Corporate Law: The Basic Concepts

The Author, Adhip Ray, is a 3rd-year, BA.LLB student at Amity University, Kolkata. He is currently interning with LatestLaws.com.

The article on “The Essential Elements of Corporate Law: What Is Corporate Law?”, authored by John Armour, Henry Hansmann, Reinier Kraakman published at Harvard John M. Olin Center for Law, Economics, and Business, is one of the leading literatures dealing on trying to define what corporate law actually is.

While lawyers and business executives may be throwing the term corporate law, left and right, we rarely understand the massive magnitude of this term.

Corporate law, in spite of popular opinion isn’t just company law.

It is not restricted to laws relating to how businesses or more specifically corporate operate. Rather it is spread over a vast majority of laws starting from registration of a company and pretty much ending nowhere.

We might be tempted to refer that insolvency and bankruptcy of a company marks its end, however that is not so for corporate law.

In fact, just this collection of the bare-acts on corporate law will help you understand the magnitude of corporate law!

However, even though the subject is so broad, we can boil it down to some basics, starting with-

What is a Corporate?

A corporate is a body or collection of people that have joined together to do business. Usually corporate are companies. Corporates are considered as artificial persons and legal fictions as they are bestowed with the recognition of persons, for their ease of operation.

This separation of a company from its members has helped separate the liabilities of a company from that of its members. Similarly, the assets and capitals of a company are known as its own assets and capitals and not that of its members.

In the case of New Horizons Ltd v. Union of Delhi[1], Justice Wadhwa of the Delhi High Court cited the following passage from Palmer’s Company Law –

“The principle that, apart from exceptional cases, the company is a body corporate, distinct from its members, lies at the root of many of the most perplexing questions, a distinction which must be firmly grasped.

The principle is thrown into clear relief by contrasting an incorporated company with a partnership, for under English law (though not under Scottish law or that of most Continental systems) a firm or partnership is not a separate entity from its members.”

A Corporate is Distinct from its Members

As soon as a corporate is born, it becomes distinct from its members. Its rights, liabilities as well as assets are its own and not that of its members.

In fact, the case of Salomon v. Salomon & Co. Ltd[2] is a leading case on this topic.

In this case, Salomon created a company under his own name Salomon & Co. Ltd by making his wife, sons and daughters subscribe themselves to the memorandum of the company. He then transferred his business to the company for 40000 euros of which he took 20,000 shares of one euro each and debentures worth 10,000 euros.

One share was also given to each member of his family. In course of his business, he took 7000 euros worth of credits from several individuals.

However, within an year, his company went into liquidation and he had to wind it up. Since he had debentures, he was paid to the exclusion of all the creditors even though they contended that his business was entirely under his control and his company was merely a sham and fraud entirely contradictory to the meaning of the Companies Act, 2013.

Exceptions to this Legal Principle

However, with time, this principle was starting to create hardships in case of doing business and even for crediting purposes.

As such, the Court created a doctrine known as lifting of the Corporate veil wherein the Court will lift the corporate veil of a company to determine its character, or if it has been engaged in any fraud or for benefit of revenue.

In the case of State of Karnataka v. Selvi J. Jayalalitha[3], the Supreme Court held that a company is a separate legal entity subject to the exception when it is a mere cloak or sham used to misdirect shareholders and authorities.

There is a lot of analysis on lifting of corporate veil of a company but it is safe to say that instances of frauds have greatly reduced due to this doctrine.

Features of a Body Corporate

A body corporate has certain features like no other business structure, which are as follows-

1. Independent Corporate Existence – As we said before, this is the fact that a corporate exists apart from its constituent members. Although the expression “body corporate” or “corporation” is defined in Section 2(11) of the Companies Act, 2013, the case of Ashoka Mktg Ltd.v. Punjab National Bank[4],   the Supreme Court helped provide a more detailed explanation of the term “body corporate”.

However it should be noted that the same act however pierces the independent existence of the company in cases of certain offences and punishes directors as well as key managerial personnel of the company for cases of wrong doing, such as for corporate breach of environmental laws. The reason this is done is because a company doesn’t act on its own. Its directors are basically its brain and therefore they are provided with certain duties and responsibilities failing which they are penalised.

However it has been held by the High Court of Bombay that directors can not be representatives in a criminal trial.

2. Limited Liability – The members of a company usually frame the company with their liability limited to unpaid amounts of shares held by them or by guarantee as may be specified in the memorandum of a company, which is basically the constitution document of a company.
3. Perpetual Succession – A company never dies. It may get wound up, but its span of living is entirely independent of the life of its members. Its membership may change hands but it will remain the same entity with the same priviledges, immunities and possessions.[5]
4. Separate Property and Transferability of Shares – A company being a separate legal person is capable of holding and selling off property. However since ownership of a company is denoted by shares, it is capable of changing hands and thus being transferred. Section 44 of the Companies Act, 2013 provides that “The shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company.”
5. Capacity to Sue and be sued by others – Again, as we stated before, just like a person can sue and be sued, the same applies in case of companies. In the case of Union Bank of India v. Khaders International Construction Ltd[6], it was held that managing director of a company need not be a necessary party to corporate proceedings.

Kinds of Corporates

We have been talking about companies as a corporate all this while. However, it should be noted that corporate is not a business structure. It is a form of legal entity. Even LLPs are given a corporate legal entity.

However, in the main slay of things, when we say a corporate, we usually refer to a company.

Section 3 of the Companies Act, 2013 provides the different structures of companies that may be formed.

These are primarily-

1. One Person Company- This is a form of company with only one member, as is defined in Section 2(62) of the Companies Act, 2013. An investment opportunity in this company is not possible as shares can not be transferred unless the company is changed to that of a private company.
2. Private Company – These types of companies can be formed with two members. However, membership is restricted to 200 members. A private company is defined under Section 3(1)(b) of the Companies Act, 2013. A private company needs to have only two directors and has several flexibilities in its operations as compared to OPCs or public companies. However it can not issue a prospectus for asking for shares from the public.
3. Public Company – A public company has 3 or more members. It may ask for shares from the public by issuing a prospectus. Although there are a lot of restrictions in its operations, large businesses which require a lot of capital often use this business structure to conduct business. It is defined in Section 2(71) of the Companies Act, 2013.

There are a lot of other forms of companies such as a small company as defined in Section 2(85), foreign company, which for the purpose of Section 2(42) and 379 means a company though incorporated outside India carries business and has a place of business in India.

A Government company, as defined in Section 2(45) is also a form of corporate.

Conclusion

As we can see the facet of corporate law is quite vast. However these according to me, form the basic concepts of corporate law. However corporate law can be so much more and include everything such as taxation of a company and go on to international laws on trade secrets. It may even include competition laws as placed by different countries.

But, for any person who is not well versant with the corporate law, this will serve as the basic building blocks of the legal knowledge on corporate law.