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Unit 1 Company Law
Company Law (Karnataka State Law University)
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Unit 1 Company Law
Historical development
Company Legislation in India owes its origin to the English Company Law. The
Companies Acts passed from time to time in India have been following the English
Companies Acts, with certain modifications. Even the Companies Act, 1956, it is said, closely
followed the U.K. Companies Act, 1948. In London, the earliest business associations during
the 11th to 13th centuries were called the ‗merchant guilds‘. These guilds obtained charters
from the Crown mainly to secure for their members, a monopoly in respect of particular trade
or commodity. These associations were either formed a ‗Commenda‘ or ‗Societas‘.
‗Commenda‘ operated in the form of partnership, the financier being a sleeping partner with
limited liability. The liability was basically borne by the working partners. In ‗Societas‘, on
the other hand, all the members took part in the management of the trade and had unlimited
liability, more in line with the present day partnership. In the 14th century, the word
‗Company‘ was adopted by certain merchants for trading overseas. This was, more or less an
extension of the merchant guilds in foreign trade. By the end of 16th century Royal Charters
granted monopoly of trade to members of the Company over a certain territory. These
companies were called regulated Companies. East India Company was one of such regulated
companies established by a Charter in 1600.
It had monopoly of trade in India; its members could carry on trade individually and
had the option to subscribe to the joint fund or stock of the company. After such voyage, the
profits made, together with the subscribed amount, were divided among the members. In
1653, however, a permanent subscribed fund was introduced, called joint fund or stock of the
company. Accordingly, the term joint stock came into use. The profits were, however, shared
at the end of each voyage. By the end of 17th century all these companies or merchant guilds
any many regulated companies which the Crown had incorporated, meanwhile had
established permanent fixed capitals represented by shares which were freely saleable and
transferable. The property with which the companies treated was recognised as being under
the exclusive control of their governors or directors for the purpose of carrying on these
undertakings and was not available for division between members at intervals of time. At this
time the only method of obtaining the incorporation of a company was by Royal Charter or
by an Act of Parliament. These methods of incorporation were quite expensive and time
consuming. Consequently, many companies were formed by agreement without
incorporation. As a result, the first 20 years of 18th Century witnessed a flood of speculative
and often fraudulent schemes of company floatation‘s of which the notorious schemes of the
South Sea Company is the best known example. The South Sea Company had a scheme to
acquire virtually the whole of the national debt (approx. £ 31,000,000) by purchasing the
holdings or exchanging the holdings for the stock of the company. The possession of interest-
bearing loan owed by the State was a basis on which the company might raise vast sums to
extend its trade. This theory was not necessarily unsoundit was indeed a logical extension of
the principle upon which the Bank of England, and the South Sea Company itself, had been
originally formed but unfortunately, the Company had very little trade to expand. It had paid
a huge sum of money for obtaining the charter in competition with the Bank of England.
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Ultimately, the company failed. In 1720, the British Parliament came down heavily on such
companies in order to check the orgy of speculation in shares and securities which had
reached its heights. Consequently, the Bubble Act, 1720 was passed. The Act prohibited
generally the use of the form of corporations unless a corporation was authorised to act as
such by an Act of Parliament or Royal Charter. However, it exempted all undertakings
operative especially before June 24, 1978. With the passing of the Act companies disappeared
like the bursting of the bubble. Although the Bubble Act held up the development of capital
market for a century, it did not destroy the unincorporated company. To avoid the rigours of
the Act, large partnerships were formed. The parties to the deed agreed to be associated with
a joint fund or stock divided into number of transferable shares and agreed to alteration of the
provisions of the deed by a specified majority. They delegated the management to the
directors. The property was vested in a body of trustees which was also given powers to sue
or be sued on behalf of the company. In 1825, the Bubble Act was repealed. In 1834, the
Trading Companies Act, 1834 was passed empowering the Crown to confer by Letters Patent
any of the privileges of incorporation except limited liability, without actually granting a
Charter. The Chartered Companies Act, 1837 re-enacted the Act of 1834 providing for the
first time that personal liability of members might be expressly limited by the Letters Patent
to a specified amount per share. In 1844, the Joint Stock Companies Act was passed for the
first time. This Act provided for the registration of Companies with more than 25 members or
with shares transferable without the consent of all the members. It also provided for
incorporation by registration. The Act for the first time created the office of the ―Registrar
of Companies‖ and required particulars of the Company‘s constitution, changes therein and
annual returns to be filed with the Registrar so that there would be full record retained
officially. Limited liability, however, was still excluded. Although the company became
incorporated, the personally liability of the members was preserved, but their liability was to
cease three years after they had transferred their shares by registered transfer and creditors
had to proceed first against the assets of the company. Members could only escape personal
liability by providing in its contracts, as unincorporated companies had formerly done, that
only the Company‘s property and the amount unpaid on its member‘s shares should be
answerable in default. Such a provision was effective if inserted in the contract on which the
plaintiff sued, but not, if it was merely contained in the Company‘s deed of settlement, even
if the plaintiff knew of it when he contracted with the Company. In 1855, however, an Act of
Parliament was passed called Limited Liability Act, 1855 by which any company registered
under the Act of 1844 might limit the liability of its members for its debts and obligations
generally to the amount unpaid of their shares.
The Act was repealed within a few months. In fact, the English Companies Act, 1856
known as the Joint Stock Companies Act, 1856 replaced both the Acts of 1844 and 1855.
Under this Act, the company legislation assumed for the first time a form which has been
broadly handed down almost to the present day, subject to various amendments which were
made from time to time to suit various exigencies. Under this Act seven or more persons
could form themselves into an incorporated company with or without limited liability by
signing a memorandum of association and complying with the requirements of the Act. The
Act of 1856, in its turn, was repealed by the Companies Act, 1862 which followed the same
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pattern but contained a number of improvements. The Companies Act, 1862 was amended by
17 later Acts, the most important of which enabled Companies to reduce their share capital to
alter the objects which they were formed to carry out, imposed liability on promoters and
directors for false statements inviting public subscription to shares and debentures, and
introduced the concept of private company, which could be incorporated with only two
members. In 1908, the whole of the existing statute law was consolidated and after further
amending statutes, in 1929 and 1948, the Companies Act of those years repealed the existing
law and enacted new consolidated legislation. The Companies Act, 1948 was itself amended
and supplemented by the Companies Acts of 1967, 1976, 1980, 1981 and 1983. In 1985, the
whole of the existing statute law relating exclusively to companies was consolidated in the
Companies Act, 1985 which is the present statute governing companies in England.
History of Company Legislation in India
As noted in the initial paragraphs, the Company Legislation in India has closely
followed the Company Legislation in England. The first legislative enactment for registration
of Joint Stock Companies was passed in the year 1850 which was based on the English
Companies Act, 1844. This Act recognised companies as distinct legal entities but did not
introduce the concept of limited liability. The concept of limited liability, in India, was
recognised for the first time by the Companies Act, 1857 closely following the English
Companies Act, 1856 in this regard. The Act of 1857, however, kept the liability of the
members of banking companies unlimited. It was only in 1858 that the limited liability
concept was extended to banking companies also. Thereafter in 1866, the Companies Act,
1866 was passed for consolidating and amending the law relating to incorporation, regulation
and winding-up of trading companies and other associations. This Act was based on the
English Companies Act, 1862. The Act of 1866 was recast in 1882 to bring the Indian
Company Law in conformity with the various amendments made to the English Companies
Act of 1862. This Act continued till 1913 when it was replaced by the Companies Act, 1913.
The Act of 1913 had been passed following the English Companies Consolidation Act, 1908.
It may be noted that since the Indian Companies Acts closely followed the English Acts, the
decisions of the English Courts under the English Company Law were also closely followed
by the Indian Courts. Till 1956, the business companies in India were regulated by this Act of
1913. Certain amendments were, however, made in the years 1914, 1915, 1920, 1926, 1930
and 1932. The Act was extensively amended in 1936 on the lines of the English Companies
Act, 1929. Minor amendments were made a number of times thereafter.
At the end of 1950, the Government of independent India appointed a Committee

under the Chairmanship of H.C. Bhaba to go into the entire question of the revision of the
Indian Companies Act, with particular reference to its bearing on the development of Indian
trade and industry. This Committee examined a large number of witnesses in different part of
the country and submitted its report in March 1952. Based largely on the recommendations of
the Company Law Committee, a Bill to enact the present legislation, namely, the Companies
Act, 1956 was introduced in Parliament. This Act, once again largely followed the English
Companies Act, 1948. The major changes that the Indian Companies Act, 1956 introduced
over and above the Act of 1913 related to:
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(a) the promotion and formation of companies;
(b) capital structure of companies;
(c) company meetings and procedures;
(d) the presentation of company accounts, their audit, and the powers and duties of
auditors;
(e) the inspection and investigation of the affairs of the company;
(f) the constitution of Board of Directors and the powers and duties of Directors,
Managing Directors and Managers, and
(h) the administration of Company Law.
The Companies Act, 1956 has been amended several times since then. The major
amendments were introduced in the years 1960, 1962, 1963, 1964, 1965, 1966, 1967, 1969,
1974, 1977, 1985, 1988 and 1991. In the wake of economic reforms processes initiated from
July, 1991 onwards, the Government recognized the many provisions of the Companies Act
had become anachronistic and were not conducive to the growth of the Indian corporate
sector in the changing environment. Consequently, an attempt was made to recast the Act,
which was reflected in the Companies Bill, 1993. The said Bill, however, was subsequently
withdrawn. As part of continuing reforms process and in the wake of enactment of the
Depositories Act, 1996, certain amendments were, however, incorporated by the Companies
(Amendment ) Act, 1996. In the year 1996, a Working Group was constituted to rewrite the
Companies Act, following an announcement made by then Union Minister for Finance in his
Budget Speech to this effect. The main objective of the Group was to re-write the Act of
facilitate healthy growth of Indian corporate sector under aliberalized, fast changing and
highly competitive business environment. Based on the report prepared by the Working
Group and taking into account the developments that had taken place in structure,
administration and the regulatory framework the world over, the Companies Bill, 1997 was
introduced in Rajya Sabha on August 14, 1997 to replace by repealing the Companies Act,
1956. In the meantime, as part of the reforms process and in view of the urgency felt by the
Government, the President of India promulgated the Companies (Amendment) Ordinance,
1998 on October 31, 1998 which was later replaced by the Companies (Amendment) Act,
1999 to surge the capital market by boosting morale of national business houses besides
encouraging FIIs as well as FDI in the country. The amendments brought about number of
important changes in the Companies Act. These were in consonance with the then prevailing
economic environment and to further Government policy of deregulation and globalisation of
the economy. The corporate sector was given the facility to buy-back company‘s own shares,
provisions relating to the investments and loans were rationalized and liberalized besides the
requirements of prior approval of the Central Government on investment decisions was
dispensed with, and companies were allowed to issue ― sweat equity‖ in lieu of intellectual
property. In order to make accounts of Indian Companies compatible with international
practices, the compliance of Indian Accounting Standards was made mandatory and
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provisions for setting up of National Committee on Accounting Standards was incorporated

