COMPANY LAW

COM331

CIA-1
COMPONENT-2

“LIC vs. ESCORTS Ltd. & ORS”

Submitted By: GROUP 5

LAKSHAY BANSAL 2110441

UDHAYAN ANANTHA KRISHNAN 2110443

TITIKKSHA RAMESH 2110460

 TABLE OF CONTENTS

SR. NO. PARTICULARS

1. INTRODUCTION

2. CORPORATE VEIL

3. CASE STUDY

4. CITATIONS

5. FACTS OF THE CASE

6. ISSUES OF THE CASE

7. JUDGEMENT OF THE CASE

8. CONCLUSION

9. REFERENCES
 INTRODUCTION

COMPANIES ACT 1956:

The Companies Act 1956 is regulated by the Government of India through the Ministry of
Corporate Affairs and the Offices of Registrar of Companies, Official Liquidators, Public
Trustee, Company Law Board, Director of Inspection, and so on. The Act is 658 segments in
length. The Act contains arrangements about Companies, overseers of the organizations,
notice and articles of affiliations, and so on. This act states and examines each and every
arrangement required or may have to oversee an organization. It makes reference to what
type on organizations their disparities, constitution , the board, individuals , capital, how
could the offers ought to be issues, debentures, enrollment of charge, toward the finish of the
demonstration it closes the about ending up of an organization, examining the circumstances
an organization should be gasping for air up. The manners in which it ought to be finished by
volunteer or through courts.

Companies Act 1956 clears up about the entire methodology of the how for structure an
organization, its expenses system, name, constitution, its individuals, and the intention behind
the organization, its portion capital, about its general executive gatherings, the board and
organization of the organization including a significant part which is the chiefs as they are the
leaders and they take every one of the significant choices for the organization their principal
obligation and liabilities about the organization make the biggest difference. The Act makes
sense about the twisting of the business also and what occurs exhaustively during the
liquidation period.

The Act contains the instrument with respect to hierarchical, monetary, and administrative,
every one of the significant parts of an organization. It engages the Central Government to
review the books of records of an organization, to coordinate extraordinary review, to arrange
examinations concerning the issues of an organization and to send off indictment for
infringement of the Act. These examinations are intended to see if the organizations lead their
undertakings as per the arrangements of the Act, whether any out of line rehearses biased to
the public interest are being turned to by any organization or a gathering of organizations and
to look at whether there is any bungle which may unfavorably influence any interest of the
investors, lenders, representatives and others.
COMPANIES ACT 2013

The Companies Act 2013 is an Act of the Parliament of India which directs the joining, plan
and working of organizations in India. The Companies Act 2013 is the substitution of Indian
Companies Act, 1956. The Act makes complete arrangements to administer every one of the
recorded and unlisted organizations of the country. The Companies Act 2013 enables
investors and features higher incentive for corporate Governance.
The Companies Act 2013 was initially introduced as the Corporate Bill in the Lok
Sabha(Lower Parliament). It was introduced on 18th December 2012. The Bill received
unanimous approval and eventually nearly a year later after some ratifications, the bill was
presented in the Rajya Sabha on 8th August 2013. The bill would eventually become the
Companies ACT 2013 as we know it today.

Framework of ACT Through Its Various Stages

1. 8th August 2013: 98 Sections

2. 26th March 2014: 183 Sections
3. 2015: 470 Sections

The primary targets of the Companies ACT 2013 was to advance the improvement of the
economy, advance exclusive expectations of corporate administration and uphold severe
activity against extortion and ridiculous unfortunate behavior with organization regulation
arrangements.

Companies ACT 2013 introduced one very important concept into the Indian Business
Environment. The provisions in the ACT have made CSR activities mandatory in the country.
Section 135 of the Companies Act presents obligatory Corporate social obligation (CSR)
commitments for enormous organizations, making it the main required CSR regulation on the
planet. As per the bill, all organizations with total assets over 5 billion rupees or ₹5 billion
(approx. $75 million), turnover north of 10 billion rupees or ₹10 billion (approx. $150
million), or net benefit north of 50 million rupees or ₹50 million (approx. $750,000) are
expected to spend no less than 2% of their yearly benefits of the first year. The law expects
that all organizations impacted will lay out a CSR panel to supervise the spending. Preceding
this regulation's entry, CSR regulations applied to public area organizations only.
Governments have informed India's hatcheries as qualified for spending under CSR.
 ★ Difference between Companies Act 1956 vs. Companies Act 2013

BASIS OF COMPANIES ACT 1956 COMPANIES ACT 2013

DIFFERENCE

Financial Year Companies were permitted to have a Companies must have their financial
financial year ending on a date decided year ending on 31 March every year.
by the Company.

