Paper-Company Law

Semester-7,
Year-4rth year
Paper-II
Paper Code-BL-7002

Unit-1
1. HISTORY OF COMPANY LEGISLATION IN INDIA

 The concept of company act taken from English Companies Act, 1844.
 The first company legislation in India was passed in 1850 known as a Joint Stock Companies Act.
 This Act was replaced by the Joint Stock Companies Act, 1857 which introduced the principle of limited
liability for the first in India.
 This act again as a Joint Stock Companies Act, 1860 modified by addition the principle to banking
companies.
 In 1866 the first comprehensive Act provided for the incorporation, regulation and winding up of
companies.
 The 1866 Act was recast in 1882 and remained in force till 1913.
 Later on the Indian Companies Act, 1913 was passed followed by the English Companies Act, 1908.
 After that this act was amended and recasted several times almost every year.
 Finally the Companies Act, 1956 was passed and came into force 1st April 1956 based on the English
Companies Act, 1943. It consists of 658 sections and 13 schedules.
 After 25 amendments the Companies Act, 2013 passed by Parliament by introducing a new Company
Bill. It came into force on the 29th of August 2013.
Background
The Companies Act 1956 was enacted on the recommendations of the Bhaba Committee set up in 1950 with the
object to consolidate the existing corporate laws and to provide a new basis for corporate operation in
independent India. With enactment of this legislation in 1956, the Companies Act 1913 was repealed.
The Companies Act, 1956, has since provided the legal framework for corporate entities in India. The need for
streamlining this Act was felt from time to time as the corporate sector grew in pace with the Indian economy,
with as many as 24 amendments taking place since 1956. Major amendments to the Actwere made through
Companies (Amendment) Act, 1988 after considering the recommendations of the Sachar Committee, and
thenagain in 1998, 2000 and finally in 2002 through the Companies (Second Amendment) Act 2002, consequent
to the report of the EradiCommittee.
Many countries faced with the task of economic restructuring in response to the realities of a changing economic
environment, have undertaken comprehensive revisions of their respective corporate laws. UK Companies Act
was revised during the 1980s. Subsequently, many countries whose legal systems were derived from UK, such
as Australia, New Zealand, Canada etc also undertook reviews of their corporate laws and brought about several
comprehensive reforms. It is widely accepted that reform and updation of the basic legal framework for
corporate entities is essential to enable sustainable economic reform.
After a hesitant beginning in the 1980s, India took up its economic reforms programme in the 1990s. Equally, a
need was felt for a comprehensive review of the Companies Act, 1956. Unsuccessful attempts were made in
1993 and 1997 to replace the present Act with a new law. Companies (Amendment) Bill, 2003; containing
important provisions relating to corporate governance was also introduced, the consideration of which has been
held back in anticipation of the comprehensive review of the Company Law. While piecemeal reform continued
through amendments, it has not yet been possible to bring about comprehensive, new legislation to replace the
existing Act.
In the current national and international context, there is a requirement for simplifying corporate laws so that
they are amenable to clear interpretation and provide a framework that would facilitate faster economic growth.
It is also increasingly being recognized that the framework for regulation of corporate entities has to be in tune
with the emerging economic scenario, encourage good corporate governance and enable protection of the
interests of the investors and other stakeholders. In the competitive and technology driven business environment,
while corporates require greater autonomy of operation and opportunity for self-regulation with optimum
compliance costs, there is a need to bring about transparency through better disclosures and greater
responsibility on the part of corporate owners and managements for improved compliance.
It is appreciated that the Government has taken up this fresh exercise for a comprehensive revision of the
Companies Act 1956 on the basis of a broad based consultative exercise. As a the first step in this consultative
process, a Concept Paper on Company Law drawn up in the legislative format was exposed for viewing on the
electronic media so that all interested may not only express their opinions on the concepts involved but may also
suggest formulations on various aspects of Company Law. This was a laudable step and has evoked
considerable response. Comments and suggestions from a large number of organizations, professional bodies
and individuals have been received. This consultative process will not only allow ideas, comments and
suggestions to flow in from all quarters, but will also enable the Government to work out appropriate legislative
proposals to meet the requirements of India's growing economy in the years to come.
The Government, therefore, felt it appropriate that the proposals contained in the Concept Paper and suggestions
received thereon be put to merit evaluation by an independent Expert Committee. The present Committee was
constituted on 2nd December, 2004 under the chairmanship of Dr. J J Irani, Director, Tata Sons, with the task of
advising the Government on the proposed revisions to the Companies Act, 1956. The objective of this exercise
is perceived as the desire on the part of the Government to have a simplified compact law that will be able to
address the changes taking place in the national and international scenario, enable adoption of internationally
accepted best practices as well as provide adequate flexibility for timely evolution of new arrangements in
response to the requirements of ever-changing business models. It is a welcome attempt to provide India with a
modern Company Law to meet the requirements of a competitive economy.
The Expert Committee consists of 13 members and 6 special invitees drawn from various disciplines and fields
including trade and industry, chambers of commerce, professional institutes, representatives of Banks and
Financial Institutions, Sr. Advocates etc. Government Ministries as well as regulatory bodies concerned with the
subject were represented through special invitees. The Committee thus brings to bear a wide range of expertise
and experience on the issues before it. In the exercise taken up by it, the Committee took the Companies Act,
1956, as amended, as the base and adopted the following approach:
i. Taking note of the Concept Paper and suggestions/objections and comments on the same received from
various quarters, to enable synthesis of opinion on the desirable features of the new law;
ii. Identifying the essential ingredients to be addressed by the new law, retaining desirable features of the
existing framework, segregating substantive law from the procedures to enable a clear framework for
good corporate governance that addresses the concerns of all stakeholders equitably.
iii. Making recommendations to enable easy and unambiguous interpretation by recasting the provisions
of the law so as to enable easy understanding and interpretation;
iv. Enabling greater flexibility in procedural aspects through rule making, so that with the change of time
the legal framework may adapt without amendment of the substantive enactment, which would be a time
consuming process;
v. Addressing the concerns arising out of the experience of the stock market scams of the 1990s, the
phenomenon of vanishing companies and recommendations made by Joint Parliamentary Committee on
Stock Market Scam;
vi. Enabling measures to protect the interests of stakeholders and investors, including small investors,
through legal basis for sound corporate governance practices.
vii. Providing a framework for responsible self-regulation through determination of corporate matters
through decisions by shareholders, in the background of clear accountability for such decisions,
obviating the need for a regime based on Government approvals;
viii. Recognizing the relevance of a climate that encourages people to set up businesses and make them
grow, addresses the practical concerns of small businesses so that people may deal with and invest in
companies with confidence, promotes international competitiveness of Indian businesses and provides it
the flexibility to meet the challenges of the global economy.
INDIAN COMPANIES ACT 2013: THE STORY SO FAR:
Introduction It has been a long time in waiting but India finally enacted its new Companies Act 2013 (the
“Companies Act”) at the end of August 2013. The Companies Bill was passed by the Lok Sabha (the
Lower House of the Parliament of India) on 18 December 2012 and in the Rajya Sabha (the Upper
House of the Parliament of India) on 8 August 2013.