in the Act. For the benefit of investors, provisions were made for setting up of ―Investor
Education and Protection Fund‖ besides introduction of facility of nomination to
shareholders debenture holders etc
The First Amendment of 2002 provides for producer companies. The Second
Amendment of 2002 replaces the Company Law Board with National Company Law
Tribunal and also creates an Appellate Tribunal. Apart from taking over the jurisdiction of the
Company Law Board, the National Company Law Tribunal has been vested with the
jurisdiction of the High Courts under the Companies Act. The result is that the jurisdiction of
the High Courts has also become reduced to a very few points. Since this amendments has
not been enforced, the original Act holds good
ORIGIN OF COMPANIES ACT
After independence it was found that the company law should again be amended.
The history of Indian company law began with the Companies act of 1850, modeled
on British Companies act of 1844.
 The Indian Companies act of 1913 was based on the British Companies act of
1908.
On the basis of the recommendations of the joint parliamentary committee, the parliament
passed the new act in November, 1955 which received the presidents assents on 18th January,
1956, this act came into force with effect from April, 1956. It consists of 658 sections and
14 schedules.  It also helps the growth of companies on healthy business principles.
EVOLUATION OF COMPANIES ACT
• After a run of around 56 years the Indian companies act, 1956 is now in the process of being
substituted by a new law.
• The new companies Bill 2012 was approved by the Lok Sabha on 18 Dec 2012 & by the
Rajya Sabha on 9 Augest 2013.
• On 29 Aug 2013 to become Law i.e, Indian companies act 2013.
• 2013 Act has 470 sec and 7 Schedules as against 658 sections and 14 Schedules in 1956
Act.
To sustain trust & faith of Shareholders To protect & preserve rights of Share holders To
make the drastic control over all the activities of company To make regulation of an effective
Annual Meetings Investment of general public should be used for the development of society
or social welfare
MEANING OF COMPANY Section 3 (1) (i) of the Companies Act, 1956 defines a
company as “a company formed and registered under this Act or an existing company”.
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Section 3(1) (ii) Of the act states that “an existing company means a company formed and
registered under any of the previous companies laws”. This definition does not reveal the
distinctive characteristics of a company .
According to Chief Justice Marshall of USA, “A company is a person, artificial,

invisible, intangible, and existing only in the contemplation of the law. Being a mere creature
of law, it possesses only those properties which the character of its creation of its creation
confers upon it either expressly or as incidental to its very existence”. Another comprehensive
and clear definition of a company is given by Lord Justice Lindley, “A company is meant an
association of many persons who contribute money or money’s worth to a common stock and
employ it in some trade or business, and who share the profit and loss (as the case may be)
arising there from.
The common stock contributed is denoted in money and is the capital of the company.
The persons who contribute it, or to whom it belongs, are members. The proportion of capital
to which each member is entitled is his share. Shares are always transferable although the
right to transfer them is often more or less restricted”. (3) According to Haney, “Joint Stock
Company is a voluntary association of individuals for profit, having a capital divided into
transferable shares. The ownership of which is the condition of membership”. From the
above definitions, it can be concluded that a company is registered association which is an
artificial legal person, having an independent legal, entity with a perpetual succession, a
common seal for its signatures, a common capital comprised of transferable shares and
carrying limited liability.
CHARACTERISTICS OF A COMPANY
The main characteristics of a company are :
1. Incorporated association. A company is created when it is registered under the

Companies Act. It comes into being from the date mentioned in the certificate of
incorporation. It may be noted in this connection that Section 11 provides that an association
of more than ten persons carrying on business in banking or an association or more than
twenty persons carrying on any other type of business must be registered under the
Companies Act and is deemed to be an illegal association, if it is not so registered. For
forming a public company at least seven persons and for a private company at least two
persons are persons are required. These persons will subscribe their names to the
Memorandum of association and also comply with other legal requirements of the Act in
respect of registration to form and incorporate a company, with or without limited liability
[Sec 12 (1)]
2. Artificial legal person. A company is an artificial person. Negatively speaking, it

is not a natural person. It exists in the eyes of the law and cannot act on its own. It has to act
through a board of directors elected by shareholders. It was rightly pointed out in Bates V
Standard Land Co. that : “The board of directors are the brains and the only brains of the
company, which is the body and the company can and does act only through them”. But for
many purposes, a company is a legal person like a natural person. It has the right to acquire
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and dispose of the property, to enter into contract with third parties in its own name, and can
sue and be sued in its own name. However, it is not a citizen as it cannot enjoy the rights
under the Constitution of India or Citizenship Act. In State Trading Corporation of India v
C.T.O (1963 SCJ 705), it was held that neither the the personal benefit of the shareholders.
On the same grounds, a member cannot claim any ownership rights in the assets of the
company either individually or jointly during the existence of the company or in its winding
up. At the same time the members of the company can enter into contracts with the company
in the same manner as any other individual can.
3.Separate legal entity of the company is also recognized by the Income Tax Act.
Where a company is required to pay Income-tax on its profits and when these profits are
distributed to shareholders in the form of dividend, the shareholders have to pay income-tax
on their dividend of income. This proves that a company that a company and its shareholders
are two separate entities.
The principal of separate of legal entity was explained and emphasized in the famous
case of Salomon v Salomon & Co. Ltd. The facts of the case are as follows : Mr. Saloman,
the owner of a very prosperous shoe business, sold his business for the sum of $ 39,000 to
Saloman and Co. Ltd. which consisted of Saloman himself, his wife, his daughter and his
four sons. The purchase consideration was paid by the company by allotment of & 20,000
shares and $ 10,000 debentures and the balance in cash to Mr. Saloman. The debentures
carried a floating charge on the assets of the company. One share of $ 1 each was subscribed
by the remaining six members of his family. Saloman and his two sons became the directors
of this company. Saloman was the managing Director. After a short duration, the company
went into liquidation. At that time the statement of affairs’ was like this: Assets :$ 6000,
liabilities; Saloman as debenture holder $ 10,000 and unsecured creditors $ 7,000. Thus its
assets were running short of its liabilities b $11,000 The unsecured creditors claimed a
priority over the debenture holder on the ground that company and Saloman were one and the
same person. But the House of Lords held that the existence of a company is quite
independent and distinct from its members and that the assets of the company must be
utilized in payment of the debentures first in priority to unsecured creditors. Saloman’s case
established beyond doubt that in law a registered company is an entity distinct from its
members, even if the person hold all the shares in the company.
There is no difference in principle between a company consisting of only two

shareholders and a company consisting of two hundred members. In each case the company
is a separate legal entity. The principle established in Saloman’s case also been applied in the
following: Lee V. Lee’s Airforming Ltd. (1961) A.C. 12 Of the 3000 shares in Lee’s Air
Forming Ltd., Lee held 2999 shares. He voted himself the managing Director and also
became Chief Pilot of the company on a salary. He died in an aircrash while working for the
company. His wife was granted compensation for the husband in the course of employment.
Court held that Lee was a separate person from the company he formed, and compensation
was due to the widow. Thus, the rule of corporate personality enabled Lee to be the master
and servant at the same time. The principle of separate legal entity of a company has been, in
fact recognized much earlier than in Saloman’s case. In Re Kondoi Tea Co Ltd. (1886 ILR 13
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Cal 43), it was held by Calcutta High Court that a company was a separate person, a separate
body altogether from its Shareholders. In Re. Sheffield etc. Society - 22 OBD 470), it has
been held that a corporation is a legal person, just as much in individual but with no physical
existence. The characteristic of separate corporate personality of a company was also
emphasized by Chief Justice Marshall of USA when he defined a company “as a person,
artificial, invisible, intangible and existing only in the eyes of the law. Being a mere creation
of law, it possesses only those properties which the charter of its creation confers upon it
either expressly or as accident to its very existence”. [Trustees of Darmouth College v
woodward (1819) 17 US 518)
4. Perpetual Existence. A company is a stable form of business organization. Its life

does not depend upon the death, insolvency or retirement of any or all shareholder (s) or
director (s). Law creates it and law alone can dissolve it. Members may come and go but the
company can go on for ever. “During the war all the member of one private company , while
in general meeting, were killed by a bomb. But the company survived; not even a hydrogen
bomb could have destroyed i”. The company may be compared with a flowing river where
the water keeps on changing continuously, still the identity of the river remains the same.
Thus, a company has a perpetual existence, irrespective of changes in its membership.
5. Common Seal. As was pointed out earlier, a company being an artificial person
has no body similar to natural person and as such it cannot sign documents for itself. It acts
through natural person who are called its directors. But having a legal personality, (8) it can
be bound by only those documents which bear its signature. Therefore, the law has provided
for the use of common seal, with the name of the company engraved on it, as a substitute for
its signature. Any document bearing the common seal of the company will be legally binding
on the company. A company may have its own regulations in its Articles of Association for
the manner of affixing the common seal to a document. If the Articles are silent, the
provisions of Table-A (the model set of articles appended to the Companies Act) will apply.
As per regulation 84 of Table-A the seal of the company shall not be affixed to any
instrument except by the authority of a resolution of the Board or a Committee of the Board
authorized by it in that behalf, and except in the presence of at least two directors and of the
secretary or such other person as the Board may appoint for the purpose, and those two
directors and the secretary or other person aforesaid shall sign every instrument to which the
seal of the company is so affixed in their presence.
6. Limited Liability : A company may be company limited by shares or a company

