The Companies Act 2013 defines the word ‘company’ as a

company formed and registered under the Act or an existing

company formed and registered under any of the previous
company laws. [Section - 3].
Chief Justice Marshal – A corporation is an artificial being, invisible,
intangible, existing only in contemplation of the law. Being a mere
creation of law, it possesses only the properties which the Charter of its
creation confers upon it, either expressly or as an incidental to its very
existence.
Lord Lindley - the company is
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 arising from it.
Prof. Haney – A company is
an artificial person, created
by law, having perpetual
succession and common
seal.
characteristic FEATURES OF THE
COMPANY
INCORPORATED ASSOCIATION
A co. must be incorporated or registered u/the
Companies Act.

Minimum no. for the purpose is 7, in case of a public

company, and 02, in case of a private company.

Maximum no. of members in case of public company

- unlimited and in case of private company - 200
ARTIFICIAL PERSON
A Co. is created with the sanction of
law and is not itself a human being,
it is therefore called artificial. And
since it clothed with certain rights
and duties it is called a person. A
Co. is accordingly a artificial person.
SEPARATE LEGAL
ENTITY
Unlike partnership, company is distinct
from the person who constitute it.

On registration the association of persons

becomes a body corporate by the name
contained in the memorandum.
FACTS

Salomon carried on business as a leather merchant.

He sold his business for a sum of £ 30,000 to a company formed by him

along with his wife, a daughter, and four sons.

Saloman was also the Managing Director of the Company.

The company almost ran into difficulties and eventually became insolvent
and winding up commenced.
At the winding up, the total assets of the company amounted to
£ 6,050;

Its liabilities were £ 10,000 secured by the debentures issued to

Mr. Salomon and £8,000 owing to unsecured trade creditor.

The unsecured creditors claimed the whole company’s assets,

viz. £6,050 on the ground that the company was a mere alias or
agent of the Salomon.
A company was formed for the purpose of
manufacturing aerial top dressing.

Lee held all but one of the shares in the

company.

And by the articles was appointed governing

director of the company and chief pilot.
Lee was killed
while piloting the
company’s aircraft
His widow claimed compensation for his death
under Workmen Compensation Act.

The company opposed the claim on the ground

that Lee was not a worker as the same person
could not be employer and the employee
It was held that there was valid contract of
service between Lee and the company, and Lee
was, therefore, a worker. Mrs. Lee’s contention
was upheld.
The co. being a separate person, its
members are not as such liable for
its debts.

In case of a co. limited by shares,

the liability of members is limited to
the nominal value of shares held by
them. Thus, if the shares is fully paid
by them their liability is nil.
SEPARATE
PROPERTY
Macaura held all except one
share of a timber company
He had also advanced
substantial amount to the
company.
On timber being destroyed by
fire his claim was rejected for
want of insurable interest.

The Court applying principle

of separate legal entity held,
the insurance company was
not liable. As He insured
the company’s timber in his
personal name
A co. being an artificial person is not
bestowed with a body of natural being.
Therefore, it has to work through its
directors, officers and other employees. But
it can be held bound by only those
documents which bears its signatures.
Common seal is the official signature of the
co.
A co. being an artificial person cannot be incapacitated by illness
and it does not have an allotted span of life. The saying “King is
dead, long live the King” very aptly applies to the company form
of organization.
Another fall out of separate legal
entity is that the company, if aggrieved
by some wrong done to it may sue or
be sued in its own name.
CASES WHEN CORPORATE VEIL MAY BE
LIFTED

For the protection of revenue. –

Sir Dinshaw Maneckjee Petit
 d

a b
A

B
INVESTED
C MONEY IN
MARKET
D
 A

B
INVESTED
MONEY IN PROFIT C

MARKET
D
 A

PROFI
LOAN
T
C

D
It was held that the company was formed by the Sir
Dinshaw purely and simply as a means of avoiding tax
and company was nothing more than he himself.

