Lecture on the Definition of Company, Characteristics of

Company, Lifting Corporate veil, Relationship between

Company and Partnership
Course Code- LAW-3501
Course Title- Legal Environment of Business
LECTURE SHEET NO- 03
Muhammad Farhad Hossain (MFH)
Assistant Professor
Department of Law
International Islamic University Chittagong
Email: farhadlex@gmail.com
Phone- +8801818369741

A company, abbreviated as co., is a legal entity made up of an association of people, be

they natural, legal, or a mixture of both, for carrying on a commercial or industrial enterprise.
Company members share a common purpose, and unite to focus their various talents and
organize their collectively available skills or resources to achieve specific, declared goals.
Companies take various forms, such as:

➢ voluntary associations, which may include nonprofit organizations

➢ business entities with an aim of gaining a profit
➢ financial entities and banks

A company or association of persons can be created at law as a legal person so that the company
in itself can accept limited liability for civil responsibility and taxation incurred as members
perform (or fail to discharge) their duty within the publicly declared "birth
certificate" or published policy.
Companies as legal persons may associate and register themselves collectively as other
companies – often known as a corporate group. When a company closes, it may need a "death
certificate" to avoid further legal obligations.

Meanings and definitions

One can define a company as an "artificial person", invisible, intangible, created by or under
law, with a discrete legal personality, perpetual succession, and a common seal. Companies
remain unaffected by the death, insanity, or insolvency of an individual member.
Etymology
The English word company has its origins in the Old French term compagnie (first recorded in
1150), meaning a "society, friendship, intimacy; body of soldiers", which came from the Late
Latin word companio ("one who eats bread with you"), first attested in the Lex Salica (c. 500 CE)
as a calque of the Germanic expression gahlaibo (literally, "with bread"), related to Old High
German galeipo ("companion") and to Gothic gahlaiba ("messmate").
Semantics and usage
By 1303, the word referred to trade guilds Usage of the term company to mean "business
association" was first recorded in 1553, and the abbreviation "co." dates from 1769.

Generally, the term Company is used to describe an association of a number of persons,

formed for some common purpose and registered according to the law relating to companies.
Section ………….. of the Companies Act, 1994 states that a company means,
"a company formed and registered under this Act or an existing
company."
Lord Justice Lindley defines a company as follows:
"By a company is meant an association of many persons who contribute money or
money's worth to a common stock and employ it for a common purpose. The
common stock so contributed is denoted in money and is the capital of the
company. The persons who contribute it or to whom it belongs are members. The
proportion of capital to which each member is entitled is his share."
Explanation
A company, formed and registered under the Companies Act, is regarded by law as a
single person, having specified rights and obligations. The law confers on a company a
distinct legal personality, with perpetual succession and a common seal. Therefore, a
company is different from its members and the individuals composing it.
 ESSENTIAL FEATURES OF A COMPANY

A company is an association of persons, formed and registered under the Company Act-1994 or
any other previous act. The following are the major features of a company:

• It is an artificial person.
• It has a separate legal entity.
• It has limited liability.
• It has perpetual succession.
• It has a common seal.
• It can possess property in its own name.

The principal characteristics of an incorporated company can be summarized as follows:

