The Scope of Interference with Company

Business under the Companies Act 1994

Submitted By Submitted To

Mohammad Sazzad Ali Sakib Professor Dr. Shima Zaman

Roll: 07
Course Title: Company Law PhD, Macquarie University,
Course Code: 304 Sydney, Australia.
 Table of Contents

Introduction ................................................................................................................................... 1

Company Business: Separate Legal Entity lying on Doctrine of Corporate veil .................... 1

Scope of Interference of the Court Through Lifting Corporate Veil: ..................................... 2

Statutory Provisions.................................................................................................................. 2

A) Carrying on business with less than the legal minimum members: Section 222 ......... 2

B) Fraudulently Trading: Section 259(2), 146,147 ........................................................... 2

C) Wrong description of the companies: Section 225, 78, 79 ........................................... 2

Judicial Interpretations ............................................................................................................ 3

A) Determination of Enemy Character: Daimler Co. Ltd. v. Continental Tyre and Rubber
Co. (Great Britain) Ltd- .......................................................................................................... 3

B) Prevention of Fraud/Façade/Sham: Jones v Lipmen– .................................................. 3

C) When the subsidiaries are not considered as a separate legal entity: Adams v Cape
Industries Plc; Smith, Stone and Knight Ltd v Lord Mayor of Birmingham; Union Carbide
Corp. v Union of India ............................................................................................................ 4

Conclusion: .................................................................................................................................... 4
Introduction
Before dealing with the scope of interference, it is pertinent to define what the meaning of a
company is. Strictly, a company has no certain definition but section 2(1)(c) of the Companies Act
1994 provides the meaning of the word in context of the provisions of the act which states:
‘Company means a company formed and registered under this Act or an existing company.’ The
company must be registered under the Companies Act for it to become an incorporated association
or separate legal person and thus it becomes a separate legal entity.

Company Business: Separate Legal Entity lying on Doctrine of Corporate veil

Corporation is a legal entity means that corporation, in the eye of law, is considered as a legal
person having certain rights and duties under the law.1 After corporation it gets some
characteristics i.e. artificial person, separate legal entity, only be extinguished by law.
Corporation is a juridical legal person, and it should be treated as separate legal person. Moreover,
the legal concept that separates the personality of a corporation from the personalities of its
shareholders and protects them from being personally liable for the company’s debts and other
obligations is called Corporate Veil. In fact, a company is separate from its members because of
this doctrine of Corporate Veil which is why it can be concluded saying that corporate veil is the
underlying philosophy of keeping the two sides distinct. If there is no corporate veil, there would
be no separate entity. In this general rule, the court cannot make the others liable except the
company. These concepts are developed through cases i.e. Salomon v Salomon2, Lee v Lee’s Air
Farming Co. Ltd3, Macaura v Northern Assurance Co. ltd.4 Here the most important one is
Salomon case which are discussed below:

Fact: Mr. Solomon had the business of shoe and boots manufacture. ‘Salomon & Co. Ltd.’
was incorporated by Solomon with seven subscribers-Himself, his wife, a daughter and four sons.
All shareholders held shares of UK pound 1 each. The company purchased the business of Salomon
for 39000 pounds, the purchase consideration was paid in terms of 10000 pounds debentures
conferring charge on the company’s assets, 20000 pounds in fully paid 1pound share each and the

1
Muhammad waqas and zahoor rehman, 'Separate Legal Entity of Corporation: The Corporate
Veil' [2016] 3(1) International Journal of Social Sciences and Management 1-4.
2
[1897] A.C. 22.
3
[1960] 3 All E.R. 420.
4
(1925) A.C. 619.
balance in cash. The company in less than one year ran into difficulties and liquidation proceedings
commenced. The assets of the company were not even sufficient to discharge the debentures (held
entirely by Salomon itself) and nothing was left to the insured creditors.

Issue: Whether the company by salomon did not comply the companies act and whether
salomon is personally liable or not.

Decision: Salomon is not personally liable as he is a sharer and corporate veil keeps the
personality between the shareholders and the company distinct from each other. Therefore, the
company is liable being a separate legal entity.

Reasoning: Here the liquidators’ contentions and the answer to it run as follows–

1. Salomon had the majority share above all therefore he is basically running a one man
company which I against the law and that’s why he is personally liable; He gets
approval from the relatives. Against which court said that the act itself is silent
regarding the maximum share and also said that nothing is mentioned regarding the
relatives’ being not qualified for a sharer that’s why these are irrelevant.
2. Selling at 40000 pounds was a fraud and he minimized the loss. Therefore, he is liable.
However, the court reasonably said that it was not farud as it followed the market price
though the motive was to minimize the loss.
3. If Salomon is encouraged with such a company, it would be an encouragement for one-
man company in future which would violate the act. Court took a liberal approach and
said that the business must go on basically this is an encouragement to business not
façade one rather to empower the economic balance.