It did no business, but was created simply as a legal

entity to ostensibly receive the dividends and interest
and to hand them over to Sir Dinshaw as pretended
loan.
Prevention of fraud– Jones v
Lipman
L agreed to sell a certain land to J. he subsequently changed his mind and to
avoid the specific performance of the contract, he sold it to a company which
was formed specially for the purpose. The company had L and a clerk of his
solicitors as the only members. J brought an action for the specific performance
against L and the company.
The court looked to the reality of the
situation, ignored the transfer and
ordered that the company should
convey the land to J.
Prevention of improper conduct– Gilford motors v horne
f
o
r
m
e
d

Co.
Where the company is a sham – Gilford Motors Co. Ltd. v Horne –
H a former employee of a company was subject to a covenant not
to solicit its customers.

He formed a company to carry on a business which if he had done

so would have been a breach of contract.

An injunction was granted both against him and the company to

restraint them from carrying on the business.

The company was described in this judgement as device a

stratagem and as a mere cloak or sham for the purpose of enabling
the defendant to commit a breach of his covenant against
solicitation
Determination of character of a company whether it is enemy – Daimler Co.
Ltd v Continental Tyre & Rubber Co. Ltd.

A co. was incorporated in England for the purpose of selling in England Tyres
made in Germany by German company which held the bulk of shares in the
English company.
The holders of the remaining shares except one and all the directors were
Germans, resident in Germany.

During the First World War the English company commenced an action for
recovery of trade debt.

It was held that the company was alien company and payment of the debt to
it would amount to trading with the enemy and therefore the company was
not allowed to proceed with the action
 Under statutory provisions
Statutory recognition has been given to the lifting of Corporate Veil as the various provisions of the Companies Act 2013, Income Tax Act, 1961, and the Foreign
Exchange Regulation Act, 1973 enumerate the circumstances in which the concept of distinct entity shall be ignored to reach the real forces of action. Within
the Companies Act, the following sections deal with this concept:

Section 12 – Misdescription of Name

Section 34 & 35 – Misstatements in Prospectus

Section 39 – Failure to return application money

Section 76A – Punishment for contravention of section 73/76

Section 219 – For facilitating the task of an inspector appointed under section 210/212

Section 339 – Fraudulent Conduct

STATUNDERUTORY PROVISION

• Mis-statement in the prospectus [s 34 and 35]

• Failure to return application money [s 39]
• Misdescription of Name [s 12]
• For facilitating the task of an inspector appointed under section 210 or 212 or 213
• Fraudulent Conduct [339]
• Liability under other Statutes.
FORMATION OF A COMPANY
The formation of a company involves
3 main stages

Promotion of a Company

Incorporation by Registration and

Commencement of Business
PROMOTION OF A
COMPANY
Before a company is formed there must be some
persons who have an intention to form it and take
necessary steps to bring it into existence.

The person who initiates the process of

formation of a company are called as
PROMOTERS.
The first person who control a company’s affairs are its
promoters.

It is they who conceive the idea of forming the company, with

reference a given object and then to set it going.

It is they who take the necessary steps to incorporate the

company – provide it with share and loan capital and acquire
the business or property which it is to manage.

When these things have been done they handover the control of
the company to its directors who are often the promoters
themselves under a different names.
The promoter of a company decides its name and ascertains that it will be accepted by the
registrar of the companies.

He settles the details of the company’s Memorandum and Articles, the nomination of
directors, solicitors, bankers, auditors and secretary and registered office of the company.

He arranges for the printing of the Memorandum and Articles, the registration of the
company, the issue of prospectus.

He is in fact responsible for bringing the company into existence for the object which he
has in view.
PRE-INCORPORATION
CONTRACT
Pre-Incorporation Contracts are those
which are purported to be made on behalf
of a company before its incorporation

The question therefore arises whether

company can be held liable for such
contracts.
 The true legal
position in
respect of pre-
•Position before
incorporation 1963
contracts may
be discussed •Position after
under
following two 1963
heads:
 Position before 1963

A Pre-incorporation contract never binds a company as a person

cannot contract before his or its existence and a company before
incorporation has no legal existence.
Even where there is a request purported to
enforce such a contract, the company cannot
be bound because ratification is not possible
as the ostensible principal did not exist at the
time the contract was made

The company is also not entitled to sue on a pre-

incorporation contract
Position after 1963
Specific Relief Act 1963
Section 15 provides that where the promoters
of a company have made a contract before its
incorporation for the purpose of the company,
the company may enforce it.

