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CA Foundation · Business Laws · The Companies Act, 2013

Meera, Karan and Tanvi hold shares in Lotus Herbals Ltd., a public company. Meera, the company's largest shareholder, says that because she controls most of the votes, the company's property is effectively hers and she may take stock from the warehouse for personal use without any formal dealing with the company. Which principle of company law makes her view incorrect?

The correct principle is separate legal entity. After incorporation, the company is a distinct person from its members, so its assets belong to the company. A shareholder, even a majority one, owns only shares and cannot take company stock for personal use as if she owned it.

  1. AA company is a separate legal entity, so its property belongs to the company and not to its membersCorrect
  2. BA company's property belongs to the majority shareholder, but only if she holds more than three-fourths of the shares
  3. CA company's property belongs jointly to all members in proportion to their shares, so each can take stock
  4. DA company's property belongs to the directors, who hold it as co-owners on behalf of members

Explanation

Once incorporated, a company is a legal person distinct from its members. Its assets belong to the company itself, and a shareholder has only the rights attached to her shares, such as dividends and voting, not ownership of specific assets. The option stating that members jointly own the property is wrong because shareholders hold shares, not title to company assets.

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