"A company is an artificial entity born out of the process of law having perpetual succession and a common seal." Do you agree with this statement defining a company? Write a detailed note on the merits and demerits of incorporation of a company.

Question:  "A company is an artificial entity born out of the process of law having perpetual succession and a common seal." Do you agree with this statement defining a company? Write a detailed note on the merits and demerits of incorporation of a company. [BJS 2017]

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Answer

The statement "A company is an artificial entity born out of the process of law having perpetual succession and a common seal" is a generally accepted definition of a company which was given by Prof. Haney and it is in line with the definition provided in the Companies Act and various case laws.

Under Companies Act, 2013 – Section 2(20) –

‘Company’ means a company incorporated under this Act or under any previous company law;

The concept of a company being an "artificial entity" means that it is a legal construct created by the process of law, rather than a natural person. This idea was established in the landmark case of Salomon v. Salomon & Co. Ltd., [1896] UKHL 1, where the court held that a company is a legal person separate from its shareholders and that it has the capacity to enter into contracts, sue and be sued, and own property in its own name.

Perpetual Succession

A company does not cease to exist unless it is specifically wound up or the task for which it was formed has been completed. Membership of a company may keep on changing from time to time but that does not affect life of the company. Insolvency or Death of a member does not affect the existence of the company. The existence of a Company is not affected by the retirement, death, lunacy or insolvency of its members. Shareholders may come and Shareholders may go but the Company goes on forever unless wound up according to the Companies Act.

The concept of "perpetual succession" means that a company continues to exist even if its shareholders or directors change. This allows the company to carry on its business without interruption and means that the company's obligations and liabilities are not affected by changes in its membership. This idea was established in the case of Macaura v. Northern Assurance Co Ltd, [1925] AC 619, where the court held that the company, being an artificial person, has perpetual succession and its existence is not affected by the death of its shareholders.

Separate Property

A company is a distinct legal entity. The company's property is it's own. A member cannot claim to be the owner of the company's property during the existence of the company.

Transferability of Shares

The capital of the company is contributed by its members. It is divided into shares of the predetermined value. The members of a public company are free to transfer their shares to anyone else without any restriction. The private companies, however, do impose some restrictions on the transfer of shares by their members. The shares of a joint stock company are freely transferable. It does not require any permission from the company or the consent of other shareholders. The shares of listed companies can be sold or purchased on the stock exchange and ownership transferred without any difficulty. However, in the case of a private limited company, the transfer of shares is subject to the restrictions given in the company’s articles.

Common Seal

The concept of a "common seal" refers to the official seal of a company, which is used to execute documents on behalf of the company is the official signature of the company, and any document executed under its seal is binding on the company.

Being an artificial person, a company can act through natural persons only. The acts of a company are authorized by the “common seal”. The “common seal” is the official signature of the company. A document not bearing the common seal is not binding on the company. While a company is an artificial person and works through the agency of human beings, it has an official signature. This is affixed by the officers and employees of the company on all its documents. This official signature is the Common Seal. However, the Companies (Amendment) Act, of 2015 has made the Common Seal optional. Section 9 of the Act does not have the phrase ‘and a common seal’ in it. This provides an alternative mode of authorization for companies who do not wish to have a common seal.

According to this amendment, if a company does not have a common seal, then the authorization shall be done by:

• Two Directors or
• One Director and the Company Secretary (if the company has appointed a Company Secretary).

Therefore it can be concluded that the statement "A company is an artificial entity born out of the process of law having perpetual succession and a common seal" is a generally accepted definition of a company, and it is in line with the definition provided in the Companies Act and various case laws.

Merits and Demerits of incorporation of a company:

The incorporation of a company has several advantages:

Limited liability: Shareholders are only liable for the amount of their investment in the company, rather than being personally liable for the company's debts.

Separation of ownership and management: Shareholders can elect a board of directors to manage the company, enabling them to separate the ownership and management of the business.

Raising capital: Incorporated companies can raise capital by issuing shares, which can be sold to investors.

Perpetual existence: Incorporated companies have a perpetual existence, meaning they continue to exist even if shareholders change.

Easier to transfer ownership: Ownership of an incorporated company can be easily transferred by buying and selling shares.

However, there are also some disadvantages to incorporation:

Increased legal and financial requirements: Incorporated companies have to comply with more legal and financial requirements than unincorporated businesses, which can be costly and time-consuming.

Double taxation: Incorporated companies are subject to corporate income tax, and any profits distributed to shareholders are also subject to personal income tax.

More bureaucratic: Incorporated companies are subject to more regulations, which can create a more bureaucratic environment than unincorporated businesses.

Loss of privacy: Incorporated companies must file annual reports and disclose certain information to the public, which can lead to a loss of privacy.

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