1. Registration: A company comes into existence only after registration under the Companies Act.
But a statutory corporation is formed and commerce the business as notified or stated in the Act
and as passed in the Legislature. In case of partnership, registration is not compulsory.
2. Voluntary Association: A company is an association of many individuals on a voluntary basis.
Therefore, a company is formed by the choice and consent of the members.
3. Legal personality: A company is regarded by law as a single person. It has a legal personality.
This rule applies even in the case of “One-Man Company.
4. Contractual capacity: A shareholder of a company, in its individual capacity, cannot bind the
company in any way. The shareholder of a company can enter into a contract with the company
and be an employee of the company.
5. Management: A company is managed by the Board of Directors, whole time Directors, Managing
Director or Manager. These persons are selected in the manner provided by the Act and the
Articles of Association of the company. A shareholder, as such, cannot participate in the
management.
6. Capital: A company must have a capital, otherwise it cannot work.
7. Permanent existence: The company has Perpetual Succession. The death or insolvency of a
shareholder does not affect its existence. A company comes into end only when it is liquidated
according to provisions of the Companies Act.
8. Registered Office: A company must have a registered office.
9. Common Seal: A company must have a Common Seal.
10. Limited Liability: The liabilities of shareholder of a company are usually limited. The creditors of
a individual shareholders and a decree obtained against a company cannot be executed against
any shareholders. It can only be executed against the assets of the company.
11. Transferability: The shareholder of a company can transfer its share and ordinarily the transferee
becomes a member of the company.
12. Statutory Obligations: A company is required to comply with various statutory obligations
regarding management, e.g., filing balance sheets, maintaining proper account books and
registers etc.
13. Not a citizen: A company is an artificial person, not a natural person. Therefore, a company is not
a Citizen, although it may have a Domicile.
14. Residence: A company has a residence (for taxation and other purpose). A company does not
possess any fundamental rights.
15. No fundamental rights: Though a company has no fundamental rights, it can challenge a law as
void if the law happens to violate fundamental rights of citizens.

Prithvi Cotton Mills V. Broach Borough Municipality-

In order to succeed the company must prove that the impugned law is expropriator of a
citizen's property.
Statesman Ltd. and others v. Fact Finding Committee and others-
"It is true that the Statesman newspaper being a Company has no fundamental rights. But
the fundamental rights of the shareholders of the Company as citizens are not lost when
they associate to form a company. The shareholders' rights are equally and necessarily
affected if the rights of the Company are affected."
16. Social Objective: The present view as regard the legal nature of Company Law is that the
Company is a social institution having duties and responsibilities toward the community, its
workers, the national economy and progress.
17. Centrally Administrated: The administration of Compa ny Law is entrusted to the Joint Stock
Company, Bangladesh.
18. "Lifting the veil" of the company

"LIFTING THE VEIL" OF THE COMPANY

An incorporated Company has a legal personality. But a Company, as a legal person, can be
distinguished from the individual persons who own the shares of the company. A company can
be used for lawful activities. On the other hand, the owners and managers of the company can
use it as a clock for fraudulent activities. The human agency which works a company can use it as
a device or as a veil or as a stratagem for illegal and unsocial activities.
It is sometimes necessary to find out the ownership of the shares. It is also necessary to find the
persons who control the company. This is called, "Lifting or piercing of the Corporate veil". It can
be done by the Courts:
1. Relationship: The relationship between holding company and its subsidiaries can be
investigated. According to Sec. 212 of the Companies Act the balance sheet of a holding company
includes the particulars of subsidiaries.
2. Reduction of membership: If the number of membership is reduced to below seven in a public
company and below two in a private company, the remaining members become liable to the
creditors of the company to an unlimited extent (Sec. 45). The number of membership and their
names can be investigated.
3. Ownership: It is sometimes necessary to find out the ownership of the shares and the extent
of the controlling power or interest in a company relating to taxes. The Court has power to
disregard the corporate personality if it is used for tax evasion or to dodge tax obligation.
(Apthorpe v. Peter Schenhofen Brewing Co. Ltd.) "Though a company has a separate juristic
personality, Income-Tax authorities and Tribunals are entitled to lift the veil of corporate entity
of a company pay regard to economic realities behind legal facade". (Commissioner of Income
Tax, Madras v. Sri Meenakhsi Mills.)
4. Illegality: If a company is formed for an improper or unlawful object, the Tribunal can lift the
veil of the corporate entity so that the guilty person can be punished. (Jones v. Lipman.)
5. Abuse of power: A Tribunal can enquire into abuse of power by controlling interest in a
company under Sec. 395. (Mismanagement and Oppression.)
6. Trading with enemies: A company can be investigated if it is carrying on trade with enemy
aliens. (Daimler & Co. Ltd. v. Continent Tyre and Rubber Co.)
7. Monopoly: A company can be investigated if it was creating a monopoly.