limited by guarantee. In company limited by shares, the liability of members is limited to the
unpaid value of the shares. For example, if the face value of a share in a company is Rs. 10
and a member has already paid Rs. 7 per share, he can be called upon to pay not more than
Rs. 3 per share during the lifetime of the company. In a company limited by guarantee the
liability of members is limited to such amount as the member may undertake to contribute to
the assets of the company in the event of its being wound up.
7. Transferable Shares. In a public company, the shares are freely transferable. The
right to transfer shares is a statutory right and it cannot be taken away by a provision in the
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articles. However, the articles shall prescribe the manner in which such transfer of shares will
be made and it may also contain bona fide and reasonable restrictions on the right of
members to transfer their shares. But absolute restrictions on the rights of members to
transfer their shares shall be ultra vires. However, in the case of a private company, the
articles shall restrict the right of member to transfer their shares in companies with its
statutory definition. In order to make the right to transfer shares more effective, the
shareholder can apply to the Central Government in case of refusal by the company to
register a transfer of shares.
8. Separate Property : As a company is a legal person distinct from its members, it is

capable of owning, enjoying and disposing of property in its own name. Although its capital
and assets are contributed by its shareholders, they are not the private and joint owners of its
property. The company is the real person in which all its property is vested and by which it is
controlled, managed and disposed of.
9. Delegated Management : A joint stock company is an autonomous, selfgoverning

and self-controlling organization. Since it has a large number of members, all of them cannot
take part in the management of the affairs of the company. Actual control and management is,
therefore, delegated by the shareholders to their elected representatives, know as directors.
They look after the day-to-day working of the company. Moreover, since shareholders, by
majority of votes, decide the general policy of the company, the management of the company
is carried on democratic lines. Majority decision and centralized management compulsorily
bring about unity of action.
DISTINCTION BETWEEN COMPANY AND PARTNERSHIP
The difference between a company and partnership is as follows: Company

Partnership
1. Mode of creation By Registration by By Agreement Statute.
2. Legal Statute Legal entity distinct Firm and partners from members, are not
separate; no perpetual succession. separate entity; uncertain life
3. Liability Limited liability of Unlimited joint and members several liability of

partners
4. Authority Divorce between Right to share mana ownership and gement, common
and management ownership and Representative Management. Management Mutual agency -
Implied authority.
5. Transfer Public Co.-freely Ordinarily no right of of shares transferable; transferee

transfer of share by a gets all the rights of partner-limited rights the transferor of transferee
6. Number of Private Co-Minimum 2 Minimum 2 members and Maximum 50

Maximum 20. public Co. Minimum7 and Maximum unlimited.
7. Resources Large and unlimited Personal resources of resources partners are limited.
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8. General Memorandum defines Easy to change the powers and confines the scope
agreement and so also of the company. the powers of the alteration difficult. partners.
9. Legal Statutory books, No legal formalities formalities Audit, Publication

Registration not Registration, compulsory. No audit, filing, etc. lots of legal no publication of
formalities accounts etc.
10. Dissolution Only according to the Dissolution by provisions of law- agreement by

usually by an order of notice, by court. the court. Death of a partner Death of a share- may
mean dissolution holder does not of partnership affect the existence of a company.
Kinds of Companies:
Companies may be classified into various kinds on the following basis:
1. On the basis of incorporation
2. On the basis of liability
3. On the basis of number of members
4. On the basis of control
5. On the basis of ownership.
1. On the Basis of Incorporation:
On the basis of incorporation companies may be classified into the following

three categories:
(i) By Royal Charter-Chartered Companies:
A chartered company is created by the charter or special sanction granted by the Head
of the State giving certain exclusive privileges, rights and powers to a distinct body of
persons for undertaking commercial activities in specified geographical areas. These rights
and privileges are to be enjoyed and the powers are to be used within the terms of the charter.
The British East India Company formed in England in 1600 and Dutch East India
Company chartered in Holland in 1602 to trade with India and the East and Bank of England
(1690) are the examples of such companies. Since the country attained independence these
types of companies do not exist in India.
(ii) Statutory Company:
A statutory company is brought into existence under the Act passed by the legislature
of the country or state. Powers, responsibilities, liabilities, objects, scope etc. of such a
company are clearly defined under the provisions of the Act which brings it into existence.
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Usually, such companies are established to run the enterprises of social or national
importance. The Reserve Bank of India, the Industrial Finance Corporation of India, the Life
Insurance Corporation of India are some of the examples of statutory companies in India.
(iii) Registered Companies:
A registered company is a company which is organised by getting it registered with

the Registrar of Companies under the provisions of Companies Act of the country concerned.
The formation, working and continuity of such a company are governed by relevant
provisions of the Companies Act.
Most of the companies in the field of industry and commerce are registered
companies. In India such companies are registered under the Indian Companies Act, 1956.
2. On the Basis of Liability:
On the basis of liability, company may be classified into:
(a) Limited liability companies.
(i) Companies limited by shares
(ii) Companies limited by guarantee
(b) Unlimited liability companies.
(a) Limited Liability Companies:
Where the liability of the members of a company is limited to the extent of the
nominal value of shares held by them, such companies are known as Limited liability
companies.
(i) Companies Limited by Shares:
Where the liability of the members of a company is limited by the Memorandum of

Association to the amount unpaid on the shares, such a company is called company limited
by shares. In case of winding up of the company the members cannot be asked to pay more
than the amount unpaid on the shares held by them. A company limited by shares may be a
public company or a private company.
(ii) Companies Limited by Guarantee:
Where the liability of the members of a company is limited by the Memorandum of

Association to such an amount as the members undertake to contribute to the assets of the
company in the event of its winding up.
Such type of companies are not formed for the purpose of profit but are formed for the
promotion of art, science, sports, commerce and for cultural activities. Such companies may
or may not have share capital. If it has a share capital, it may be a public company or a
private company.
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(b) Unlimited Liability Companies:
Where the liability of members is not limited, such companies are known as unlimited
liability companies. Every member of such a company is liable for its debts in proportion to
his interest in the company. Such a company can be converted into a limited liability
company after passing a special resolution for conversion and applying to the Registrar of
Companies for enrolling it as a limited company.
3. On the Basis of Number of Members:
On the basis of number of members, a company may be:
1. Private Company and
2. Public Company.
1. Private Company:
According to Sec. 3(1)(iii) of the Indian Companies Act, 1956, a private company
is that company which by its articles of association:
(i) limits the number of its members to fifty, excluding employees who are members
or ex-employees who were and continue to be members;
(ii) restricts the right of transfer of shares, if any;
(iii) Prohibits any invitation to the public to subscribe for any shares to debenture of
the company.
Where two or more persons hold share jointly, they are treated as a single member.
According to Sec. 12 of the Companies Act, the minimum number of members to

form a private company is two. A private company must use the word ‘Pvt’ after its name.
Characteristics or Features of a Private Company:
The main features of a private company are as follows:
(i) A private company restricts the right of transfer of its shares. The shares of a
private company are not as freely transferable as those of public companies. The articles
generally state that whenever a shareholder of a Private company wants to transfer his shares,
he must first offer them to the existing members of the company. The price of the shares is
determined by the directors. It is done so as to preserve the family nature of the company’s
shareholders.
(ii) It limits the number of its members to fifty excluding members who are
employees or ex-employees who were and continue to be the members. Where two or more
persons hold shares jointly they are treated as a single member. The minimum number of
members to form a private company is two.
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(iii) A private company cannot invite the public to subscribe for its shares or
debentures. It has to make its own private arrangement to raise its capital or loans.
Advantages of Private Company:
A private company enjoys the following advantages over limited company.
1. A private company is easy to form than a public company. Only two members are
sufficient to form a private company.
2. It can start its business immediately after incorporation. Certificate to commence

business is not required to be obtained, which is compulsory for a public company.
3. It may pay remuneration to directors and managerial personnel or appoint any one
to the office of profits without any restrictions.
4. As no outsiders are its shareholders it is not required to hold a statutory meeting or

file a statutory report.
5. It may give loan to directors without obtaining consent or approval of the Central
Government.
6. There is a greater flexibility in regard to the management and conduct of the

business than in the public company.
7. The control and management is generally in the hands of capital owners, which is
not the case with public company.
2. Public Company:
According to Section 3(1)(iv) of Indian Companies Act, 1956 A public company

means a company which is not a private company.
If we explain the definition of Indian Companies Act, 1956 in regard to the

public company, we note the following:
(i) The articles do not restrict the transfer of shares of the company.
(ii) It imposes no restriction on the maximum number of the members in the company.
(iii) It invites the general public to purchase the shares and debentures of the
company.
4. On the Basis of Control:
On the basis of control, companies may be classified into two categories:
1. Holding company [Sec. 4(4)].
2. Subsidiary company [Sec. 4(1)].
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1. Holding Company:
According to Section 4(4) of the Companies Act, 1956 “A company shall be deemed
to be the holding company of another, if that other is its subsidiary.”
2. Subsidiary Company:
A company is said to be a subsidiary of another if:
(i) The other company controls the composition of its Board of Directors.
(ii) The other company holds more than half in nominal value of its equity share
capital.
(iii) It is a subsidiary of such a company which is itself subsidiary of any other

company.
For example, if company B is the subsidiary of company A and company C is the

subsidiary of company B then company C also becomes the subsidiary of company A. If
company D is the subsidiary of company C, it also becomes subsidiary of Company B and A
and so on.
5. On the Basis of Ownership:
On the basis of ownership, company may be a:
(i) Government company.
(ii) Non-government company.
1. Government Company:
According to section 617 of the Companies Act. 1956, Government company means,
“any company in which not less than 51% of the paid-up share capital is held by the Central
Government or by any State Government and includes a company which is a subsidiary of a
Government Company.” It may be a public company or a private company.
2. Non-Government Companies:
Non-Government company means a company which is not government company. The

majority of companies in India belong to this category.
Foreign Company:
Foreign company means any company incorporated outside India but has established
business in India.
These companies may be of the following two types:
(i) Companies incorporated outside India which established a place of business in

India after the commencement of Indian Companies Act, 1956; and
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(ii) Companies incorporated outside India which established a place of business in

