A Comprehensive Analysis of Section 9 of the Companies Act, 2013

In this article, the author seeks to comprehensively analyse the effect of the registration of a company which is provided in Section 9 of the Companies Act, 2013. The article also focuses on explaining in details the elements of the provision with the help of judicial pronouncements.

I. Introduction

A company is the most important corporate entity in today’s business world and is formed for the fulfilment of a lawful objective. Unlike certain other forms of business models such as a partnership firm, a company comes into existence only upon its registration as mandated by the Companies Act. It means that the birth of a company is dependent on receiving the certificate of incorporation from the Registrar of Companies under Section 7 of the Act.

It is only on registration that a company receives its status as a legal person having a distinct identity and independent existence. The effect of registration of a company has been clearly enumerated in Section 9 of the Companies Act, 2013.

II. The Provision Regarding the Effect of Registration

Section 9 of the Act reads:

“From the date of incorporation mentioned in the certificate of incorporation, such subscribers to the memorandum and all other persons, as may, from time to time, become members of the company, shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company under this Act and having perpetual succession with power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name.” [1]

III. Elements of Section 9 of the Companies Act

To put it simply, the effect of registration can be summarised as:

• The subscribers to the memorandum of association shall become members of the company.
• The company shall attain the status of a separate legal entity from the date of incorporation as provided in the registration certificate with the name contained in the memorandum.
• The company shall have perpetual succession
• The company shall have the power to acquire, hold and dispose of property
• The company shall have the power to enter into contracts in their own name
• The company shall have the power to sue and be sued in its own name.
• Members or shareholders

The words “member” and “shareholder” are often used interchangeably and, generally speaking, apart from the few exceptional situations, are synonyms. For instance, there are companies limited by guarantee or unlimited companies, which may not have share capital and hence, can have no shareholders but they do have members. Section 2(55) of the Act defines a member in relation to a company. It enunciates that a person can become a member by subscribing to its memorandum, by allotment or by agreeing in writing to become a member and with the name entered in the register of members, beneficial owners in records of a depository; by transmission and by transfer as well.[2]

It must be noted that every person who is competent to contract can be a member of a company. A minor and a person of unsound mind, being incompetent to contract, cannot be members of a company. It must be taken into consideration that a company, being a legal person, can become a member of another company if its memorandum empowers it to invest money in shares.[3]

• Company is a Separate Legal Entity

One of the most important features of a company is that once it is registered under the Companies Act, it becomes vested with a corporate personality which is independent and distinct from its members. The major effect of registration is that it bestows a company with a legal personality. It is called a body corporate because the persons composing it are made into one body by incorporating it according to the law and clothing it with legal personality.

The word “corporation” is derived from the Latin term “corpus” which means “body”. As a legal person, a corporate is capable of enjoying many rights and incurring many liabilities of a natural person. In the landmark case of Salomon v. Salomon and Co. Ltd [4], the principle that a company is a separate legal person distinct from its members was clearly established by the court.

• Company has Perpetual Succession

Perpetual succession is another benefit of registration. Once registered, a company’s existence is not depended on its members. It is often said than an incorporated company never dies. A company cease to exist only by procedure prescribed by law. According to Professor Gower:

“Members may come and go, but the company can go on forever. During the war, all the members of one private company, while in a general meeting, were killed by a bomb. But the company survived; not even hydrogen bomb could have destroyed it.”[5]

This means neither the death nor the insolvency of its member shall have any effect on the continued existence of the company.

Perpetual succession means that the membership of a company may keep changing from time to time, but that shall not affect its continuity. Even if there is a complete alteration in the membership of a company, the company shall remain the same. The membership of an incorporated company may change either because one shareholder has sold/transferred his shares to another or his shares devolve on his legal representatives on his death or he ceases to be a member under some other provisions of the Companies Act.

Perpetual succession denotes the ability of a company to maintain its existence by the succession of new individuals who step into the shoes of those who cease to be members of the company. The company remains the same entity “in the manner as river Thames is still the same river, though the parts which compose it are changing every instant[6].”

• Power to hold Separate Property

The property of a registered company is vested in the corporate body itself. A company is capable of holding and enjoying property in its own name once it has been properly registered. No member, not even all the members can claim ownership of any of the company’s assets. In the case of R.F. Perumal v. H. John Deavin [7], the court held that “no member can claim himself to be the owner of the company’s property during its existence or in its winding-up”. In another case of Macaura v Northern Assurance Co Ltd [8], the court had held that the shareholder does not even have in the company’s property.

• Power to Enter into Contracts

A company, being a legal entity different from its members is capable of entering into contracts for the conduct of the business in its own name. It must be noted that a shareholder cannot enforce a contract made by his company. It is because he is neither a party to the contract nor can he be entitled to the benefit derived from it, as a company is not a trustee for its shareholders.

Similarly, a shareholder cannot be sued on contracts made by his company. The distinction between a company and its members is not confined to the rules of privity but permeates the whole law of contract. Thus, if a director fails to disclose a breach of his duties towards his company, and in consequence, a shareholder is induced to enter into a contract with the director on behalf of the company which he would not have entered into had there been a disclosure, the shareholder cannot rescind the contract.

• Company has the Power to Sue and Get Sued in its Own Corporate Name

Once a company has been registered and receives the certificate of incorporation, it becomes entitled to sue and be sued in its own name. To sue means to institute legal proceedings against (a person) or to bring a suit in a court of law. All legal proceedings against the company are to be instituted in its name. Similarly, the company may bring an action against anyone in its own name. A company’s right to sue arises when some loss is caused to the company, i.e., to the property or the personality of the company. Moreover, it must be noted that a company, being distinct from its members, has the right to sue even one of its own members.

In the case of Floating Services Ltd. v. MV San Fransceco Dipaloa [9], it was held that a company has the right to sue for damages in libel or slander as the case may be. Thus, when a defamatory material is published which affects a company’s reputation and business, a company has every right to seek damages. In the case of Lalit Surajmal Kanodia v. Office Tiger Database Systems India (P) Ltd [10], it was held that a company is not liable for contempt committed by its officer.

IV. Conclusion

To conclude, it is very evident that all the rights, as well as liabilities which are vested in a company, are a result of its registration. It is only when a company is registered that it attains the status of an artificial legal person and the rights bestowed on them are a result of registration as well. In this article, the elements of Section 9 of the Companies Act, 2013 have been comprehensively analysed.

References

[1] Extract of Section 9 of CA, 2013

[2] See Section 2(55) of CA, 2013

[3] Avatar Singh, Business Law (10^th ed., 2014) 590.

[4] (1897) A.C. 22, Available Here

[5] L.C.B Gower, Modern Company Law (2^nd ed., 1957) 71.

[6] Avatar Singh, Business Law (10^th ed., 2014) 542

[7] A.I.R. 1960 Mad. 43

[8] 1925 AC 619 (HL)

[9] (2004) 52 SCL 762 (Guj)

[10] (2006) 129 Com Cases 192 Mad

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1. Company Law; Notes, Case Laws and Study Material