Sunday, July 4, 2010

Introduction to Company Law (Law 346)


There are three main forms of business organisations. i.e

i. Sole Proprietorship
ii. Partnership
iii. Company – a) Limited
b) Unlimited.

A Sole Proprietorship
The simplest economic and legal unit is the sole proprietor – that is, an individual carrying on business either entirely alone or employing others. As an economic unit he is very vulnerable since he can be made personally bankrupt for his business trade. i.e one person in business for himself.


Partnership is the relation of two or more persons carrying on a business in a common view to make profit. Partnership is a form of contract involving principles of commercial agency. These two types of business organisations are referred to as ‘unincorporated associations’.

The above-mentioned types of business organisations have no separate legal existence apart from the persons who conduct the business. A man may set aside property for the purpose of business, but in law that property is still his. He may run up debts or incur liabilities in the name of the business, but the law still fixes him with the obligation to discharge those debts and liabilities.

In contrast, a company is an incorporated association. Once it is formally incorporated, it becomes a separate legal person. An incorporated company may own property on its own name; once the property is transferred by the corporators to a company, those corporators cease to own the property. A company may incur debts and liabilities on its own behalf; the members will not be liable in respect of those debts and liabilities. It may be sued on its own name and sue on its own name.


No Separate existence apart from the persons who conduct the business. Here man may set aside property for his business but in law the property is still his. Incur liability in his name of business but the law still fixes him with the obligations of paying these liabilities.


In contrast, a company is an incorporated association. Once it is formally registered it becomes a separate legal entity / legal person – Salomon v Salomon & Co Ltd (1897). It has an existence apart from the person who formed it. The company can own it own property. It also can incur liabilities and can sue and be sued in its own name.

Number of Member

Sole proprietor – one member

Partnership - between 2 to 20 people. The upper limit is 20 because as per section 14(3): Partnership with more than 20 members should be registered as a company unless it is an association or partnership formed for the purpose of carrying on any professional .

Company – On the other hand, a company must have a minimum number of 2 persons. Section 36 Company Act makes it an offence for a company to carry on business for more than 6 months after the membership has fallen below 2.

Ability to Hold Property

Company hold its own property and the company’s assets are not legally own by the members. On the other hand in a sole proprietorship, the assets are that of the sole proprietor and in partnership, these are owned by the partners.

Member’s liability for debts.

In the case of unincorporated association, the members are ultimately responsible for all the debts of the firm. If the firm’s assets are insufficient to discharge the firm’s liabilities, the members must contribute towards those assets until the liabilities are discharged. The liability of the members to pay the firms debt is unlimited, and cannot be limited.

Mode of taking legal proceedings.

An unincorporated association has no legal personality. Therefore, any legal proceedings in which the firm may be involved are brought or defended in the name of the members of the firm, and not in the name of the firm. However according to the Rules of High Court 1980 Ord 77 do allow a person to sue and be sued using the firm’s name. In contrast an incorporated company must sue and be sued on its own name, the members have no right to do so.

Duration and dissolution

A sole proprietor can give up his business at anytime he wants. A partnership may be dissolved by agreement amongst partners. An unincorporated association dies when the members die but an incorporated organisation may live on regardless – even without business, without directors , without members.

Classification of a Company

Limited and unlimited Company

The company’s own liability for its debt is never limited. A company must pay off every single cent it owes to the creditors. The question of members’ liability becomes relevant when the company goes into liquidation, and debts cannot fully be discharged out of its assets.

Unlimited company is one, which the liability of the members is not limited in anyway. Generally speaking, when a company is wound up every present and the past member is liable to contribute to the assets of the company an amount sufficient for the payment of its debt and liabilities and the costs charges and expenses of the winding up and for the adjustment of the rights of the contributories among themselves.

In the case of a limited company, the liability of the members to contribute towards the assets of the company is limited.

According to Section 14 of the company’s Act - a company can be :-
Limited by shares
Limited by Guarantee
Limited by both shares and guarantee

However as per Section 14A (since 1985) no company can be formed which is limited by guarantee with share capital.

Public and Private Company

The name of a public company must end with the words public limited company. Its memorandum must state that it is to be a public company and it must have at least two directors. A company that is not a public company is a private company. The important distinguishing features of a public company is that the general public may be invited to buy its shares and other securities.

The securities of a private company cannot be listed on the Stock Exchange; it will be an offence for a private company to issue an advertisement offering its securities to the public.

“A listed company is a public company but not all public company is a listed company.”

[1] Section 214(1) CA 1965
[2] Section 15 CA 1965

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