India before the commencement of this Act and continued to have such a place of business in
India at the time of commencement of this Act.
After the establishment of business in India the following documents must be filed
with the Registrar of Companies within 30 days from the date of establishment.
(i) A certified copy of Memorandum and Articles of the company translated into
English.
(ii) The complete address of the Registered Office of the company.
(iii) A list of directors and secretary of the company.
(iv) The complete address of the place at which the company has constituted as its
main office in India.
One-Man Company:
One-man company is that company where one man holds practically the whole of the
share capital of the company and in order to meet the statutory requirement of minimum
number of members, some dummy names are added. The dummy names which are added are
mostly the relatives or friends of principal shareholder.
One-man company is a legal entity distinct from its members. The company in law is
equal to a natural person and has a legal entity of its own. The shareholder, even if he holds
all the share is not a company. Neither he nor any creditor of the company has any property,
legal or equitable in the assets of the company.
(Differences between a Public Company and a Private company)
1. Minimum number : The minimum number of persons required to form a public company is
7. It is 2 in case of a private company.
2. Maximum number : There is no restriction on maximum number of members in a public

company, whereas the maximum number cannot exceed 50 in a private company.
3. Number of directors. A public company must have at least 3 directors whereas a private
company must have at least 2 directors (Sec. 252)
4. Restriction on appointment of directors. In the case of a public company, the directors

must file with the Register a consent to act as directors or sign an undertaking for their
qualification shares. The directors or a private company need not do so (Sec 266)
5. Restriction on invitation to subscribe for shares. A public company invites the general
public to subscribe for shares. A public company invites the general public to subscribe for
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the shares or the debentures of the company. A private company by its Articles prohibits
invitation to public to subscribe for its shares.
6. Name of the Company : In a private company, the words “Private Limited” shall be added
at the end of its name.
7. Public subscription : A private company cannot invite the public to purchase its shares or
debentures. A public company may do so.
8. Issue of prospectus : Unlike a public company a private company is not expected to issue
a prospectus or file a statement in lieu of prospectus with the Registrar before allotting shares.
9. Transferability of Shares. In a public company, the shares are freely transferable (Sec. 82).
In a private company the right to transfer shares is restricted by Articles.
10. Special Privileges. A private company enjoys some special privileges. A public company
enjoys no such privileges.
11. Quorum. If the Articles of a company do not provide for a larger quorum. 5 members
personally present in the case of a public company are quorum for a meeting of the company.
It is 2 in the case of a private company (Sec. 174)
12. Managerial remuneration. Total managerial remuneration in a public company cannot

exceed 11 per cent of the net profits (Sec. 198). No such restriction applies to a private
company.
13. Commencement of business. A private company may commence its business immediately
after obtaining a certificate of incorporation. A public company cannot commence its
business until it is granted a “Certificate of Commencement of business”.
Special privileges of a Private Company Unlike a private a public company is subject

to a number of regulations and restrictions as per the requirements of Companies Act, 1956. It
is done to safeguard the interests of investors/shareholders of the public company. These
privileges can be studied as follows :
a) Special privileges of all companies. The following privileges are available to every private
company, including a private company which is subsidiary of a public company or deemed to
be a public company :
1. A private company may be formed with only two persons as member. [Sec.12(1)]
2. It may commence allotment of shares even before the minimum subscription is subscribed
for or paid (Sec. 69).
3. It is not required to either issue a prospectus to the public of file statement in lieu of a
prospectus. (Sec 70 (3)]
4. Restrictions imposed on public companies regarding further issue of capital do not apply
on private companies. [Sec 81 (3)] (19)
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5. Provisions of Sections 114 and 115 relating to share warrants shall not apply to it. (Sec. 14)
6. It need not keep an index of members. (Sec. 115)
7. It can commence its business after obtaining a certificate of incorporation. A certificate of

commencement of business is not required. [Sec. 149 (7)]
8. It need not hold statutory meeting or file a statutory report [Sec. 165 (10)]
9. Unless the articles provide for a larger number, only two persons personally present shall
form the quorum in case of a private company, while at least five member personally present
form the quorum in case of a public company (Sec. 174).
10. A director is not required to file consent to act as such with the Registrar. Similarly, the
provisions of the Act regarding undertaking to take up qualification shares and pay for them
are not applicable to directors of a private companies [Sec. 266 (5) (b)]
11. Provisions in Section 284 regarding removal of directors by the company in general
meeting shall not apply to a life director appointed by a private company on or before 1st
April 1952 [Sec. 284 (1)]
12. In case of a private company, poll can be demanded by one member if not more than
seven members are present, and by two member if not more than seven member are present.
In case of a public company, poll can be demanded by persons having not less than one-tenth
of the total voting power in respect of the resolution or holding shares on which an aggregate
sum of not less than fifty thousand rupees has been paid-up (Sec. 179). (20)
13. It need not have more than two directors, while a public company must have at least three
directors (Sec. 252) b) Privileges available to an independent private company (i.e. one which
is not a subsidiary of a public company) An independent private company is one which is not
a subsidiary of a public company.
The following special privileges and exemptions are available to an independent

private company.
1. It may give financial assistance for purchase of or subscription for shares in the company
itself.
2. It need not, like a public company, offer rights shares to the equity shareholders of the
company.
3. The provisions of Sec. 85 to 90 as to kinds of share capital, new issues of share capital,
voting, issue of shares with disproportionate rights, and termination of disproportionately
excessive rights, do not apply to an independent private company.
4. A transfer or transferee of shares in an independent private company has no right of appeal

to the Central Government against refusal by the company to register a transfer of its shares.
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5. Sections 171 to 186 relating to general meeting are not applicable to an independent
private company if it makes its own provisions by the Articles. Some provisions of these
Sections are, however made expressly applicable.
6. Many provisions relating to directors of a public company are not applicable to an

independent private company, e.g.
a) it need not have more than 2 directors.
b) The provisions relating to the appointment, retirement, reappointment, etc. of directors

who are to retire by rotation and the procedure relating, there to are not applicable to it.
c) The provisions requiring the giving of 14 days’ notice by new candidates seeking election
as directors, as also provisions requiring the Central Government’s sanction for increasing the
number of directors by amending the Articles or otherwise beyond the maximum fixed in the
Articles, are not applicable to it.
d) The provisions relating to the manner of filing up casual vacancies among directors and
the duration of the period of office of directors and the requirements that the appointment of
directors should be voted on individually and that the consent of each candidate for
directorship should be filed with the Registrar, do not apply to it.
e) The provisions requiring the holding of a share qualification by directors and fixing the
time within which such qualification is to be acquired and filing with the Registrar of a
declaration of share qualification by each director are also not applicable to it.
f) It may, by its Articles, Provide special disqualifications for appointment of directors.
g) It may provide special grounds for vacation of office of a director.
h) Sec. 295 prohibiting loans to directors does not apply to it.
i) An interested director may participate or vote in Board’s proceedings relating to his

concern of interest in any contract of arrangement.
7. The restrictions as to the number of companies of which a person may be appointed

managing director and the prohibition of such appointment for more than 5 years at a time, do
not apply to it
8. The provisions prohibiting the subscribing for, or purchasing of, shares or debentures of
other companies in the same group do not apply to it.
9. The provisions of Section 409 conferring power on the Central Government to present
change in the Board of directors of a company where in the opinion of the Central
Government such change will be prejudicial to the interest of the company, do not apply to it.
When a Private company becomes a Public company A private company shall become a
public company in following cases :
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i) By default : When it fails to comply with the essential requirements of a private company
provided under Section 3 (1) (iii) Default in complying with the said three provisions shall
disentitle a private company to enjoy certain privileges (Sec. 43).
ii) A private company which is a subsidiary of another public company shall be deemed to be
a public company.
iii) By provisions of law - Section 43-A. Section 43-A
a) Where not less than 25% of the paid-up share capital of a private company is held by one
or more bodies” corporate such a private company shall (23) become a public company from
the data in which such 25% is held by body corporate [Sec. 43-A (1)]
b) Where the average annual turnover of a private company is not less than Rs. 10 crores
during the relevant period, such a private company shall become a public company after the
expiry of the period of three months from the last day of the relevant period when the
accounts show the said average annual turnover [Sec. 43 A (1 A)].
c) When a private company holds not less than 25% of the paid up share capital of a public
company the private company shall become a public company from the date on which the
private company holds such 25% [Sec. 43A (IB)].
d) Where a private company accepts, after an invitation is made by an advertisement of

receiving deposits from the public other than its members, directors or their relatives, such
private company shall become a public company [Sec. 43A (IC)].
iv) By Conversion : When the private company converts itself into a public company by
altering its Articles in such a manner that they no longer include essential requirements of a
private company under Section 3 (1)
(iii). On the data of such alternations, it shall cease to be private company. It shall comply
with the procedure of converting itself into a public company [Sec. 44]. The Articles of
Association of such a public company may continue to have the three restrictions and may
continue to have two directors and less than seven members. Within 3 months of such a
conversion. Registrar of Companies shall be intimated.
The Registrar shall delete the word ‘Private’ before the words ‘Limited’ in the name
of the company and shall also make necessary alternations in the certificate of incorporation.
On the basis of Control On the basis of control, a company may be classified into :
1. Holding companies, and
2. Subsidiary Company
1. Holding Company [Sec. 4(4)]. A company is known as the holding company of

another company if it has control over the other company. According to Sec 4(4) a company
is deemed to be the holding company of another if, but only if that other is its subsidiary. A
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company may become a holding company of another company in either of the following
three ways :-
a) by holding more than fifty per cent of the normal value of issued equity capital of
the company;
or b) By holding more than fifty per cent of its voting rights;
or c) by securing to itself the right to appoint, the majority of the directors of the other
company , directly or indirectly. The other company in such a case is known as a “Subsidiary
company”. Though the two companies remain separate legal entities, yet the affairs of both
the companies are managed and controlled by the holding company. A holding company may
have any number of subsidiaries. The annual accounts of the holding company are required to
disclose full information about the subsidiaries.
2. Subsidiary Company. [Sec. 4 (I)]. A company is know as a subsidiary of another

company when its control is exercised by the latter (called holding company) over the former
called a subsidiary company. Where a company (company S) is subsidiary of another
company (say Company H), the former (Company S) becomes the subsidiary of the
controlling company (company H).
On the basis of Ownership of companies
a) Government Companies. A Company of which not less than 51% of the paid up
capital is held by the Central Government of by State Government or Government singly or
jointly is known as a Government Company. It includes a company subsidiary to a
government company. The share capital of a government company may be wholly or partly
owned by the government, but it would not make it the agent of the government . The
auditors of the government company are appointed by the government on the advice of the
Comptroller and Auditor General of India. The Annual Report along with the auditor’s report
are placed before both the House of the parliament. Some of the examples of government
companies are - Mahanagar Telephone Corporation Ltd., National Thermal Power
Corporation Ltd., State Trading Corporation Ltd. Hydroelectric Power Corporation Ltd.
Bharat Heavy Electricals Ltd. Hindustan Machine Tools Ltd. etc.
b) Non-Government Companies. All other companies, except the Government