It received Presidential Assent on 29th August 2013 thereby creating the Companies Act 2013. The new
Companies Act, replaced the old Companies Act 1956, which although amended approximately 25 times
was still considered to be out of date and inadequate compared to the legislation regulating companies in
many other jurisdictions. It took four years to implement the Companies Act since it was first introduced
as a Companies Bill in 2009 but not all of its provisions will come into force immediately as a number of
them require the Indian Government to draft rules and regulations for their implementation.

Some of the provisions of the Companies Act 2013 that did not require any additional rules or
regulations for their implementation were brought into force on 12 September 2013, following a
notification by the Ministry of Corporate Affairs. However, these provisions only represented 98 out of
the 470 sections of the Companies Act and it has caused confusion because businesses still have to look
at both the old Companies Act and the new Companies Act to interpret the current law. Many have
argued that the whole of the Companies Act should have been brought into force at one time, whilst
other believe that a step by step approach provides businesses with time to get to grips with the new
provisions.

The draft Companies Act Rules (“Rules”) which are required for the implementation of some of the
provisions have been issued for public comment. These have been issued in two phases, with feedback
on the 1st Phase Rules to be submitted by 10 October and feedback on the 2nd Phase Rules to be
provided by 23 October.
We have set out below a brief summary of some of the key changes that are coming into force,
including clarifications provided by the draft Rules.

