of dividend. Premium on
debentures is shown under the head Reserves & Surplus on the liability side of the Balance
Sheet.
Issue of Debentures for Cash
Debentures may be issue for cash at a par, at a discount or at a premium. When amount is payable in
instalments entries will be similar to the issue of shares. Any premium or discount on issue of debentures
is usually adjusted at the time of making allotment. Premium payable on redemption of debentures is also
adjusted at the time of issue of debentures.
Issue of debentures for non-cash consideration
Debentures may be issued for consideration other than cash such as acquisition of business, or assets. It
should be noted that ouch debentures may be issue at par or at a premium or at a discount.
Issue of debentures as a collateral security
 Debentures can be issued as collateral security against a loan or overdraft from bank or other financial
institution. Collateral Security means an additional or parallel security.
Redemption of Debentures
Debentures may be redeemed (repaid) a) at a par b) at a premium or c) at a discount.
 Redeemable at par: When debentures are to be redeemed at their face value they are
said to be redeemable at par.
 Redeemable at a premium: When debentures are to be redeemed at an amount higher
than their face value they said to be redeemable at a premium. Premium payable on
redemption of debentures is a capital loss for the company. Such premium even though
payable on redemption must be provided as a liability at a time of issue of debentures.
 Redeemable at a discount: When debentures are to be redeemed at an amount lower
than their face value, they are said to be redeemable at a discount such discount is a
capital profit for the company.
How debentures are different from bonds?
Bonds and Debentures, both are similar and holders of both of them are creditors to the company. Both
bonds and debentures can be secured or unsecured. Generally, the bonds issued by the companies are
secured by their assets. But there are unsecured bonds as well. The bonds issued by municipalities or
government companies etc. are normally not secured by any assets.
Both bonds and debentures get priority over shares when company is liquidated. However, if the bonds
are secured, they get priority over unsecured debentures.
What is Convertibility in Debentures?
Convertibility in debentures denotes conversion of a debenture to equity shares. On this basis they are of
four types as follows:
 Partly Convertible Debentures (PCD):A part of these instruments are converted into
Equity shares in the future at notice of the issuer. The issuer decides the ratio for
conversion. This is normally decided at the time of subscription.
 Fully convertible Debentures (FCD):These are fully convertible into Equity shares at
the issuer’s notice. The ratio of conversion is decided by the issuer. Upon conversion the
investors enjoy the same status as ordinary shareholders of the company.
 Optionally Convertible Debentures (OCD): The investor has the option to either
convert these debentures into shares at price decided by the issuer/agreed upon at the
time of issue.
 Non Convertible Debentures (NCD): Non-convertible debentures , which are simply
regular debentures, cannot be converted into equity shares of the liable company. They
are debentures without the convertibility feature attached to them. As a result, they
usually carry higher interest rates than their convertible counterparts. Thus, these
instruments retain the debt character and can not be converted in to equity shares
What is difference between Debentures and Shares
Distinction between Debenture and Shares

Debentures Shares

Debentures constitute a loan. Shares are part of the capital of a company.

Debenture holders are creditors Shareholders are members/owners of the company

Debenture holder gets fixed interest which Shareholder gets dividends with a varying rate.
carries a priority over dividend.

Debentures generally have a charge on the Shares do not carry any such charge.

assets of the company.

Debentures can be issued at a discount without Shares cannot be issued at a discount.

restrictions.

The rate of interest is fixed in the case of Whereas on equity shares the dividend varies from

debentures. year to year depending upon the profit of the

company and the Board of directors decides to

declare dividends or not.

Debenture holders do not have any voting Shareholders enjoy voting rights.

Interest on debenture is payable even if there Dividend can be paid to shareholders only out of the

are no profits i.e. even out of capital. profits of the company and not otherwise.

Bond Vs Debenture – The Key Differences

Some of the prime differences between bonds and debentures are as follows:

1. Bonds are the financial instruments issued by Government

agencies and also by Private organizations for raising
additional fund from the public. Debentures are issued by
private/public companies for raising capital from the
investors.

2. Bonds are backed by the asset of the issuer whereas

debentures are not secured by any of the physical assets or
collateral. Debentures are issued and purchased only on the
creditworthiness and reputation of the issuing party.

3. The interest rate of bonds is generally lower than

debentures. The lower interest rate depicts the low-risk
factor. On the other hand, debentures give you a high-
 interest rate but they are unsecured in nature hence the risk
factor is more here.

4. The interest on a bond is given to the bondholder in

monthly, half-yearly or annually. The interest amount never
differs as the interest paid is not depended on the
performance of the issuer. Adversely, if you buy debentures,
your interest rate may be high but the interest payment will
be periodic depending on the performance of the issuer.

5. There is no to the minimum risk involved in bond

investments but the risk factor is high in debentures.

6. At the time of liquidation, the bondholders are always given

preference.

7. If you own bonds, you can never convert it to equity shares,

but debentures can be transferred to equity funds.