Companies, are called non-government companies. They do not satisfy the characteristics of
a government company as given above.
On the basis of Nationality of the Company
a) Indian Companies : These companies are registered in India under the Companies
Act. 1956 and have their registered office in India. Nationality of the members in their case is
immaterial.
b) Foreign Companies : It means any company incorporated outside India which has
an established place of business in India [Sec. 591 (I)]. A company has an established place of
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business in India if it has a specified place at which it carries on business such as an office,
store house or other premises with some visible indication premises. Section 592 to 602 of
Companies Act, 1956 contain provisions applicable to foreign companies functioning in
India.
Corporate personality
Corporate personality is the fact stated by the law that a company is recognized as a
legal entity distinct from its members. A company with such personality is an independent
legal existence separate from its shareholders, directors, officers and creators. This is
famously known as the veil of incorporation.
As a result of corporate personality, a company has perpetual succession. It simply

means the company is everlasting and will continue to do business until it is properly wound
up. As a separate legal person, a company will not be affected by changes such as death,
transfer of shares or resignation of any members but will continue to exist despite the number
of times the changes of membership occur. Even if all the members die, it will not influence
the privileges, immunities, estates and possessions of a company. The principle of perpetual
succession is clearly illustrated in the case of Re Noel Tedman Holdings Pty Ltd (1967)
Proprietary interest is another principle of corporate personality. Proprietary interest

refers to the ability of a company to own property like a land or building. A company as a
body corporate has every right to acquire, hold and dispose of as well as transfer property in
its own name. Since a company gain full ownership of property, any changes among
individual membership would not affect the title. According to the case of Macaura v.
Northern Assurance Co. (1925), the property of a company is not the property of the
shareholders; it is the property of the company. Each shareholder has no legal rights on the
capital and assets held by the company (Lee, 2005).
Debt is also the principle in corporate personality. A company being a legal person has
an unlimited amount of debts. The company is fully responsible for the debts that will be
incurred during the course of business. However, this principle does not apply to its members
with a limited liability. In case the company is insolvent, members are not required to pay
more than the initial amount invested on their shares or guarantee. Their liability is limited to
the amount of shares they subscribe or any unpaid value on such shares. Therefore, creditors
of the company cannot take any action against the members if the company went into
liquidation as established in Salomon v. Salomon Co Ltd (1897) (Lee, 2005).
The other principle of corporate personality is demonstrated in the case of Foss v.

Harbottle (1843). A company may sue or be sued in its own name. The company must take
the initiative to sue the other party by using its own name or handle any possibilities of
criminal complaint that might be filed against it. For instance, John as a director cannot take
an action against one of his employee for money laundering. It is the company’s position to
sue the employee for the wrongdoing
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MAIN INSTANCES OF LIFTING THE VEIL OF CORPORATION
Although the company and its members were protected by the veil of incorporation, it
has its limitations too. It means that, the veil of incorporation sometimes can lead to injustice
where the principle is misused. In order to prevent injustice, the court decided to lift the
corporate veil. Below are main instances of lifting the corporate veil.
The first main instance of lifting the veil is number of members below two. When the
company membership is less than two, the sole member left in the company is assumed to be
a sole owner. By right, the single member can only operate the business in sole
proprietorships. He or she can still continue to operate their business within six months
period. After the said six months period, the member would be personally liable for any debts
incurred from that point onward. If the company still continues to operate after six months,
the corporate veil will be lifted and the company and members would be guilty under Section
36 of Companies Act 1965 (Lee, 2005).
The second is doing fraudulent trading. The court may be willing to pierce the
corporate veil if it is found that the owners are plotting fraudulent scheme behind the veil of
incorporation. By carrying on a business with the intention to cheat others, the company are
said to be doing fraud where the veil will be lifted. When this happens, all members of the
company with knowledge of this action are guilty of the crime and may be put responsible for
the debts and other liabilities of the company without any limitation. By referring to the case
of Re William C. Leitch Brs Ltd, the company was insolvent but one of its director still run
the business normally by purchasing goods from its suppliers on credit. Since there is element
of fraud existed, the court disclosed that particular director to be personally liable for the
debts (McGee, 1992).
The third is evasion of legal obligations. The court will not hesitate to lift the
corporate veil if its members used the veil as a way to avoid an existing legal obligation.
These normally occur when individuals used the doctrine of separate legal entity to do some
forbidden act. In law, an individual is not permitted to use the company’s name with the
power in his hand to do something that is prohibited from doing as illustrated in Jones v
Lipman. In this case, the defendant entered into a contract to sell land to the plaintiff but he
transferred the land to a company under his control. The court ordered the corporate veil to be
lifted as the defendant used the company as a device to avoid his contractual obligations
(Sulaiman et al, 2008).
The fourth is holding and subsidiary company. A holding company dominates other
companies by owning some or all of their shares. Those other companies were known as
subsidiary companies. According to Lee 2005, a holding company and its subsidiary
companies are generally two separate legal entities. In other words, each of them had their
own corporate veil. The corporate veil will usually be lifted when a holding company
produces group accounts known as consolidated financial statement together with all its
subsidiaries. In the event that something happens to the subsidiary company, the holding
company would be responsible for it and can be sued as if they were a single entity. This is
shown in the case of Hotel Jaya Puri Bhd. v National Union of Hotel, Bar & Restaurant
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Workers & Anor (1980) where the court held that the hotel and its restaurant are one group
enterprise (Thavarajah & Low, 2009).
The last is publication of name. The use of company’s seal or write out of any
business letter, statement of account, invoice, official notice, bill of exchange, cheques,
negotiable instruments and other documents requires the company’s name to be stated. On the
seal and all other publications, it must have the name of the company with readable letters
and company’s number. The veil will be lifted and an officer will be guilty of an offence
under Section 121 (2) Companies Act 1965 if he or she omitted the company’s name in
respect of business documents signed on behalf of the company. For example, if Darren signs
a contractual agreement with other company without his company’s official name, the
contract will be treated as illegal and he may be put behind bars (Lee, 2005)
LIMITED LIABILITY
Limited Liability Company is another category of company registered under the

Indian New Companies Act, 2013. There are numbers of companies are available in India
including private limited and public limited ones but Limited Liability Company is a brand
new one in the line. It's often called as a Limited Liability Corporation and its nature of
business is quite similar with partnership firm and sole trade business. Company is an
association of persons or an artificial person formed under the Indian Companies act in order
to carry out a certain business. Under the Limited Liability Company Act, liability is limited
among members or partners and no one is responsible for other's misconduct and
responsibilities in any case. Limited liability company registration has been extensively
growing due to its many advantages over other form of business enterprises.
What is a Limited Liability Company - LLC
A limited liability company is a corporate structure whereby the members of the

company are not personally liable for the company's debts or liabilities. Limited
liability companies are hybrid entities that combine the characteristics of a corporation and a
partnership or sole proprietorship. While the limited liability feature is similar to that of a
corporation, the availability of flow-through taxation to the members of an LLC is a feature
of partnerships.
Limited Liability Company Registration Services
Limited liability company registration services are widely available in India as

company formation is a big hit among Indian entrepreneurs. New Companies Act, 2013 has
defined all rules and regulations regarding incorporating and registering all limited liability
companies. One should apply to the Registrar of Companies (RoC) by giving all the details
regarding company including name of the company, name and address of board of directors,
location of the company as per the company registration services. India as a business
destination has been immensely growing and there are large numbers business entrepreneurs
are coming to India in order to kick start variety of business. One can register a company
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either directly through online or can take the help of a professional like trademark or patent
lawyer in order to make this process absolutely smooth. The most important documents
required for limited liability company registration are:
 Articles of Association (AoA)
 Memorandum of Association (MoA)
LIFTING OF CORPORATE VEIL
The principle of veil of incorporation is a 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. While a company is a
separate legal entity, the fact that it can only act through human agents that compose it,
cannot be neglected. Since an artificial person is not capable of doing anything illegal or
fraudulent, the façade of corporate personality might have to be removed to identify the
persons who are really guilty. This is known as lifting of the corporate veil. Besides the
statutory provisions for lifting the corporate veil, courts also do lift the corporate veil to see
the real state of affairs. However, even though the legislature and the courts have in many
cases now allowed the corporate veil to be lifted, it should be noted that the principle of veil
of incorporation is still the rule and the instances of lifting or piercing the veil are the
exceptions to this rule.
Before dealing with the lifting of corporate veil it is pertinent to define what the
meaning of a company is. Strictly, a company has no particular definition but section 3(1) (i)
of the Companies Act attempts to provide the meaning of the word in context of the
provisions and for the use of this act. It states: ‘a company means a company formed and
registered under this Act or an existing company as defined in section 3 (1) (ii).’ The
company must be registered under the Companies Act for it to become an incorporated
association. If it is not registered it becomes an illegal association. This paper would deal
with the lifting of corporate veil and its aspects with the judicial decisions. Let us first discuss
the exact meaning of corporate veil and lifting of corporate veil with limited liability concept.
Corporate veil:
A 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.
Lifting of Corporate veil:
At times it may happen that the corporate personality of the company is used to
commit frauds and improper or illegal acts. Since an artificial person is not capable of doing
anything illegal or fraudulent, the façade of corporate personality might have to be removed
to identify the persons who are really guilty. This is known as ‘lifting of corporate veil’.
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It refers to the situation where a shareholder is held liable for its corporation’s debts
despite the rule of limited liability and/of separate personality. The veil doctrine is invoked
when shareholders blur the distinction between the corporation and the shareholders. A
company or corporation can only act through human agents that compose it. As a result, there
are two main ways through which a company becomes liable in company or corporate law:
firstly through direct liability (for direct infringement) and secondly through secondary
liability (for acts of its human agents acting in the course of their employment).
There are two existing theories for the lifting of the corporate veil. The first is the
“alter-ego” or other self theory, and the other is the “instrumentality” theory.
The alter-ego theory considers if there is in distinctive nature of the boundaries