Section 19 also allows the other party to

enforce the contract against the company.
REGISTRATION OF COMPANY
Registration of a company is obtained by filing an application
with the registrar of companies.

The application should be accompanied by the following by the

following documents :

1. Memorandum of Association
2. Articles of Association
3. A copy of the agreement, if any, which the company
proposes to enter into with any individual
4. A declaration that all the requirements of the Act have been
complied with.
MEMORANDUM OF ASSOCIATION
The first step in the formation is to prepare a
document called the memorandum of
association.

This contains the constitution of the company.

• OBJECTS, POWERS AND ULTRA VIRES.

• The objects clause has a two – fold operation.

• It determines affirmatively the field of industry within which the

corporate activities are to be confined and

• It determines negatively that nothing shall be done beyond that field.

The company was held not liable.

Their Lordships were of the opinion that general terms like “general
contractors” must be taken in reference to the main objects of the
company, because otherwise the memorandum would authorise
every kind of activity and would be meaningless.
• The doctrine of ultra vires has been upheld in a large number of
Indian cases also.

Lakshmanaswami Mudaliar v LIC

• It is significant to note that the doctrine of ultra vires confines
corporate action within fixed limits.

• Which resulted in long list syndrome.

• In case of Cotman v Brougham, the House of Lords ruled that such an
act will defeat the very purpose of object clause and therefore, the
courts should adopt the ‘main object rule’ of construction while
applying the ultra vires doctrine.
CAPITAL CLAUSE

• Amount of authorised capital with the company gets registered

ALTERATION OF MEMORANDUM

• Alteration is allowed only when it is necessary for any of the following

purposes:
1. To enable the company to carry on its business more economically
or more efficiently.
2. To enable the company to attain its objects by new and improved
means.
3. to amalgamate with any other company or body or person.
T

The articles of association of a company and its bye laws are the
regulations which govern the management of its internal affairs
and the conduct of its business.

They define the duties rights powers and authority of the share
holders and the directors in their respective capacities and of the
company

The mode and form in which the business of the company is to be

carried out.
The Articles of association of a company have a
contractual force between company and its members as
also between the members inter se in relation to their
rights as such members.

They are subordinate to and are controlled by

memorandum of association.
Articles of association can not supersede the
objects as set out in memorandum of association.

The memorandum lays down the objects scope

and powers of the company, where as the articles
governs the ways in which the objects of the
company are to be carried out.
ALTERATION OF ARTICLES

Subject to the provisions of the Act and to the conditions

contained in its memorandum, a company may, by special
resolution alter or add to its articles.
• The alteration must not exceed the powers given by the memorandum or
conflict with other provisions of the memorandum

• The alternation must not be inconsistent with any provision of the

Companies Act or any other statute.

• The altered articles must not include anything which is illegal, or opposed
to public policy or unlawful

• The alteration must be bonafide for the benefit of the company as a whole.
• The memorandum and articles, when registered become public
documents and then they can be inspected by anyone on payment of
a nominal fee.

• Every person dealing with the company is presumed to have read

these documents and understood them in their true perspective. This
is known as Doctrine of Constructive Notice.
• Indoor management restricts the operation of “constructive notice”
to the public documents of the company.

• Accordingly a person dealing with the company is bound to read only

the public documents of the company.
• If his contract is consistent with them, the company is bound.

• He will not be affected by any irregularity in the internal management

of the company.
• The directors of the company borrowed a sum of money from the
plaintiff. The company’s regulations provided that the directors might
borrow on bonds such sums as may from time to time be authorized
by shareholders’ resolutions. The shareholders contended that there
had been no such resolution authorizing the loan.
• The company was held liable once it was found that the directors
could borrow subject to a resolution, the plaintiff had the right to
assume that the necessary resolution must have been passed
• The rule is based on the reason –
The internal procedure is not a matter of public knowledge. An
outsider is presumed to know the constitution of a company, but
not what may or may or have taken place within the doors that are
closed to him.
• The rule is applied to protect persons contracting with companies
from all kinds of internal irregularities.
• The rule is, however to certain limitations:
1. Knowledge of the irregularity
• Howard v. patent Ivory Co.
• The articles of the company empowered the directors to borrow up
to £1,000. They could exceed the limit of £ 1,000 with the consent
of the company in general meeting. Without such consent, they
borrowed £ 3,500 from themselves and took debentures. The
company refused to the amount.
2. NO KNOWELDGE OF ARTICLES
• Rama Corporation v Proved Tin & General Investment