COMPANY AND PARTNERSHIP

The company form of business organization enjoys a number of benefits over the partnership.
This is due to the fact that, in a partnership firm, there must be at least two persons, mutually
agree to run the business and share the profits or losses in a manner prescribed in the agreement.
The maximum number of partners a partnership firm could have is only 20. This gave rise to the
evolution of Company, in which there can be any number of members.
The company is an association of persons who came together for a common objective and share
its profit and losses. Despite the fact that, there are some similarities between the company and
partnership firm, there are a number of dissimilarities as well. In the given article, we are going
to talk about the difference between partnership firm and company.
The points of difference between a Partnership and a Company can be summed up as follows:
A company is regulated in accordance with the Companies Act-1994, while a partnership is
regulated by the Indian Partnership Act-1932.
1. Registration: A company comes into existence only after registration under the Companies
Act. In the case of a partnership, registration is not compulsory.
2. Minimum number of members: The minimum number of persons required to form a company
is 2 in the case of private companies and 7 in the case of public companies. The minimum number
of persons required to form a partnership is 2.
3. Maximum number of members: A public company may have any number of members. A
private company cannot have more than 50 members. A partnership carrying on banking
business cannot have more than 10 members and partnership carrying on other types of business
cannot have more than 20 members.
4. Legal Status: A company is regarded by law as a single person. It has a legal personality. A
partnership is a collection of individuals. It is not considered to be a single person.
5. Authority of members: The property of a partnership is the joint property of the partners.
Each partner has authority to bind the firm by his acts. The property of the company belongs A
shareholder in his individual capacity cannot bind the company in any way.
6. Contractual capacity: The shareholder of a company can enter into contracts with the
company and can be an employee of the company. Partners can contract with other partners but
not with the firm as a whole.
7. Management: A partnership firm is managed by the partners themselves. The work of
management can be distributed among them in any manager they like.
A company is managed by the Board of Directors or Whole Time Directors or Managing Directors
or Manager who are selected in the manner provided by the Act. A shareholder, as such, cannot
participate in the management.
8. Length of existence: A company has perpetual succession. The death or insolvency of a
member does not affect its existence. It comes to an end only when liquidated according to the
provisions of the Companies Act. A partnership, in the absence of a contract to the contrary,
comes to an end when a partner dies or becomes insolvent.
9. Liability of members: The liability of the members of a partnership for the debts of the firm is
unlimited. The liability of the members of a company is limited.
10. Liability of firm and company: The creditors of a firm are creditors of the individual partners
and a decree obtained against a firm can be executed against the individual partners. The
creditors of company are not creditors of the individual shareholders and decree obtained
against a company cannot be executed against any shareholder. It can only be executed against
the assets of the company.
11. Transferability: A partner of a firm cannot transfer his interest in the firm to an outsider and
make the transferee a partner without the consent of all the other partners. The shareholder of
a company can ordinarily transfer his share and the transferee becomes a member of the
company.
12.Statutory obligations: A company is required to comply with various statutory obligations
regarding management, e.g., filing balance sheets, maintaining proper account books and
registers. In the case of partnership there are no such statutory obligations.

Comparison Chart
BASIS FOR
PARTNERSHIP FIRM COMPANY
COMPARISON

Meaning When two or more persons A company is an association of

agree to carry on a business and persons who invests money towards
share the profits & losses a common stock, for carrying on a
mutually, it is known as a business and shares the profits &
Partnership firm. losses of the business.

Governing Act Partnership Act, 1932 Companies Act, 1994

How it is created? Partnership firm is created by The company is created by

mutual agreement between the incorporation under the Companies
partners. Act.

Registration Voluntary Obligatory

Minimum number Two Two in case of private company and

of persons Seven in case of public company.

Maximum number 20 partners 50 in case of a private company and a

of persons public company can have unlimited
number of members.
 BASIS FOR
PARTNERSHIP FIRM COMPANY
COMPARISON

Audit Not Mandatory Mandatory

Management of Partners itself. Directors

the concern

Liability Unlimited Limited

Contractual A partnership firm cannot enter A company can sue and be sued in its
capacity into contracts in its own name own name.

Minimum capital No such requirement 1 lakh in case of private company and

5 lakhs in case of public company.

Use of word No such requirement. Must use the word 'limited' or

limited 'private limited' as the case may be.

Legal formalities in No Yes

dissolution /
winding up

Separate legal No Yes

entity

Mutual agency Yes No