between the corporation and its shareholders.
The instrumentality theory on the other hand examines the use of a corporation by its
owners in ways that benefit the owner rather than the corporation. It is up to the court to
decide on which theory to apply or make a combination of the two doctrines.
Concept of limited liability:
One of the main motives for forming a corporation or company is the limited liability
that it offers to its shareholders. By this doctrine, a shareholder can only lose what he or she
has contributed as shares to the corporate entity and nothing more. This concept is in serious
conflict with the doctrine of lifting the veil as both these do not co-exist which is discussed
by us in the paper in detail.
DEVELOPMENT OF THE CONCEPT OF “LIFTING THE CORPORATE VEIL”
One of the main characteristic features of a company is that the company is a separate
legal entity distinct from its members. The most illustrative case in this regard is the case
decided by House of Lords- Salomon v. A Salomon & Co. Ltd. In this case Mr. Solomon had
business of shoe and boots manufacture. ‘A 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 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 1 pound share each and the
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.
The House of Lords unanimously held that the company had been validly constituted, since
the Act only required seven members holding at least one share each and that Salomon is
separate from Salomon & Co. Ltd. The entity of the corporation is entirely separate from that
of its shareholders; it bears its own name and has a seal of its own; its assets are distinct and
separate from those of its members; it can sue and be sued exclusively for its purpose;
liability of the members are limited to the capital invested by them.Further in Lee v. Lee’s Air
Farming Ltd. it was held that there was a valid contract of service between Lee and the
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Company, and Lee was a 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.
In The King v Portus; ex parte Federated Clerks Union of Australia where Latham CJ
while deciding whether or not employees of a company owned by the Federal Government
were not employed by the Federal Government ruled that the company is a distinct person
from its shareholders. The shareholders are not liable to creditors for the debts of the
company. The shareholders do not own the property of the company.
In course of time, the doctrine that a company has a separate and legal entity of its
own has been subjected to certain exceptions by the application of the fiction that the veil of
corporation can be lifted and its face examined in substance.
Thus when “Tata Company” or “German Company” or “Government Company” is

referred to, we look behind the smoke-screen of the company and find the individual who can
be identified with the company. This phenomenon which is applied by the courts and which is
also provided now in many statutes is called “lifting of the corporate veil”. As a consequence
of the lifting of the corporate veil, the company as a separate legal entity is disregarded and
the people behind the act are identified irrespective of the personality of the company. So,
this principle is also called “disregarding the corporate entity”.
LIFTING THE CORPORATE VEIL
Meaning of the doctrine:
Lifting the corporate refers to the possibility of looking behind the company’s
framework (or behind the company’s separate personality) to make the members liable, as an
exception to the rule that they are normally shielded by the corporate shell (i.e. they are
normally not liable to outsiders at all either as principles or as agents or in any other guise,
and are already normally liable to pay the company what they agreed to pay by way of share
purchase price or guarantee, nothing more).
When the true legal position of a company and the circumstances under which its
entity as a corporate body will be ignored and the corporate veil is lifted, the individual
shareholder may be treated as liable for its acts.
The corporate veil may be lifted where the statute itself contemplates lifting the veil
or fraud or improper conduct is intended to be prevented.
“It is neither necessary nor desirable to enumerate the classes of cases where lifting
the veil is permissible, since that must necessarily depend on the relevant statutory or other
provisions, the object sought to be achieved, the impugned conduct, the involvement of the
element of public interest, the effect on parties who may be affected, etc.”. This was iterated
by the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd.
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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
Section 5 of the Companies Act defines the individual person committing a wrong or
an illegal act to be held liable in respect of offences as ‘officer who is in default’. This section
gives a list of officers who shall be liable to punishment or penalty under the expression
‘officer who is in default’ which includes a managing director or a whole-time director.
Section 45– Reduction of membership below statutory minimum: 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 the case of Madan lal v.
Himatlal & Co. the respondent filed suit against a private limited company and its directors
for recovery of dues. The directors resisted the suit on the ground that at no point of time the
company did carry on business with members below the legal minimum and therefore, the
directors could not be made severally liable for the debt in question. It was held that it was
for the respondent being dominus litus, to choose persons of his choice to be sued.
Section 147- Misdescription of name: Under sub-section (4) of this section, an officer
of a company who signs any bill of exchange, hundi, promissory note, cheque wherein the
name of the company is not mentioned is the prescribed manner, such officer can be held
personally liable to the holder of the bill of exchange, hundi etc. unless it is duly paid by the
company. Such instance was observed in the case of Hendon v. Adelman.
Section 239– Power of inspector to investigate affairs of another company in same

group or management: It provides that if it is necessary for the satisfactory completion of the
task of an inspector appointed to investigate the affairs of the company for the alleged
mismanagement, or oppressive policy towards its members, he may investigate into the
affairs of another related company in the same management or group.
Section 275- Subject to the provisions of Section 278, this section provides that no
person can be a director of more than 15 companies at a time. Section 279 provides for a
punishment with fine which may extend to Rs. 50,000 in respect of each of those companies
after the first twenty.
Section 299- This Section gives effect to the following recommendation of the
Company Law Committee: “It is necessary to provide that the general notice which a director
is entitled to give to the company of his interest in a particular company or firm under the
proviso to sub-section (1) of section 91-A should be given at a meeting of the directors or
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take reasonable steps to secure that it is brought up and read at the next meeting of the Board
after it is given.The section applies to all public as well as private companies. Failure to
comply with requirements of this Section will cause vacation of the office of the Director and
will also subject him to penalty under sub-section (4).
Sections 307 and 308- Section 307 applies to every director and every deemed
director. Not only the name, description and amount of shareholding of each of the persons
mentioned but also the nature and extent of interest or right in or over any shares or
debentures of such person must be shown in the register of shareholders.
Section 314- The object of this section is to prohibit a director and anyone connected
with him, holding any employment carrying remuneration of as such sum as prescribed or
more under the company unless the company approves of it by a special resolution.
Section 542- Fraudulent conduct: If in the course of the winding up of the company,
it appears that any business of the company has been carried on with intent to defraud the
creditors of the company or any other person or for any fraudulent purpose, the persons who
were knowingly parties to the carrying on of the business, in the manner aforesaid, shall be
personally responsible, without any limitation of liability for all or any of the debts or other
liabilities of the company, as the court may direct. In Popular Bank Ltd., In re it was held that
section 542 appears to make the directors liable in disregard of principles of limited liability.
It leaves the Court with discretion to make a declaration of liability, in relation to ‘all or any
of the debts or other liabilities of the company’. This section postulates a nexus between
fraudulent reading or purpose and liability of persons concerned.
JUDICIAL INTERPRETATIONS
By contrast with the limited and careful statutory directions to ‘lift the veil’ judicial
inroads into the principle of separate personality are more numerous. Besides statutory
provisions for lifting the corporate veil, courts also do lift the corporate veil to see the real
state of affairs. Some cases where the courts did lift the veil are as follows:
1. United States v. Milwaukee Refrigerator Transit Company– In this case the U.S.
Supreme Court held that “where the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud or defend crime, the law will disregard the
corporate entity and treat it as an association of persons.”
Some of the earliest instances where the English and Indian Courts disregarded the
principle established in Salomon’s case are:
2. Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd– This is an
instance of determination of enemy character of a company. In this case, there was a
German company. It set up a subsidiary company in Britain and entered into a
contract with Continental Tyre and Rubber Co. (Great Britain) Ltd. for 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 since the
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decision making bodies, the board of directors and the general body of share holders
were controlled by Germans, the company was a German company and not a British
company and hence it was an enemy company.
3. Gilford Motor Co. v. Horne– This is an instance for prevention of façade or sham. In
this case an employee entered into an agreement that after his employment is
terminated he shall not enter into a competing business or he should not solicit their
customers by setting up his own business. After the defendant’s service was
terminated, he set up a company of the same business. His wife and another employee
were the main share holders and the directors of the company. Although it was in their
name, he was the main controller of the business and the business solicited customers
of the previous company. The Court held that the formation of the new company was
a mere cloak or sham to enable him to enable him to breach the agreement with the
plaintiff.
4. Re, FG (Films) Ltd– In this case the court refused to compel the board of film censors
to register a film as an English film, which was in fact produced by a powerful
American film company in the name of a company registered in England in order to
avoid certain technical difficulties. The English company was created with a nominal
capital of 100 pounds only, consisting of 100 shares of which 90 were held by the
American president of the company. The Court held that the real producer was the
American company and that it would be a sham to hold that the American company
and American president were merely agents of the English company for producing the
film.
5. Jones v. Lipman– In this case, seller of a piece of land sought to evade 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.
6. Tata Engineering and Locomotive Co. Ltd. State of Bihar – In this case it was stated
that a company is also not allowed to lay claim on fundamental rights on the basis of
its being an aggregation of citizens. Once a company is formed, its business is the
business of an incorporated body thus formed and not of the citizens and the rights of
such body must be judged on that footing and cannot be judged on the assumption
that they are the rights attributable to the business of the individual citizens.
7. N.B. Finance Ltd. v. Shital Prasad Jain– In this case the Delhi High Court granted to
the plaintiff company an order of interim injunction restraining defendant companies
from alienating the properties of their ownership on the ground that the defendant
companies were merely nominees of the defendant who had fraudulently used the
money borrowed from the plaintiff company and bought properties in the name of
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defendant companies. The court did not in this case grant protection under the
doctrine of corporate veil.
8. Shri Ambica Mills Ltd. v. State of Gujarat– It was held that the petitioners were as
good as parties to the proceedings, though their names were not expressly mentioned
as persons filing the petitions on behalf of the company. The managing directors in
their individual capacities may not be parties to such proceedings but in the official
capacity as managing directors and as officers of the company, they could certainly be
said to represent the company in such proceedings. Also as they were required to so
act as seen from the various provisions of the Act and the Rules they could not be said
to be total strangers to the company petition.
COMPANIES BILL 2011
India being one of the top three emerging economies, has been longing for strong and
cogent corporate laws that will enable the country’s international trade to conduct its affairs
on a par with the western industrialized nations. The proposals in the Bill are expected to act
as a catalyst to fostering growth of the economy. One of the main highlights of this Bill is that
it proposes a mechanism for vigilance that will reward whistle blowers. This measure will
allow companies to follow transparency at every move they initiate. The authors have
mentioned a few provisions which bring in responsibilities and liabilities upon a director.
Section 127- A director of a company is punishable with imprisonment or fine if a