• T was a director in the investment company. He purporting to act on behalf

of the company, entered in to a contract with the Rama Corporation and
took a cheque from the latter. The articles of the company did provide that
the Directors could delegate their powers to one of them. But Rama
Corporation never read the articles. Later, it was found that the directors of
the company did not delegate their powers to T. Plaintiffs relied on the rule
of Indoor Management.
• It was held that they could not, because they did not know the
existence of the power to delegate.
3. Void or illegal Transaction – the rule does not apply to transactions
which are void or illegal ab initio. E.g., forgery.
4. Negligence - If an officer of a company does something which
would not ordinarily be within his powers, the person dealing with
him must make proper inquiries and satisfy himself as to the
officer’s authority. If he fails to make inquiry, he cannot rely on the
rule.
PROSPECTUS
In order to finance its activities a company needs
capital which is raised by a public company by
issue of a prospectus inviting offers for shares
and debentures from the public.

A private company is prohibited from making any

invitation to the public to subscribe for any
shares in or debentures of the company. Hence it
need not issue a prospectus.
 PROSPECTUS
A Public
company may
issue securities -

To public
Through private
through
placement
prospectus
 A private
company may
issue securities –

Through private
placement
Prospectus is a document described or issued as prospectus or any notice,
circular, advertisement or other document inviting offers from the public
for the subscription or purchase of any securities of a body corporate.
[DEFINITION]

Prospectus must be in writing. An oral invitation to the public to subscribe

in or debentures of a company is not a prospectus.

Likewise advertisements in television or film is not treated to be

prospectus.
A document is not a prospectus unless it is an invitation to the public to subscribe for
shares in, or debentures of, a company.

But if the document satisfies the condition of invitation to the public (Nash v Lynde)

An advertisement which stated that “some shares are still available for sale according to
the terms of the company which may be obtained on application” was held to be a
prospectus as it invited the public to purchase shares (Pramatha Nath v Kali kumar Dutt).

If the invitation is made to a small circle of friends of the directors or the existing
shareholders it is not an offer to the general public.
Prospectus is the window through which an investor can
look into the soundness of a company’s venture. The
investor must therefore be given a complete picture of a
company’s intended activities and its position.

This is done through prospectus which must secure the

fullest disclosure of all material and essential particulars
and lay the same in full view of all intending purchasers
of shares.
The central theme of a prospectus from the
money raising point of view is that it sets out the
prospects of the company and the purpose for
which the capital is required.

The prospectus is the basis on which the

prospective investors form their opinion and take
decisions as to the worth and prospects of the
company.
 TYPES OF PROSPECTUS

PROSPECTUS

SHELF
REDHERRING ABRIDGE
PROSPECTUS
 RED HERRING PROSPECTUS –

A prospectus which does not include

complete particulars of the quantum
or price of the securities.
 Shelf prospectus

Means a prospectus in respect of which the

securities or class of securities included therein
are issued for subscription in one or more
issues over a certain period without issue of a
further prospectus.
 When a Co. may issue a
prospectus

If the promoter & director

When securities are
– mobilize resources from
Co. is a private company. offered to existing security
personal relationships and
holders
contracts
Misstatements in prospectus and their consequences

• If there is any misstatement of a material fact in a prospectus there may arise –

Civil liability

Criminal liability
 • Contain any false statements
Therefore, • Have a false representation of
any fact
a
• Lead to suppression of any fact
prospectus • Have a representation of any
shall not fact in such a way that creates
an untrue belief.
CIVIL LIABILTY