Formats of Financial Schedule VI Schedule III

Statements

Maximum Number 10 in banking business and 20 in any As per rules, subject to maximum 100.
of Partners other business. Currently it is 50.

Max Shareholders in 50 excluding past and present 200 excluding past and present
Pvt Ltd Company employees. employees.

One Person Did not exist Company which has only one natural
Company (OPC) person as its member.

Issue of Share at Section 79 permitted issue of shares at a Section 53 prohibits issue of shares at a
Discount discount. discount. However, Section 54 permits
the issuing of ESOPs to its employees at
a discount.

Security Premium Utilization of Securities Premium Utilization of Securities Premium

Reserve Reserve was provided in Section 77A Reserve is provided in Section 52(2).
and 78.

Article of Table A applied where Companies did Table F applies where Companies
Association not adopt their own AOA. limited by shares do not adopt their own
AOA.

Interest in Calls in In the absence of a clause in the AOA, In the absence of a clause in the AOA,
Arrears the maximum interest chargeable on the maximum interest chargeable on
Calls-in-Arrears was 5% p.a. Calls-in-Arrears is 10% p.a.

Interest in Calls in In the absence of a clause in the AOA, In the absence of a clause in the AOA,
Advance the maximum interest payable on Calls- the maximum interest payable on Calls-
in-Advance was 6% p.a. in-Advance is 12% p.a.

Minimum Section 69, the requirement of Section 39, a company shall not allot
Subscription minimum subscription was with respect securities unless the amount stated in the
to shares only. prospectus as minimum subscription has
been subscribed & the sum paid.

CORPORATE VEIL
The organization, once consolidated, holds a different legitimate substance according to
regulation. The organization can act under its own name, have its very own mark, can go into
agreements, buy or sell property, have a financial balance and sue or get sued in a similar
way as a person. Hence, an organization is a juristic individual not quite the same as the
people who comprise it.

The Corporate Veil is a shield that protects the members from the action of the company. It
is a legalized concept separating the actions of the organization from that of its shareholders.

It additionally defends the investors from being at fault for the activities of the organization.
The court has the privilege to decide the liable party. This strategy practiced by the court is
classified "piercing the corporate veil" where the court can straightforwardly charge the
financial backers of the organization as answerable for obligations or fakes and set to the side
the restricted risk of the investors. The viability of penetrating the corporate cover can be for
the most part seen in shut and little organizations which have restricted investors and
resources. In any case, it is more advantageous to go without elevating this cover except if
some serious break of undertakings and wrongdoing occur.

The adequacy of penetrating the corporate veil can be for the most part seen in shut and little
enterprises which have restricted investors and resources. However, it is more helpful to keep
away from elevating this shroud except if some serious break of undertakings and unfortunate
behavior happen.
CASE STUDY
 Life Insurance Corporation of India (LIC)

The Life Insurance Corporation of India was established on 1st September 1956. It came to
life after the Indian Parliament passed the Life Insurance Act of India. The Company is
Headquartered in Mumbai, Maharashtra. The Act helped nationalize the Insurance Industry in
India. LIC is the current leader in the space for the last 20 years. It has over 290 million
policyholders and has almost 26 million claims per year. The company and its associates also
have operations in Fiji, Mauritius, the UK, Bahrain, the UAE, Kuwait, Qatar, Oman, Nepal,
Sri Lanka, Saudi Arabia and Kenya. LIC invests in sectors such as banks, cement, chemicals
and fertilizers, electricity and transmission, electrical and electronics, engineering,
construction and infrastructure, fast-moving consumer goods, finance and investments,
healthcare, hotels, information technology, metals and mining, motor vehicles, and
ancillaries, oil and natural resources, retail, textiles, transportation, and logistics.