dividend which is declared has not been paid or a warrant which in respect thereof has not
been posted within 30 days of the date of declaration.
Section 159 r/w 156- It is the duty of every existing director to intimate his Director
Identification Number to the company or all companies wherein he is a director within one
month of the receipt of the same from the Central Government. If any director of a company
contravenes, such director shall be punishable with imprisonment or with fine under Section
159.
Section 166- Under this section various duties of a director are enumerated such as
the duty of good faith, of due and reasonable care, to act in accordance with the articles of
association etc. Any director in violation of these duties will be punishable with a fine of not
less that Rs 1 lakh and not more than Rs 5 lakhs.
Section 184- This section imposes a duty upon a director of a company to disclose his
concern or interest, including shareholding, in any company or companies, or bodies
corporate, companies, firms, or other associations of individuals or if he is a party to any
contract or agreement with a body corporate in which such director holds more than 2%
shareholding or otherwise as mentioned or any firm in which such director is a partner or
owner etc. Sub-section (4) is the penalty clause.
Section 194- This section puts a prohibition in forward dealings of securities of the
company, its subsidiaries or in its holding or associate company by a director of such
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company. In any contravention to this effect, the director will be punishable with
imprisonment or/and fine as prescribed.
APPROACH OF THE INDIAN COURTS IN THE 21ST CENTURY
1. Subhra Mukherjee v. Bharat Coking Coal Ltd– Sham or façade- In this case a private
coal company sold its immovable property to the wives of directors prior to
nationalization of the company. In fact, documents were ante-dated to show the
transaction was prior to nationalization of the company). Where such transaction is
alleged to be sham and collusive, the Court was justified in piercing the veil of
incorporation to ascertain the true nature of the transaction as to know who were the
real parties to the sale and whether it was genuine and bona fide or whether it was
between the husbands and wives behind the façade of the separate entity of the
company.
2. Bajrang Prasad Jalan v. Mahabir Prasad Jalan]– Subsidiary-holding company- The

court, for the purpose of considering a complaint of oppression held that the corporate
veil can be lifted in the cases of not merely of a holding company, but also its
subsidiary when both are family companies.
3. Singer India v. Chander Mohan Chadha– The concept of corporate entity was
evolved to encourage and promote trade and commerce but not to commit illegalities
or to defraud the people. Where therefore the corporate charter is employed for the
purpose of committing illegality or for defrauding others, the court would ignore the
corporate character and will look at the reality behind the corporate veil so as to
enable it to pass appropriate orders to do justice between the parties concerned.
4. Saurabh Exports v. Blaze Finance & Credits (P.) Ltd. – Defendant no. 1 was a private
limited company. Defendant no. 2 and 3 were the directors of that company.
Defendant no. 4 was the husband of D-3 and the brother of D-2. Allegedly on
representation of D-4 that D-1 company was inviting short term deposits at good
interest rates, plaintiff made a deposit of Rs. 15 lakhs in the company for a period of 6
months. When the company failed to pay the amount, the plaintiff sued it for the said
amount along with interest. D-2 and 3 denied their liability in the ground that there
was no personal liability of the directors as the deposit was received in the name of
the company. D-4 denied the liability on the ground that it had nothing to do with the
transaction in question as he was neither a director nor a shareholder of the company
so it was held that he had no locus in the company and hence not liable. It was held
that D-3 being a house wife had little role to play and therefore could not be made
liable. The plaintiff was sought to be defrauded under the cloak of a corporate entity
of D-1 and, therefore, corporate veil was lifted taking into consideration that D-1 was
only a family arrangement of the remaining defendants. D-2 was running the business
in the name of the company. So D-1 and D-2 were both personally liable.
5. Universal Pollution Control India (P.) Ltd. v. Regional Provident Fund

Commissioner– This is a case of ‘default in payment of employee’s provident fund’-
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Certain amount was due and payable to provident fund office by the sister concern of
the petitioner-company, a demand was raised on the petitioner company only on the
ground that two directors of these two companies were common. It was held that the
contention raised by the respondent that the Court should lift the corporate veil and
fasten the liability on the petitioner was without any merits and was baseless. Both the
companies were separate legal entities under the provisions of the Companies Act and
there was no provision under the Provident Fund Act that a liability of one company
can be fastened on the other company even by lifting the corporate veil.
6. The Decision of Karnataka High Court. Decided On 24.03.2011 – Richter Holding

Ltd. v. The Assistant Director of Income Tax– Richter Holdings Ltd., a Cypriot
company and West Globe Limited, a Mauritian company purchased all shares of
Finsider International Co. Ltd. (FICL), a U.K. company from Early Guard Ltd.
another U.K. company. FICL held 51% shares of Sesa Goa Ltd. (SGL), an Indian
company. The Tax department issued a show cause notice to Petitioner alleging that
the Petitioner had indirectly acquired 51% in Sesa Goa Ltd and was therefore, liable
to deduct tax at source before making payment to Early Guard Limited. The Income
Tax Department contended that as per section 195 of the Act, the Petitioner is liable to
deduct tax at source in respect of payment made for purchase of capital asset. The
High Court of Karnataka held that the Petitioner should reply to show-cause notice
issued by the Tax department and urge all their contentions before it. The High Court
also emphasized that the fact finding authority (Tax Department) may lift the
corporate veil to look into the real nature of the transaction to ascertain the vital facts.
The aspect that deserves greater attention is that the Karnataka High Court
demonstrates a keen interest in lifting the corporate veil. This has a number of implications.
First, the Richter Holding Case extends even further the scope of the principles laid down in
the Vodafone Case. For example, in Vodafone the Bombay High Court did not consider lifting
the corporate veil to impose taxation in case of indirect transfers. Second, it is not clear from
the judgment itself whether the tax authorities advanced the argument regarding lifting the
corporate veil. Third, the Karnataka High Court appears to have readily permitted lifting the
corporate veil without at all alluding to the jurisprudence on the subject-matter. Generally,
courts defer to the sanctity of the corporate form as a separate legal personality and are slow
to lift the corporate veil, as evidenced by Adams v. Cape Industrie, unless one of the
established grounds exist.
It should be noted that the principle of Salomon v. A. Salomon & Co. Ltd. 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 corporate veil to be lifted. The principle that a
company has its own separate legal personality of its own finds an important place in the
Constitution of India as well. Article 21 of the Constitution of India, says that: No person
shall be deprived of his life and personal liberty except according to procedure established by
law. Under Article a company also has the right to life and personal liberty as a person. This
was laid down in the case of Chiranjitlal Chaudhary v. Union of India where the Supreme
Court held that fundamental rights guaranteed by the constitution are available not merely to
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individual citizens but to corporate bodies as well except where the language of the provision
or the nature of right compels the inference that they are applicable only to natural persons.
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. It is under the ‘seal of the company’ that the members or shareholders commit
fraud or such acts and therefore the company should also be liable as it also a person which is
accorded fundamental rights under Article 21 of the Constitution of India.
The other side of this coin can be that, as the company is privileged to have its own
right to life and personal liberty, how can its fundamental right be taken away by disregarding
its corporate entity for the wrongs committed by its members and not the company itself.
As a result of incorporation, an incorporated company wears a ‘corporate veil’ and

thus acquires the ‘corporate personality’, behind which there are shareholders who have
formed the company. Although in law the company has an independent personality, it is an
artificial person and hence, behind the corporate curtain, there are natural
persons, i.e. shareholders who have associated themselves into a company. So if this
corporate personality is uncovered or unveiled, the shareholders or the directors mostly are
found to be behind the veil.
Promoters
Meaning of a Promoter:
The idea of carrying on a business which can be profitably undertaken is conceived

either by a person or by a group of persons who are called promoters. After the idea is
conceived, the promoters make detailed investigations to find out the weaknesses and strong
points of the idea, to determine the amount of capital required and to estimate the operating
expenses and probable income.
The term ‘promoter’ is a term of business and not of law. It has not been defined
anywhere in the Act, but a number of judicial decisions have attempted to explain it.
According to L.J. Brown. “The term promoter is a term not of law but of business,
usefully summing up in a single word a number of business operations familiar to the
commercial world by which a company is generally brought into existence.”
According to Justice C. Cockburn. “Promoter is one who undertakes to form a

company with reference to a given object and to set it going, and who takes the necessary
steps to accomplish that purpose.”
According to Palmer, “Company promoter is a person who originates a scheme for the
formation of the company, has the memorandum and the articles prepared, executed and
registered and finds the first directors, settles the terms of preliminary contracts and
prospectus (if any) and makes arrangement for advertising and circulating the prospectus and
placing the capital.”
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According to Guthmann and Dougall. “Promoter is the person who assembles the
men, the money and the materials into a going concern.”
“Promoter is the person who originates the idea for formation of a company and gives
the practical shape to that idea with the help of his own resources and with that of others.”
A person cannot be held as promoter merely because he has signed at the foot of the
Memorandum or that he has provided money for the payment of formation expenses.
The promoters, in fact, render a very useful service in the formation of the company.
A promoter has been described as ”a creator of wealth and an economic prophet.” The
promoters carry a considerable risk because if the idea sometimes goes wrong then the time
and money spent by them will be a waste.
In the words of Henry E. Heagland, “A successful promoter is a creator of wealth. He

is an economic prophet. He is able to visualise what does not yet exist and to organise
business enterprise to make the products available to the using public.”
A promoter may be an individual, a firm, an association of persons or even a

company.
Functions of a Promoter:
The Promoter Performs the following main functions:
1. To conceive an idea of forming a company and explore its possibilities.
2. To conduct the necessary negotiation for the purchase of business in case it is

