The company: history, nature and corporate personality

1. Historical development

In England the early trading companies (the East India Company of 1600 among them) were incorporated by royal charter. Speculation led to the Bubble Act, 1720, which restricted unincorporated joint stock ventures until its repeal in 1825. Registration as a route to incorporation came with the Joint Stock Companies Act, 1844, and limited liability with the Limited Liability Act, 1855. The Companies Act, 1862 consolidated the law, and it was under that Act that Salomon was decided.

India followed the English model closely:

• Joint Stock Companies Act, 1850 — the first Indian statute, providing for registration but not limited liability.
• 1857 Act — introduced limited liability (extended to banking companies in 1858).
• Indian Companies Acts of 1866, 1882 and 1913 — successive consolidations, each tracking the English Acts of the day.
• Companies Act, 1956 — enacted on the Bhabha Committee report; a long and heavily regulatory statute, amended more than twenty times.
• Companies Act, 2013 — based on the J.J. Irani Committee (2005), in force in stages from 2013–14. It introduced the One Person Company, independent directors, mandatory CSR, class actions and the National Company Law Tribunal. It has been amended in 2015, 2017 (Act 1 of 2018), 2019 and 2020; the 2020 Amendment (Act 29 of 2020) removed imprisonment for many procedural defaults and converted them into civil penalties adjudicated under section 454. The winding up chapters were rewritten in 2016 by the Insolvency and Bankruptcy Code.

2. Meaning of company

Section 2(20) of the 2013 Act defines a company only as “a company incorporated under this Act or under any previous company law”. The definition tells you how a company comes into being, not what it is. For the nature of a company you go to the case law and to Lord Lindley's description of 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, sharing the profit or loss.

Section 9 states the legal effect: from the date of incorporation mentioned in the certificate, the subscribers and all later members become a body corporate by the registered name, with perpetual succession, power to acquire, hold and dispose of property, to contract, and to sue and be sued in that name.

3. Separate legal personality: Salomon

In Salomon v. A. Salomon & Co. Ltd. (House of Lords, 1897), Aron Salomon sold his boot business to a company formed for the purpose. He held 20,001 of the 20,007 shares; his wife and five children held one each. Part of the price was paid in secured debentures. When the company failed, the liquidator argued that the company was only Salomon's agent or a sham, so he should pay its debts and his debentures should rank after the unsecured creditors. The House of Lords rejected this. Once the statutory formalities are met, the company is a different person from its members, even if one man holds almost all the shares; it is not his agent; and Salomon, as a secured creditor, was entitled to be paid first.

The principle has been applied many times:

• Lee v. Lee's Air Farming Ltd. (Privy Council, 1961) — Lee, the controlling shareholder and governing director, was also employed as the company's pilot. When he died in a crash his widow could claim workmen's compensation, because he was the company's employee: the company and Lee were two persons who could contract with each other.
• Macaura v. Northern Assurance Co. (House of Lords, 1925) — Macaura sold his timber to a company he wholly owned, but insured it in his own name. When it burned he could not recover: the timber belonged to the company, and a shareholder has no insurable interest in the company's assets.
• Bacha F. Guzdar v. Commissioner of Income-tax, Bombay, 1954 INSC 102, AIR 1955 SC 74 — a shareholder is not a part-owner of the company's property. Dividend from a tea company was therefore not agricultural income in the shareholder's hands, although the company's own income came from agriculture.

4. Characteristics of a company

• Incorporated association. It comes into existence only on registration under the Act (section 7).
• Separate legal entity. Distinct from its members (Salomon).
• Limited liability. In a company limited by shares a member's liability is limited to the amount unpaid on his shares (section 4(1)(d)(i)); in a company limited by guarantee, to the amount he undertook to contribute on winding up.
• Perpetual succession. Members may come and go, die or become insolvent; the company continues until it is wound up or struck off.
• Separate property. The company owns its assets; the members do not (Macaura, Bacha Guzdar).
• Transferability of shares. Shares are movable property (section 44); in a public company they are freely transferable (section 58(2)), while a private company must restrict transfer by its articles (section 2(68)).
• Common seal. No longer compulsory: the 2015 Amendment made the seal optional, and documents may be authenticated by directors or the company secretary.
• Capacity to sue and be sued in its own name.
• Separation of ownership and management. Members own; the Board manages.

5. Advantages and disadvantages of incorporation

The advantages are the characteristics turned into reasons for incorporating: limited liability for the investor; perpetual succession, so the business survives its founders; the ability to raise large capital from many investors; free transferability and therefore liquidity of investment; separate property, which keeps business assets distinct from the owners' estates; borrowing on the security of a floating charge, which a firm cannot create; and professional management.

The disadvantages should be given in a sentence or two: formality and expense of formation; continuing compliance and disclosure obligations; loss of privacy, since documents filed with the Registrar are open to inspection (section 399); separation of control from ownership, which allows the majority or the managers to act against minority interests; and the possibility that the veil of incorporation will be lifted where it is misused.

6. Limited liability and its limits

Limited liability protects members; it does not protect the company, which is liable for all its debts without limit. The protection is also withdrawn by statute in some cases. Under section 3A (inserted by the 2017 Amendment), if the membership of a public company falls below seven, or of a private company below two, and it carries on business for more than six months while so reduced, every member who knows of it is severally liable for the whole debts contracted after those six months. Directors may also be made personally liable for fraudulent conduct of business (section 339) and the Tribunal may direct that members' liability be unlimited where the company was incorporated by fraud (section 7(7)(b)).

7. Problem

During the war, all the members of a private company, while in general meeting, were killed by a bomb. Does the company cease to exist?

Issue. Whether the death of every member brings the company to an end.

Law. Under section 9 a company is a body corporate with perpetual succession. It is a person separate from its members (Salomon). A company ends only by the process the law prescribes: winding up by the Tribunal under sections 270–271, voluntary liquidation under section 59 of the Insolvency and Bankruptcy Code, 2016, or removal of its name from the register under section 248. On a member's death his shares pass by transmission to his legal representatives, whom the company registers on proof of title (section 56(2)).

Application. The bomb killed the members, not the company. Their shares devolve on their heirs or legal representatives, who may be registered as members and can then appoint directors and continue the business. Section 3A is not attracted merely because, for a short period, there are no registered members: it imposes personal liability on members who knowingly carry on business with too few members for more than six months, and here no one is carrying on business. Gower's well-known illustration is exactly this case: a private company whose members were all killed by a bomb during a general meeting in the Second World War survived them.

Conclusion. The company does not cease to exist. It continues with perpetual succession until it is wound up or struck off, and the heirs of the deceased members step into their shoes by transmission.

How this is examined

January 2026 asked “What are the advantages of incorporation of a company?” as the 10-mark question and set the bomb problem above as the 6-mark alternative. June 2025 asked for a short note on “independent corporate existence of a company”. All three are answered from this note: define a company with section 2(20) and section 9, state Salomon in full, add Lee, Macaura and Bacha Guzdar, list the characteristics, and close with the limits on limited liability. For an essay on advantages, add a short paragraph on the disadvantages; it shows balance and costs you two minutes.