Chapter

Basic Concept
1

Chapters Overview

Contents
 Introduction
 Characteristics/Features/Advantages of Company
 Important Case Studies
 Concept of Corporate veil & Lifting of such veil
Basic Concept Company Law

INTRODUCTION
❖ The word ‘company’ generally means coming together to generate penny i.e. money, and it
originally referred to an association of persons who took their meals together. Company is a
joint stock enterprise in which the capital is contributed by several people.

❖ Thus, a company denotes an association of likeminded persons formed for the purpose of
carrying on some business or undertaking. A company [Incorporated] is a corporate body and
a legal person having status and personality distinct and separate from the members
constituting it.

❖ 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. Accordingly,
‘corporation’ is a legal person created by a process other than natural birth. It is, therefore,
sometimes called artificial legal person.

❖ An incorporated company [including OPC]/body corporate/corporation owes its existence either

to a special Act of Parliament or to company law.

Form of company

COMPANY may be in the form of:

Incorporated Unincorporated
Corporation
company company

Enacted by a special Mere collection/aggregation

A separate person distinct
Act of Parliament, of individuals,
from the individuals
e.g. LIC of India. e.g. Partnership firm.
constituting it,
e.g. Tata Iron & Steel Co. Ltd.

IN THE LEGAL SENSE:

A company is an association of both natural and artificial persons incorporated under the
existing law of a country.
AS PER THE COMPANIES ACT, 2013:
A “company means a company formed and registered under the Companies Act, 2013 or
under the previous company law" [Sec.2(20)].

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Basic Concept Company Law

AS PER JUDICIAL JUDGEMENT:

⧫ Company means a voluntary organization of persons who are contributing their money in the
common stock of the company and who agree to invest the same for a common goal/purpose,
and to share the profits and the losses arising threfrom.

⧫ Persons who are contributing their money are called as shareholders or members; and the
common stock in which contributed is called share capital of the company.

WETHER ALL COMPANIES ARE INCORPORATED FOR EARNING THE PROFITS?

 Section 8 of the companies Act, 2013 deals with “associations not for profit”, i.e. the companies
meant for promotion of arts, science, culture or commerce, and which prohibit the payment of
dividend to its members by AOA.
 Such company [including OPC] get itself registered under Companies Act without the words
“Ltd./Pvt. Ltd. at the end of its name after obtaining licence from the CG (RD). For Example: CII,
FICCI etc.

Characteristics/features [advantages] of company

Main characteristics or features

1. CORPORATE ✓ The company being a separate legal entity bears its own name and
PERSONALITY: acts under a corporate name.
✓ It has a seal of its own. Its assets are separate and distinct from
those of its members.
✓ It is capable of owning property, incurring debts, borrowing money,
having a bank account, employing people, entering into contracts and
suing or being sued in the same manner as an individual.
✓ A shareholder cannot be held liable for the acts of the company
even if he holds the entire share capital. The shareholders are not
the agents of the company and so they cannot bind it by their acts.
✓ The company does not hold its property as an agent or trustee
for its members and they cannot sue to enforce its rights, nor can they
be sued in respect of its liabilities.
2. LIMITED LIABILITY The company being a separate entity, leading its own business life, the
members are not liable for its debts.

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Basic Concept Company Law

The liability of the members:

➢ In the case of a company limited by shares: to the extent of the
nominal value of the shares held by them.
➢ In the case of a company limited by guarantee: only to the
extent of the amount guaranteed by them and not beyond, and only
when the company goes into liquidation.

3. PERPETUAL ✓ An incorporated company never dies, except when it is wound up as

SUCCESSION per law. A company, being a separate legal entity is unaffected by
death/departure of any member even in case of total change in the
membership.
✓ Perpetual succession, therefore, means that the membership of a
company may keep changing from time to time, but that shall not
affect its continuity which means “Members may come and go, but
the company can go on forever”

✓ Even in case of war all the members of one private company, while in
GM, were killed by a bomb, but the company survived — not even
a hydrogen bomb could have destroyed it”

4. SEPARATE → A company being a legal person and entirely distinct from its
PROPERTY members, is capable of owning, enjoying and disposing of
property in its own name.
→ “No member can claim himself to be the owner of the company’s
property during its existence or in its winding-up”. A member does
not even have an insurable interest in the property of the company.

5. TRANSFERABILITY ✓ The capital of a company is divided into parts, called shares. The
OF SHARES shares are said to be movable property and, subject to certain
conditions, freely transferable and therefore provide liquidity to the
members.
✓ The shares of public companies are freely transferable. In the case
of a private company, the Companies Act put certain restrictions on
the transferability of shares.

6. COMMON SEAL ➢ Although company is a separate legal entity yet it has no physical
existence, therefore require to act through its agents and all such
contracts entered into by its agents must be under the seal of the
company.
➢ The common seal, acts as the official signature of a company. The
name of the company must be engraved on its common seal.
➢ A document not bearing common seal is not authentic and has
no legal force behind the company.