Escorts Ltd. & ORS

Escorts Limited is an Indian multinational conglomerate that operates in the sectors of
agricultural machinery, construction machinery, material handling, and railway equipment.
Its headquarters are located in Faridabad, Haryana. The company was launched in 1944 and
has marketing operations in more than 40 countries. Escorts manufactures tractors,
automotive components, railway equipment, and construction and material handling
equipment. Escorts Limited and group is known for its various products such as Escorts Agri
Machinery, Escorts Construction Equipment, Railway Equipment Division, Escorts Auto
Products, Motorcycles etc. The company also has a Knowledge Management Center (KMC)
which was established in 1976. The center designs tractors. It has facilities such as an engine
laboratory that has computerized test beds with online control, data acquisition, and analysis;
an advanced vehicle testing laboratory; a noise vibration and harshness lab; a metrology lab;
and a materials engineering lab.

CITATIONS OF THE CASE

DATE OF THE JUDGEMENT:
19 December, 1985

PETITIONER:
LIFE INSURANCE CORPORATION OF INDIA (LIC)

RESPONDENT:
ESCORTS LTD. & ORS

BENCH:
REDDY, O. CHINNAPPA (J)
VENKATARAMIAH, E.S. (J)
ERADI, V. BALAKRISHNA (J)
MISRA, R.B. (J)
KHALID, V. (J)

CITATION:
1985 SCR Supl. (3) 909
1985 SCALE (2) 1289
1986 AIR 1370
1986 SCC (1) 264

COURT:
SUPREME COURT OF INDIA

DOCKET NUMBER:
Appeal Civil 2317 of 1984

LIC VS ESCORTS
Salomon v. A. Salomon & Co. Ltd. is one of the most well-known decisions in business law,
when it was decided that a corporation is a different legal entity from the stockholders. The
idea of the veil of incorporation developed as a result of judgement. According to the current
understanding, a company may enter into agreements, possess property, file lawsuits, and be
sued on its own behalf.
In addition, it shields stockholders from being held personally responsible for the debt or
other obligations of the business. However, because a company is an artificial person, it is
unable to commit any crimes or commit fraud. The corporate persona must be removed in
order to identify the people who are in charge of any illegal activity carried out in the
company's name. This is known as lifting of the corporate veil. This premise will be used to
examine the Life Insurance Corporation of India v. Escorts Ltd. case. This case also
highlighted the idea of corporate democracy, which is defined as the legal right of
shareholders to participate in corporate governance.

FACTS OF THE CASE

➢ Under the Foreign Exchange Regulation Act of 1973, the government implemented a
non-resident portfolio plan that permitted non-resident businesses to purchase shares
of Indian corporations if at least 60% of their beneficial ownership was held by non-
resident Indians. Only with the prior consent and approval of the Reserve Bank of
India could non-residents make use of this. According to the plan, investments may
not exceed a margin of 5% and were limited to 1% of the paid-up equity capital of
Indian enterprises.
➢ A trust, whose beneficiaries included Mr. Swaraj Paul and members of his family,
held 60% of the shares of the company Caparo Group Ltd. (all of them were
nonresidents of Indian origin). As a result, they chose to invest in the Indian business
Escort Ltd. under the plan. In order to execute the investment, Caparo Group Ltd.
appointed Punjab National Bank as their authorized dealer and Mr. Raja Ram Bhasin
and co. as their broker.
➢ Punjab National Bank sent the RBI numerous letters detailing the company's plans
and providing the necessary paperwork so they could move forward with RBI
approval. But none of those letters received a response. Because of this, Punjab
National Bank noted in one of the letters that the RBI was required to grant
authorization upon application being submitted in the required manner, and that they
had done so without hearing from the RBI. He added that the corporation was not
needed to wait for RBI approval before buying shares of any Indian company,
according to the scheme's regulations.
➢ Later, the RBI informed the Assistant Controller of the Government of India that a
non-resident of Indian origin only indirectly owned Caparo Group Ltd. The RBI noted
that it would be challenging to enforce the FERA's scheme and conditions if it were to
be extended to foreign corporations that were not directly owned by non-resident
Indian citizens.
➢ Escorts Ltd. requested the RBI's approval after Punjab National Bank informed it that
Caparo Group Ltd. was already investing in its shares. The shares were bought in
here, however, in the name of the broker rather than the principal, namely M/s Raja
Ram Bhasin and co., as permitted by Stock Regulation Exchange bye-law 242. This
was done because all the necessary formalities had not been fulfilled. Thus, it
threatened legal action when the transfer of shares was not registered.
 ➢ Following the recommendation of the Share Security and Transfer Committee of
Directors, Escorts Ltd. decided not to register the transfer of shares.
➢ The RBI eventually concluded that the business was evading the scheme's 1% ceiling
after conducting an examination.
➢ Escorts Ltd. filed a writ petition after accusing LIC and a few other financial
institutions of exerting pressure on them to register the transfer of shares.
➢ Later, LIC and other financial institutions (who collectively controlled 52% of the
outstanding shares) requested a special meeting to remove 9 of the part-time directors
and elect replacements. Since they were already under considerable pressure to record
the transfer of shares, Escort Ltd. deemed this action to be mala fide and the meeting
to be arbitrary, unlawful, and ultra vires.