intended to purchase as existing business. In this context, the help of experts may be taken, if
considered necessary.
3. To collect the requisite number of persons (i.e. seven in case of a public company
and two in case of a private company) who can sign the ‘Memorandum of Association’ and
‘Articles of Association’ of the company and also agree to act as the first directors of the
company.
4. To decide about the following:
(i) The name of the Company,
(ii) The location of its registered office,
(iii) The amount and form of its share capital,
(iv) The brokers or underwriters for capital issue, if necessary,
(v) The bankers,
(vi) The auditors,
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(vii) The legal advisers.
5. To get the Memorandum of Association (M/A) and Articles of Association (A/A)

drafted and printed.
6. To make preliminary contracts with vendors, underwriters, etc.
7. To make arrangement for the preparation of prospectus, its filing, advertisement

and issue of capital.
8. To arrange for the registration of company and obtain the certificate of

incorporation.
9. To defray preliminary expenses.
10. To arrange the minimum subscription.
Legal Position of a Promoter:
The promoter is neither a trustee nor an agent of the company because there is no
company yet in existence. The correct way to describe his legal position is that he stands in a
fiduciary position towards the company about to be formed.
Lord Cairns has correctly stated the position of promoter in Erlanger V. New
Semberero Phophate Co. “The promoters of a company stand undoubtedly in a fiduciary
position. They have in their hands the creation and moulding of the company. They have the
power of defining how and when and in what shape and under what supervision, it shall start
into existence and begin to act as a trading corporation.”
From the fiduciary position of promoters, the two important results follow:
(1) A promoter cannot be allowed to make any secret profits. If it is found that in any
particular transaction of the company, he has obtained a secret profit for himself, he will be
bound to refund the same to the company.
(2) The promoter is not allowed to derive a profit from the sale of his own property to
the company unless all material facts are disclosed. If he contracts to sell his own property to
the company without making a full disclosure, the company may either repudiate/rescind the
sale or affirm the contract and recover the profit made out of it by the promoter.
A promoter who wishes to sell his own property to the company must make a full
disclosure of his interest.
The disclosure may be made:
(i) To an independent Board of Directors, or
(ii) In the articles of association of the company, or
(iii) In the prospectus, or
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(iv) To the existing and intended shareholders directly.
If the promoter fails to discharge the obligation demanded of his fiduciary position the
company may rescind the contract or may in the alternative choose to take advantage of the
contract and sue the promoter for damages for breach of his duty to the company.
Secret profits on the sale of property can be recovered from a promoter only when the
property was bought and sold to the company while he was acting as a promoter.
Rights of Promoter:
The rights of promoters are enumerated as follows:
1. Right of indemnity:
Where more than one person act as the promoters of the company, one promoter can
claim against another promoter for the compensation and damages paid by him. Promoters
are severally and jointly liable for any untrue statement given in the prospectus and for the
secret profits.
2. Right to receive the legitimate preliminary expenses:
A promoter is entitled to receive the legitimate preliminary expenses which he has

incurred in the process of formation of the company such as cost of advertisement, fee of
solicitor and surveyors. The right to receive the preliminary expenses is not a contractual
right. It depends upon the discretion of the directors of the company. The claim for expenses
should be supported by vouchers.
3. Right to receive the remuneration:
A promoter has no right against the company for his remuneration unless there is a
contract to that effect. In some cases, articles of the company provide for the directors paying
a specified amount to promoters for their services but this does not give the promoters any
contractual right to sue the company. This is simply an authority vested in the directors of the
company.
However, the promoters are usually the directors, so that in practice the promoters
will receive their remuneration.
The remuneration may be paid in any of the following ways:
(i) A commission may be paid to the promoter on the purchase price of the business or
property taken over by the company through him.
(ii) The promoters may be granted by the company a lumpsum amount.
(iii) The promoters may be given fully or partly paid shares in consideration of their
services rendered.
(iv) The promoter may be given a commission at a fixed rate on the shares sold.
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(v) The promoter may purchase the business or other property and sell the same to the
company at an inflated price. He must disclose this fact.
(vi) The promoters may take an option to subscribe within a fixed period for a certain
portion of the company’s unissued shares at par.
Whatever be the nature of remuneration, it must be disclosed in the prospectus if paid

within the preceding two years from the date of prospectus.
Duties of Promoter:
The duties of promoters are as follows:
1. To disclose the secret profit:
The promoter should not make any secret profit. If he has made any secret profit, it is
his duty to disclose all the money secretly obtained by way of profit. He is empowered to
deduct the reasonable expenses incurred by him.
2. To disclose all the material facts:
The promoter should disclose all the material facts. If a promoter contracts to sell the
company a property without making a full disclosure, and the property was acquired by him
at a time when he stood in a fiduciary position towards the company, the company may either
repudiate the sale or affirm the contract and recover the profit made out of it by the
promoters.
3. The promoter must make good to the company what he has obtained as a
trustee:
A promoters stands in fiduciary position towards the company. It is the duty of the
promoter to make good to the company what he has obtained as trustee and not what he may
get at any time.
4. Duty to disclose private arrangements:
It is the duty of the promoter to disclose all the private arrangement resulting him
profit by the promotion of the company.
5. Duty of promoter against the future allottees:
When it is said the promoters stand in a fiduciary position towards the company then
it does not mean that they stand in such relation only to the company or to the signatories of
memorandums of company and they will also stand in this relation to the future allottees of
the shares.
Liabilities of Promoter:
The liabilities of promoters are given below:
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1. Liability to account in profit:
As we have already discussed that promoter stands in a fiduciary position to the

company. The promoter is liable to account to the company for all secret profits made by him
without full disclosure to the company. The company may adopt any one of the following two
courses if the promoter fails to disclose the profit.
(i)The company can sue the promoter for an amount of profit and recover the same
with interest.
(ii) The company can rescind the contract and can recover the money paid.
2. Liability for mis-statement in the prospectus:
Section 62(1) holds the promoter liable to pay compensation to every person who
subscribes for any share or debentures on the faith of the prospectus for any loss or damage
sustained by reason of any untrue statement included in it. Sec. on 62 also provides certain
grounds on which a promoter can avoid his liability. Similarly Sec. 63 provides for criminal
liability for mis-statement in the prospectus and a promoter may also become liable under this
section.
The promoter may also be imprisoned for a term which may extend to two years or
may be punished with the fine upto Rs. 5,000 for untrue statement in the prospectus. (Sec.
63).
3. Personal liability:
The promoter is personally liable for all contracts made by him on behalf of the
company until the contracts have been discharged or the company takes over the liability of
the promoter.
The death of promoter does not relieve him from liabilities.
4. Liability at the time of winding up of the company:
In the course of winding up of the company, on an application made by the official

liquidator, the court may make a promoter liable for misfeasance or breach of trust. (Sec.
543).
Further where fraud has been alleged by the liquidator against a promoter, the court
may order for his public examination. (Sec. 478).
Preliminary Contracts/Pre-Incorporation Contracts Made by the Promoters:
Preliminary contracts are those contracts which are made by the promoters with
different parties on behalf of the company yet to be incorporated. Such contracts are generally
entered into by promoters to acquire some property or right for and on behalf of the company
to be formed.
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The promoters enter into preliminary contracts, generally as agents or trustees of the
company. Such contracts are not legally binding on the company because two consenting
parties are necessary to a contract whereas the company is nonentity before incorporation.
The company has no legal existence until it is incorporated. It therefore follows:
1. That when, the company is registered, it is not bound by the preliminary contract.
2. That the company when registered cannot ratify the agreement. The company was
not a principal with contractual capacity at the time of contract. A contract can be ratified
only when it is made by an agent for a principal who is in existence and who is competent to
contract at the time when the contract is made.
3. That if the agent undertook any liability under the agreement, he would be
personally liable notwithstanding that he is described in the agreement as an agent and that
the company may have attempted to ratify the agreement.
4. The company cannot enforce the preliminary agreement.
The preliminary contracts made by promoters generally provided that if the company
adopts the agreement the promoter’s liability shall cease and if the company does not adopt
the agreement within a certain time either party may rescind the contract. In such a case
promoter’s liability would cease after the lapse of fixed time.
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Unit 1 Company Law

Company Law (Karnataka State Law University)

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Unit 1 Company Law

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History of Company Legislation in India

At the end of 1950, the Government of independent India appointed a Committee

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(a) the promotion and formation of companies;

(b) capital structure of companies;

(c) company meetings and procedures;

(e) the inspection and investigation of the affairs of the company;

(h) the administration of Company Law.

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provisions for setting up of National Committee on Accounting Standards was incorporated

ORIGIN OF COMPANIES ACT

EVOLUATION OF COMPANIES ACT

• On 29 Aug 2013 to become Law i.e, Indian companies act 2013.

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According to Chief Justice Marshall of USA, “A company is a person, artificial,

The main characteristics of a company are :

1. Incorporated association. A company is created when it is registered under the

2. Artificial legal person. A company is an artificial person. Negatively speaking, it

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There is no difference in principle between a company consisting of only two

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4. Perpetual Existence. A company is a stable form of business organization. Its life

6. Limited Liability : A company may be company limited by shares or a company

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8. Separate Property : As a company is a legal person distinct from its members, it is

9. Delegated Management : A joint stock company is an autonomous, selfgoverning

DISTINCTION BETWEEN COMPANY AND PARTNERSHIP

The difference between a company and partnership is as follows: Company

1. Mode of creation By Registration by By Agreement Statute.

3. Liability Limited liability of Unlimited joint and members several liability of

5. Transfer Public Co.-freely Ordinarily no right of of shares transferable; transferee

6. Number of Private Co-Minimum 2 Minimum 2 members and Maximum 50

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9. Legal Statutory books, No legal formalities formalities Audit, Publication

10. Dissolution Only according to the Dissolution by provisions of law- agreement by

Companies may be classified into various kinds on the following basis:

1. On the basis of incorporation

2. On the basis of liability

3. On the basis of number of members

4. On the basis of control

5. On the basis of ownership.

1. On the Basis of Incorporation:

On the basis of incorporation companies may be classified into the following

(i) By Royal Charter-Chartered Companies:

(ii) Statutory Company:

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(iii) Registered Companies:

A registered company is a company which is organised by getting it registered with

2. On the Basis of Liability:

On the basis of liability, company may be classified into:

(a) Limited liability companies.

(i) Companies limited by shares

(ii) Companies limited by guarantee

(b) Unlimited liability companies.

(a) Limited Liability Companies:

(i) Companies Limited by Shares: