COMPANY LAW I

GOVERNMENT COMPANY’ – IS IT ‘STATE’ FOR THE PURPOSE

OF CONSTITUTIONAL LAW

Submitted by

Vaibhav Jeswani

Division A Roll No 17010220481 Batch 2017-22

Symbiosis Law School, NOIDA

Symbiosis International (Deemed University),

PUNE

In
August, 2019

Under the guidance of

Prof.s - Rajnish Jindal and Sonakshi Kumar

1|Page
 CERTIFICATE

The Project entitled “Government Company’ – Is It ‘State’ For the

Purpose of Constitutional Law” submitted to the Symbiosis Law School,
NOIDA for Company Law I as part of internal assessment is based on my
original work carried out under the guidance of Professors Rajnish Jindal
and Sonakshi Kumar from July to August. The research work has not been
submitted elsewhere for award of any degree.

The material borrowed from other sources and incorporated in the thesis
has been duly acknowledged.

Signature of the candidate

Date:

2|Page
 ACKNOWLEGMENT

The completion of this project is not a result of solely my efforts and preparation, rather
it required support and guidance of a lot of people to whom I would like to show my
gratitude. I pay my regards to our project guide, Professors, Rajnish Jindal and Sonakshi
Kumar and thank them for providing me with the opportunity to do this project work
and for granting me the assistance I needed in completing this project and throughout
the period of my research.

Thank you, for your guidance. It helped me in evolving my project and making it
unique, to the best of my abilities. I would like to thank the library staffs and
management to help in browsing and choosing the right book, patiently and also the
stationary staffs for providing me with the final hard copy of my project.

3|Page
 INDEX

SR. NO. TITLE PAGE NO.

1. ABSTRACT 5

2. INTRODUCTION 5

3. THE DEFINITION OF STATE AND 6

GOVERNMENT COMPANY

4. LEGAL STATUS OF A COMPANY 7

5. ANALYSIS 7

6. CONCLUSION 10

7. BIBLIOGRAPHY 10

4|Page
 ABSTRACT

A company form of business is preferred due over other forms as it not only provides a
person with additional funds but also with limited liability as a company is considered
as a separate legal entity and has rights and limitations of its own, which makes sure
that the persons running the business are not personally held liable in case of any loss
but with time this feature was misused and to curb this the courts had to interfere and
lift the corporate veil and make sure those using this garb of a company to defraud
others are held liable personally. In India the State has the power to enter into any
business and in any form it wishes and thus the State too started business functions
under company form of business but the Courts had to interfere through Judicial
Interpretation to ensure that the state does not misuse the freedom of limited liability
and act in any way what so ever and thus the principle of ‘instrumentality’ was applied
to determine the position of Government Companies and whether they will be
considered a part of State as given under Art.12 of the constitution or will be considered
as a separate entity and will receive benefits of limited liability.

INTRODUCTION

The word Company was derived by combining two Latin terms ‘Com’ which means
coming with or together and ‘Panis’ which means bread. Thus, originally referred to an
association of persons who took their meals together and with time this definition was
modified as it was not confined only to taking bread together but earning the bread
together. The Joint Stock Act of 18441 was the first legislative measure which
facilitated regulations, although the concerns registered under it were referred to as
partnerships and there was no concept of limited liability. The right to trade with limited
liability was introduced in 18552 and in 1856 the whole new law relating to such
companies was consolidated.3 The history of Indian Company law began in the year
1850 under the British rule and since then the cumulative process of amendments and
consolidation brought us the most comprehensive piece of legislation, the Companies

1
Joint Stock Companies Act, 1844 (7 & 8 Vict C 110).
2
Limited Liability Act, 1855 (18 Vict C 133).
3
Joint Stock Companies Act, 1856 (19 & 20 Vict. C 47).

5|Page
Act, 1956 and it was replaced by the Companies Act, 20134 which was enforced from
1st April 2014.

The word ‘Company’ has no strict technical or legal meaning in the Indian
Jurisprudence and as per the definition given under the Companies Act of 2013,
company means “a company formed under this Act or any previous company law.”5 In
practical way, a company means a voluntary association of people who have come
together for carrying on some business and had an option of either carrying on as a
partnership or as a company and decide to register under the companies act as it is the
only form of business organisation which offers the privilege of limiting personal
liability for business debts.6

The Indian Constitution grants the power to carry on trade7 to the government, both
centre and state, and thus government can also invest in companies as well as open its
own companies in order to generate extra revenue and provide employment to the
people and thus it is necessary to ensure that the Government does not misuse this
freedom to do acts which it cannot perform as a sovereign body and does them under
the garb of a company which has a limited liability.