ISSUES OF THE CASE

1. Whether LIC had the right to issue the requisition to hold and extraordinary general
meeting?
2. Whether shareholders have the authority to issue a requisition notice for the
appointment of new Directors?
3. Whether the Reserve Bank of India has the power to give ex-post facto permission for
the purchase of shares in India by a foreign company?

JUDGMENT OF THE CASE

● The Supreme Court disagreed with the petitioners' assertion that LIC's actions were
inconsistent with the requirements of the Companies Act of 1956 and the Indian
Constitution. According to Section 173(2) of the Companies Act, a statement need not
be made during the meeting even though it is necessary to announce the meeting and
its purposes. As a result, the shareholders had the freedom to call an extraordinary
general meeting and could not be prevented from doing so. They were also under no
obligation to give notice of the proposed resolution calling the meeting. According to
the classic case of John Shaw & Sons (Salford) Ltd v Shaw, the court's jurisdiction
does not include restraining or imposing an injunction of the shareholders for calling
the meeting. The court would have the authority to investigate the state's actions if the
case had been in the public law area, but because it is in the private law area, it
declines to do so. The state now enjoys all of the rights accessible to any other
shareholder of the corporation because it became a shareholder. As a result, the state
need not provide justification for calling the meeting, just like any other shareholder.

● The financial institutions involved in the case had a lot at risk, yet despite the ongoing
issues, management did not consult them. The proposed resolution called for the
removal of nine non-executive Directors instead of executive Directors because doing
so would interfere with the company's management. According to the court, tThe the
aforementioned resolution was wholly democratic. Through a set process, the
majority of the company's shareholders have the authority to appoint and dismiss
directors. These are the fundamentals of corporate democracy, hence what LIC did
was legal.

● Finally, the court determined that FERA, which stipulates that a firm cannot refuse to
register a share transfer after receiving RBI consent, governed the transfer of shares. It
was not the responsibility of any organization, body, or authority to determine if the
permission issued was legitimate or not. Despite failing to share their response earlier,
it was also determined that the RBI did not have any bad motives. While the Union of
India was deemed to have no malicious motives of its own, the Punjab National Bank
failed to perform its obligations.

CONCLUSION
A basic but not inviolable rule of contemporary corporation law is the idea of a
company's legal and philosophical independence, as well as the corporate veil that
separates it from its stockholders. This veil can, in rare circumstances, be lifted or
pierced to look at and take into consideration the shareholders or entities in actual
control of the corporation in question, as discussed in LIC v. Escorts and beyond.
However, Indian law requires that courts respect the sanctity of the corporate veil and
the independent corporate personality that emerges immediately upon a company's
incorporation unless there are compelling circumstances. Considerations like the
economic reality, the substance of the transaction, and viewing the transaction as a
whole are critically evaluated.
 REFERENCES

● https://whitecode.legal/more/NzM0/LIC-V-ESCORTS-AND-BEYOND-
LIFTING-THE-CORPORATE-VEIL
● https://corporate.cyrilamarchandblogs.com/2018/01/lic-v-escorts-beyond-
lifting-corporate-veil/
● https://legalraj.com/articles-details/doctrine-of-corporate-veil
● https://www.law.cornell.edu/wex/piercing_the_corporate_veil