In this case, Corporate veil was not lifted and therefore the company was lain on separate legal
entity principle. Further in Lee v. Lee’s Air Farming Ltd., it was held that there was a valid
contract of service between Lee and the Company, and Lee was therefore a worker within the
meaning of the Act. It was a logical consequence of the decision in Salomon’s case that one person
may function in the dual capacity both as director and employee of the same company.
Scope of Interference of the Court Through Lifting Corporate Veil:
The general rule is that the company is a separate legal entity and therefore court cannot make the
shareholders liable. However, the court can interfere and lift the veil and demolish the concept of
separate legal entity to some extents as it is often used as a shield to commit fraud and illegal acts.
This is known as ‘lifting of corporate veil’. It refers to the situation where a shareholder is held
liable for its corporation’s debts despite the rule of limited liability and/or separate personality.
The circumstances under which corporate veil may be lifted can be categorized broadly into two
following heads:

1. Statutory Provisions
2. Judicial interpretation

Statutory Provisions
A) Carrying on business with less than the legal minimum members: Section 222
This section provides that if the members of a company is reduced below seven in the case of a
public company and below two in the case of a private company (given in Section 12) and the
company continues to carry on the business for more than six months, while the number is so
reduced, every person who knows this fact and is a member of the company is severally liable for
the debts of the company contracted during that time. In A.S.A Nur V Registrar Joint Stock
Companies, it was held before six-month, corporate veil would not be lifted.5

B) Fraudulently Trading: Section 259(2), 146,147

In the event of winding up if it appears that the business had been carried on fraudulently to defraud
the official liquidator (259) or any creditor (147) the court may find the real personality as liable.
Section 146 and 147 mainly state the personal liability of persons fraudulently inducing persons
for making investment and making untrue statement in the prospectus. Thus here the company is
not liable rather individual person causing such fraudulent acts is liable.

C) Wrong description of the companies: Section 225, 78, 79

A document can be authenticated by signature by the directors and the company’s name on it.6
Section 78 requires a company to display in front of the office its name and registered address and

5
[1981] 1 BLD (AD) 202.
6
The Companies Act 1994, s 225.
show its name in seal, advertisement, bill, notice, official publication etc. Finally, section 78
provides that if a company defaults in complying with the provisions of sections 78 then every
officer who has knowingly or willingly approved of the default will be liable to penalty and
personally liable responsible for any debt of the company contracted on the bill heads etc.7

Judicial Interpretations
Besides statutory provisions for lifting the corporate veil, courts also do lift the corporate veil to
see the real situation. Some cases where the courts did lift the veil are as follows:

A) Determination of Enemy Character: Daimler Co. Ltd. v. Continental Tyre and Rubber
Co. (Great Britain) Ltd8-
There was a German company which set up a subsidiary company in Britain and entered into a
contract with Continental Tyre and Rubber Co. (Great Britain) Ltd. for the supply of tyres. During
the time of war, the British company refused to pay as trading with an alien company is prohibited
during that time. To find out whether the company was a German or a British company, the Court
lifted the veil and found out that the company was a German company and hence it was an enemy
company.

B) Prevention of Fraud/Façade/Sham: Jones v Lipmen9–

A vendor Mr. Lipman contracted to sell a house to Mr. jones for $5250. He changed his mind and
refused to complete. The seller of a piece of land sought to evade the specific performance of a
contract for the sale of the land by conveying the land to a company which he formed for the
purpose and thus he attempted to avoid completing the sale of his house to the plaintiff. Russel J.
describing the company as a ‘devise and a sham, a mask which he holds before his face and attempt
to avoid recognition by the eye of equity’ and ordered both the defendant and his company
specifically to perform the contract with the plaintiff.

7
M Zahir, Commentary on Company Law, (3rd Edn, Dhaka) 22.
8
[1916] 2 AC 307.
9
[1962] 1 All ER 442.
 C) When the subsidiaries are not considered as a separate legal entity: Adams v Cape
Industries Plc10; Smith, Stone and Knight Ltd v Lord Mayor of Birmingham11; Union
Carbide Corp. v Union of India 12

Generally, if a company has control over another company and it holds the majority of the shares
of another company, it is known as a holding company. However, Parent company and a subsidiary
company are distinct legal entities; However, this general rule is subject some exceptions. In
Adams v cape case, Court narrowed the path of lifting the corporate veil in case of subsidiaries
companies and pointed out three major yardsticks on the basis of which Court can interfere into
the company business even it is a parent company. The case runs as follows:

Issue: Whether Cape was present within the US jurisdiction through its subsidiaries or had
somehow submitted to the US jurisdiction.

Decision and Reasoning: Court found that Cape was not present in US through its
subsidiaries as the latter one as it is not working as an agency of Cape. According to the court the
presence can be found only if the veil is lifted, either treating the cape group as a single economic
unit or finding the subsidiaries were a mere façade or that they were agent for cape. Nevertheless,
there was no agency relation as subsidiaries were independent businesses free from the day-to-day
control of cape and with no general power to bind the parent. Therefore, cape could not present in
the US through its subsidiaries.

In contrast, Union Carbide Corp. v Union of India, the court lifted the corporate veil and
compensated thereafter the injured country. Therefore, we can contend that the court can interfere
in the above circumstances and these are the exceptions to the general rule of Salomon v Salomon
case.

Conclusion:
The principle of Salomon case is still the rule and the instances of piercing the veil are the
exceptions to this rule. The legislature and the courts have in many cases now allowed the

10
[1990] Ch 433.
11
[1939] 4 All ER 116.
12
(1990) AIR 273; (1989) SCC (2) 540.
corporate veil to be lifted. So, a corporation can own and sell properties, sue, or be sued, or commit
a criminal offence because a corporation is made up of and run by people, acting as agents of the
company. So, if this corporate personality is uncovered or unveiled, the shareholders or the
directors mostly are found to be behind the veil.