• A person who has been induced to subscribe for shares (or debentures) on the faith
of a misleading prospectus has remedies against the company, and the directors,
promoters and experts.
Remedies against company –
 If there is a misstatement or withholding of a material information in a prospectus,
and if it has induced any shareholder to purchase shares he can -
1. Rescind the contract
2. Claim damages from the company whether the statement is fraudulent or an
innocent one – (Damages for deceit) Derry v Peek
• The Statement must be untrue (Rex v Lord Kylsant)–
• A prospectus was issued by a company stating that the company had paid a
dividend every year between 1921 and 1927 (years of depression) and thus giving
the impression of a financially stable company. However the company had in each
of those year incurred considerable trading losses. This fact was suppressed. It was
held that the prospectus was ‘false in material particular’ in that it conveyed a false
impression.
• If a person purchases shares in the open market he has no right against the
company (Peek v Gurney)
• A company issued a prospectus containing false statements. A, relying on the
prospectus applied for and was allotted shares. Later he sold these shares to P. The
company was wound up and P had to pay nearly $100,00 as a contributory.
Sought an indemnity for his loss from the directors at the time of the issue of the
prospectus. It was held that directors were not liable to P.
Remedies against the directors, promoters and experts –
The persons who are liable to pay compensation for any loss or damage to
subscribers for any shares or debentures on the faith of a prospectus containing
misleading statements are:
• Director of the company at the time of the issue of the prospectus;
• Person who have authorised themselves to be named as directors in the
prospectus;
• Promoters;
• Persons who have authorised the issue of the prospectus;
• Expert
• The liability of such person may be exempted if –
1. The person after giving consent to be the director or to be named
as a director has withdrawn his consent before the prospectus is
issued;
2. The prospectus was issued without his authority or consent
3. The prospectus was issued without his knowledge or consent and
after becoming aware, he has forthwith given public notice that it
was issued without the consent.
Criminal liability

• The person will be personally liable for any misleading or untrue statement in the
prospectus.
• Where a prospectus contains any untrue statement, every person authorized to
issue the prospectus is punishable with imprisonment which may extend to 5
years, or with a fine which may extent to Rs. 5 lakhs, or with both.
• Defense – criminal liable
1. Such a statement was immaterial
2. He had reasonable grounds to believe that the statement were true
3. The inclusion and omission was necessary.
• Company is governed and managed by will of majority of shareholders.

• wide powers may be misused by majority shareholders to exploit the minority

shareholders.

• Need for balance for the smooth functioning of company affairs.

Why protection of minority

• A proper balance of the rights is done by allowing minority to exercise their

powers

• To regulate powers of majority and majority to observe the principles of natural

justice and fair play
• The principle of rule by majority has been made applicable to the management of
the affairs of companies

• Once the resolution is passed by the requisite majority then it is binding on all the
members

• As a consequence thereof the court will generally not intervene to protect the
minority interest affected by the resolution, as on becoming a member each person
impliedly consents to submit to the will of the majority of the members
Basis of the rule of supremacy of majority

• To honour the will of the majority shareholders

• To avoid the multiplicity of suits
• To recognise the separate legal entity of the company
• To preserve the right of the majority to decide the matters –
The majority shareholders has the right to decide how the company’s affairs shall
be affected
The rule of supremacy of majority seeks to preserve this right of the majority as
the minority is not allowed to challenge the lawful acts of the majority.
EXCEPTIONS TO THE RULE OF SUPREMACY OF MAJORITY

• Certain acts cannot be approved or ratified even by the majority in such cases even
a single shareholder may bring a legal action – for example
• Ultra-vires acts – this rule does not apply where the act complained of is ultravires
the company.
• Fraud against minority – where the majority of a company’s member use their
power to defraud the minority their conduct is liable to impeached even by a
single shareholder
• Inadequate notice of a resolution passed at a meeting of members – if an
sufficiently informative notice is not given of a resolution to be proposed at a
general meeting any member who does not attend the meeting or who vote against
the meeting may bring a representative action to restrain the company and its
director from carrying out the resolution.
• Where the personal rights of the members are infringed – infringement of a
member’s individual rights like membership rights of a member, right to receive
dividends etc., entitles him to proceed in his own name.
• Besides members the following may also apply for relief –
• The central government or any person authorized by the central government.
• A legal representative of a deceased member on whom title to the shares devolves
by operation of law
• Trustees of a shareholder/member may also make petition