THE DEFINITION OF STATE AND GOVERNMENT COMPANY

Article 12 of Constitution provides the widest interpretation of the State and it not only
includes the “Government and Parliament of India and the Government and the
Legislature of each of the States and all local or other authorities within the territory of
India or under the control of the Government of India.”8 This definition does not
explicitly mentions the term government company and it already known and established
that the Government Departments are considered as an authority or the state under Art.
12 but the question whether the autonomous and non-departmental bodies, whether
registered or unregistered, will also fall within the definition of ‘other authorities’ under
Art 12.

4
Companies Act, 2013 (Act No. 18 of 2013).
5
Sec. 2 (20), Companies Act, 2013 (Act No. 18 of 2013).
6
Avtar Singh, Company Law 2, (16th ed. 2015).
7
India Const. art. 298.
8
India Const. art 12.

6|Page
As mentioned, earlier, the term company has no strict interpretation and any company
in which “not less than fifty-one per cent. of the paid-up share capital is held by the
Central Government, or by any State Government or Governments, or partly by the
Central Government and partly by one or more State Governments, and includes a
company which is a subsidiary company of such a Government company”9 is
considered as a government company.

LEGAL STATUS OF A COMPANY

A company is a separate legal entity and has various rights of its own, it can sue and be
sued by others parties. The fact that company in itself is considered as a separate legal
entity ensures that it can be held liable in its personal capacity and no individuals,
promoters or directors, will be held liable for its acts. This principle of separate entity
was first answered in the case of In Re Kandoli Tea Co. Ltd.10 wherein the court held
that the company was separate from its shareholders and they can not be held liable as
they were totally different persons, the principle of separate legal entity was also upheld
in the Salomon11 case which made this principle globally recognizable and gave a
precedent which is followed even today as it serves the purpose of forming a company,
i.e., operating and running a business with limited liability.

ANALYSIS

To determine whether a body set up directly by a statute, or a non-statutory body, i.e.,

a body registered under a general law, such as the companies act, state cooperative
societies act etc will be considered as State or not, the Supreme Court came up with the
concept of an “instrumentality” of the state. Anybody which can be regarded as an
instrumentality of the state falls under Art 12. The reason for adopting such a broad
view is that the Constitution should, whenever possible, “be so construed as to apply to
arbitrary application of power against individuals by centres of power. The emerging
principal appears to be that a public corporation or creation of the state is subject to

9
Sec. 2 (45), Companies Act, 2013 (Act No. 18 of 2013).
10
In Re Kandoli Tea Co. Ltd. v. Unknown, ILR (1886) 13 Cal 43.
11
Aron Salomon v. A Salomon and Co. Ltd., 1897 AC 22 (UK).

7|Page
constitutional limits as the state itself.12 Further that the power level located must be
subject to the fundamental constitutional limitations”13 and it was held that the truest
test for the purpose of determining whether a body was an authority or not was not
whether it formed by a statute or under a statute but it was functional.14

The question regarding a non-statutory body was finally clinched in Ajay Hasia v.
Khalid Mujib,15 where a society registered under the Society’s Registration Act running
a regional engineering college, sponsored supervised and financially supported by the
government, was held to be an authority. Money to run the college was provided by the
State and Central Governments, the State Government could review the functioning of
the college and issue suitable instructions if considered necessary. Nominees of the
State and Central Governments were members of the society including its chairman.
The Supreme Court ruled that where a corporation is an instrumentality or agency of
the government, it must be held to be an Authority under article 12. " the concept of
instrumentality or agency of the government is not limited to a corporation created by
a statute but is equally applicable to a company or society..." Thus, registered society
was held to be an authority for the purpose of Art. 12. The Hon’ble Apex court also laid
down the following test whether a body is an instrumentality of the government or not:

1. If the entire share capital of the body is held by the government, it goes a long
way towards indicating that the body is an instrumentality of the government.
2. Where is the financial assistance given by the government is so large as to meet
almost entire expenditure of the body, it may indicate that the body is
impregnated with government character.
3. It is the relevant factor if the body in enjoys Monopoly status which is conferred
or protected by the state.
4. Existence of deep and pervasive state control may afford an indication that the
body is a state instrumentality.
5. If the functions performed by the body are of public importance and closely
related to government functions, it is a relevant factor to treat the body as an
instrumentality of the government.

12
Sukhdev v. Bhagatram, AIR 1975 SC 1331.
13
Id. at 1352.
14
Som Prakash v. Union of India, AIR 1981 SC 212.
15
Ajay Hasia v. Khalid Mujib, AIR 1981 SC 487.