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Basic Concept Company Law

Points to be Remembered:

Now the common seal is made at the option of the company.

Companies act 2013 required common seal to be affixed on
certain documents (such as bill of exchange, share
certificates, etc.) Now, the use of common seal has been
made optional. All such documents which required affixing the
common seal may now instead be signed by two directors or
one director and a company secretary of the company.

7. CAPACITY TO SUE ✓ A company, being a separate entity, can sue and be sued in its own
AND BE SUED name.

✓ All legal proceedings against the company are to be instituted in its

own name. Similarly, the company may bring an action against
anyone in its own name.

CONCEPT OF CORPORATE VEIL

• Separate legal identity of the company acts as a “corporate veil” which segregates the
persons present inside the company (i.e. BOD and the Members) from the outside world.

• All the benefits accruing to the company are enjoyed by its members and directors, but if
the company commits any breach of contract then the suit is faced by the company in its own
name, and not by the shareholders and directors in their personal names.

LIFTING OF OR PIERCING THROUGH THE CORPORATE VEIL

 Although company is a distinct personality but in fact it is an association of persons

[including OPC] who are the beneficial owners of the property of the body corporate. A
company, being an artificial person, cannot act on its own, it can act only through
natural persons.

 As the company is a separate personality under the eyes of law, it must be used for
legitimate business purposes only. And if a fraudulent and dishonest use is made of the
legal entity, the individuals concerned will not be allowed to take shelter behind the
corporate personality. The Court will break through the corporate shell and apply the
principle of “lifting of or piercing through corporate veil”.

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Basic Concept Company Law

Circumstances where corporate veil is lifted.

AS PER STATUTORY PROVISIONS
In case of furnishing false Making of fraudulent application for In case of fraudulent conduct of the
information for incorporation removal of name of company from business while in the course of
[Sec.7] register of companies [Sec.251] winding up [Sec.339]

AS PER JUDICIAL PRONOUNCEMENT

Situations of Cases on the basis of situations where
lifting of corporate veil has lifted
corporate veil

Where the corporate In Jones v. Lipman, (1962)

veil has been used for Fact in issue
commission of fraud or
✓ A agreed to sell certain land to B. Pending completion of formalities of
improper conduct the said deal, A sold and transferred the land to a company which he
had incorporated in which he and a clerk were the only shareholders and
directors.
✓ This was done in order to escape a decree for specific performance in
a suit brought by B.

Decision of court
✓ The Court held that the company was created by A only for avoidance of
his liability from specific performance. Thus, A must complete the
contract, since he had the full control of the limited company in which the
property was vested.

Where the company is

incorporated only as In Re. R.G. Films Ltd. (1953)
an instrument. Fact in Issue

➢ An American company produced a film in India technically in the name

of a British Company, 90% of whose capital was held by the
President of the American company which financed the production of the
film.
Decision
➢ Board of Trade refused to register the film as a British film which
stated that English company acted merely as the nominee of the
American corporation.

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Basic Concept Company Law

For determining the

In Daimler Co. Ltd. v. Continental Tyre & Rubber Co., (1916)
true character or
status of the company. Decision of court
❖ It was held that a company will be regarded as enemy character, if the
persons having de facto control of its affairs are resident in an enemy
country or, wherever they, are acting under instructions from or on
behalf of the enemy.

Where the veil has

been used for evasion Re. Sir Dinshaw Manakjee Petit (1927)
of taxes and duties Fact in Issue
✓ In this case, the assessee was a wealthy man enjoying large dividend and
interest income. He formed four private companies and agreed with each
to hold a block of investment as an agent for it.
✓ Income received was credited in the accounts of the company but the
company handed back the amount to him as a pretended loan. This
way he divided his income in four parts in a bid to reduce his tax liability.
✓ It was held “the company was formed by the assessee purely and simply
as a means of avoiding super tax and the company was nothing more
than the assessee himself.

✓ It did no business, except to receive the dividends and interests and to

hand them over to the assessee as pretended loans”.

Decision of the court

✓ The Court had disregard the corporate entity as it was being used for tax
evasion.

Where the purpose of

company formation The Workmen Employed in Associated Rubber Industries Limited,
Bhavnagar v. The Associated Rubber Industries Ltd., Bhavnagar
was to avoid welfare and another (1986)
legislation.
Fact in issue
In this case a new company was created wholly by the principal company with
no assets of its own except those transferred by the principal company, with no
business or income of its own except receiving dividends from shares
transferred to it by the principal company i.e. only for the purpose of
splitting the profits into two hands and thereby reducing the obligation to
pay bonus.

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Basic Concept Company Law

Decision of the Court

The Supreme Court held that the new company was formed as a device
to reduce the gross profits of the principal company and thereby reduce the
amount to be paid by way of bonus to workmen.
The amount of dividends received by the new company should, therefore,
be taken into account in assessing the gross profit of the principal company.

[8] [By CS. Rajeev Choudhary]