8|Page
This judgment initiated a new judicial Trend, viz., that of expanding the significance of
the term authority. The law appears to be now settled in the view of the judgement of a
seven judge constitution bench of the Supreme Court in the case of Pradeep Kumar
Biswas16 where, after considering the authorities it concluded that the test formulated
in Ajay Hasia17 were not a rigid set of principles so that if a body Falls within any of
those test, ex hypothesis, it must be considered to be a state within the meaning of article
12. The court suggested a General guideline observing: " the question in each case
would be weather in the light of the cumulative facts as established, the body is
financially, functionally and administratively dominated by or under the control of the
government. Such control must be particular to the body in question and must be
pervasive. If this is found then the body is a state within article 12. On the other hand,
when the control is mainly regulatory whether under a statute or otherwise, it would not
serve to make the body a state.” And not only Government Companies but if a private
body, in the absence of any authorization, chooses to discharge any functions or duties
which amount to public duties or state functions which is not prohibited by law then it
may be considered to be an instrumentality of the state.18

The Courts further elaborated upon the “instrumentality” in the case Mysore paper
mills, a government company, which was held to be an instrumentality of State
Government and hence, an Authority under article 12.19 More than 97% of the share
capital of the company has been contributed by the state government And The Financial
Institutions of the central government, out of 12 directors, five are government
nominees and the rest are approved by the government. The company has been
interested with import public duties and the government exercises various other forms
of supervision over the company. The company is an instrumentality of the Government
and its physical form of a company "is merely a clock or cover for the government."
any doubts as to whether a writ petition under article 226 would like against the state
corporation has been set at rest by the declaration of the supreme court.20

16
Pradeep Kumar Biswas v. Indian Institute of Chemical Biology, (2002) 5 SCC 111.
17
Supra note 15.
18
Zee Tele films ltd. v. UOI (2005) 4 SCC 649.
19
Mysore paper mills ltd. v. The Mysore Paper Mills Officer’s Association, (2002) 2 SCC 167.
20
Virendra Kumar Srivastava v. UP Rajya Karamchari Kalyan Nigam, (2005) 1 SCC 149.

9|Page
 CONCLUSION

Indian courts have faced the issue pertaining to the autonomy of corporate bodies
various times as the state has the power to carry on trade21 as well as has to ensure the
public benefit and growth and fulfil its responsibilities as a Socialist state22. The courts
had to strike a balance between both the features as enshrined under the constitution as
holding Government companies liable will go against the basic objective of carrying a
business with limited liability whereas absolute freedom will give government a free
hand and they will act in arbitrary manner which will go against the public policy. Thus,
the Indian Courts had to interpret Art. 12, harmoniously to the provisions of the
Companies Act, in the widest possible manner to ensure that fundamental rights of
people are not violated, the Courts have been led to take such an expansive view of Art.
12 because of the feeling that if instrumentalities of Govt. are not subjected to the same
legal disciplines as the government itself because of the plea that they are distinct and
autonomous entities, then the govt. would be tempted to adopt the stratagem of setting
up such administrative structures on a big scale in order to evade the discipline and
constrains of the Fundamental Rights thus eroding and negating their efficacy to a very
large extend and in this process the judicial control over these bodies would be very
much weakened.23

21
Supra note 7.
22
India Const. preamble.
23
Steel Authority of India Ltd. v. National Union Water Front Workers, AIR 2001 SC 3527.

10 | P a g e
 BIBLIOGRAPHY
CASES
Ajay Hasia v. Khalid Mujib, AIR 1981 SC 487. ....................................................... 8, 9
Aron Salomon v. A Salomon and Co. Ltd., 1897 AC 22 (UK). .................................... 7
In Re Kandoli Tea Co. Ltd. v. Unknown, ILR (1886) 13 Cal 43. ................................. 7
Mysore paper mills ltd. v. The Mysore Paper Mills Officer’s Association, (2002) 2 SCC
167.............................................................................................................................. 9
Pradeep Kumar Biswas v. Indian Institute of Chemical Biology, (2002) 5 SCC 111. .. 9
Som Prakash v. Union of India, AIR 1981 SC 212. ...................................................... 8
Steel Authority of India Ltd. v. National Union Water Front Workers, AIR 2001 SC
3527.......................................................................................................................... 10
Sukhdev v. Bhagatram, AIR 1975 SC 1331. ................................................................. 8
Virendra Kumar Srivastava v. UP Rajya Karamchari Kalyan Nigam, (2005) 1 SCC 149.
.................................................................................................................................... 9
Zee Tele films ltd. v. UOI (2005) 4 SCC 649. ............................................................... 9
STATUTES
Companies Act, 2013 (Act No. 18 of 2013). ................................................................. 6
Joint Stock Companies Act, 1844 (7 & 8 Vict C 110)................................................... 5
Joint Stock Companies Act, 1856 (19 & 20 Vict. C 47)................................................ 5
Limited Liability Act, 1855 (18 Vict C 133) ................................................................. 5
BOOKS
Avtar Singh, Company Law 2, (16th ed. 2015). ............................................................ 6

OTHER BOOKS REFERRED

Companies Act With Rules . (2019). Jhajjar: Taxmann Publications (P.) Ltd.
Jain, M. (2011). Indian Constitutional Law. Nagpur: Lexis Nexis Butterworths
Wadhwa.
Shukla, V. (2015). Constitution of India. Lucknow: Eastern Book Company.
Singh, A. (2015). Company Law. Lucknow: Eastern Book Company.

11 | P a g e