Key changes being implemented Financial Year –

The financial year of every company must be end on 31 March every year, which is the same period as is
required for tax reporting purposes. An Indian company which is a holding company or a subsidiary of a
foreign company requiring consolidation outside India will have an option to apply to the National
Company Law Tribunal to follow a different period as its financial year. Existing companies have two
years to align their financial year with the new requirements.
One Person Company and Small Company –
The Companies Act introduces the concepts of a one person company and a small company which will
not have to comply with certain requirements relating to reporting, board meetings and other procedural
matters. A small company is defined as a company other than a public company which has either (a) a
paid up share capital of no more than INR 50 lakhs (c. US$80k); or (b) turnover which does not exceed
INR 2 Crore (c. US$320k) or such higher amount as may be prescribed but not more than INR 20 Crore
(c. US$3.2m). However, these provisions will not apply to a holding company or a subsidiary, a charity
or a body corporate governed by any special Act.

The draft Rules further provide that in respect of a One Person Company, the shareholder must be a
natural person who is an Indian citizen and resident in India. They further state that a person can only
incorporate a maximum of five One Person Companies.

Dormant Company –
The Companies Act recognises the concept of a “dormant company” which can be formed for a future
project or to hold an asset or intellectual property, provided it has no “significant accounting transaction”
which in summary means any transactions other than transactions relating to the maintenance of the
company and compliance with law.

Entrenchment Provisions –
Companies can now include entrenchment provisions within their articles of association. An
entrenchment provision is a provision which can only be amended or removed by a vote of such number
of shareholders exceeding that number that would be required for a special resolution. As a result,
minority protection provisions such as veto rights, or drag – along and tag-along rights, can now be
included within articles of association without fear of their amendment or removal by a special
resolution, thereby providing rights to minority investors which could previously only be reflected in a
shareholders’ agreement. The adoption of any entrenchment provisions must be notified to the Register
of Companies within 30 days.

Corporate Social Responsibility (“CSR”) –

CSR will be made mandatory for Indian companies with a net worth of INR 500 crores (c.US$80m) or
more, or a turnover of INR 1,000 crores (c. US$160m) or more, or net profits of INR 5 crores (c.
US$800k) or more during any financial year. Such companies will be required to establish a CSR
committee to formulate a CSR policy and to recommend expenditure of CSR projects. The company is
required to spend at least 2% of the company’s average annual net profits over the preceding three
financial years on social and charitable causes annually in accordance with its CSR policy.

The draft Rules state that for the purposes of the first CSR reporting, the net profit shall be the average of
the annual net profit of the company for the preceding three financial years ending on 31 March 2014.

Any company subject to these provisions which does not comply with this requirement must provide the
reasons for not doing so in its annual financial statements.

Auditor Rotation –
Under the previous Companies Act auditors were appointed on an annual basis and held office until the
conclusion of the next AGM. Under the new Companies Act auditors must hold office until their sixth
AGM (i.e. 5 years), although the appointment still needs to be ratified at each AGM. Furthermore, listed
companies and companies belonging to prescribed classes of companies may not appoint or reappoint
their auditors for (i) more than two consecutive five year terms if the auditor is an audit firm; or (i) for
more than one term of five consecutive years if the auditor is an individual. Following retirement from a
company an auditor may not be reappointed for a further five years.

The draft Rules state that the prescribed classes of company referred to above are all companies
excluding small companies and one person companies. The draft Rules further state that any period prior
to the commencement of the Companies Act shall be taken into account in determining the five or ten
year consecutive terms.

Directors –
Under the previous Companies Act, a public company, or any private company which was a subsidiary
of a public company, could only have a maximum of 12 directors. Any increase required an approval
from the Central Government. Under the new Companies Act the number of directors that any Indian
company can have has been increased to 15 directors. This can be increased further by the passing of a
special resolution.

Certain classes of companies “as may be prescribed” must now have a female director, although there is
a transitional period in which to comply with this.

According to the draft Rules, the classes of companies shall be every listed public company, who will
have one year from commencement of the provision to comply; and every other public company having
a paid up share capital of INR 100 Crore (c. US$16m), or a turnover of INR 300 Crore (c. US$50m),
who will have three years from commencement of the provision to comply.

Every company must now have a director who resided in India for 182 days or more in the previous
calendar year.
The directors duties have now been codified. They state that a director of the company shall (a) act in
accordance with the articles of the company; (b) act in good faith in order to promote the objects of the
company for the benefit of its members as a whole, and in the best interests of the company, its
employees, the shareholders, the community and the protection of the environment; (c) exercise his
duties with due and reasonable care, skill and diligence and shall exercise independent judgement; (d)
not involve himself in a situation in which he may have a direct or indirect interest that conflicts, or
possibly may conflict, with the interests of the company; (e) not achieve or attempt to achieve any undue
gain or advantage either to himself or his relatives, partners or associates; and (f) not assign his office.

Board meetings by telephone conference are now explicitly permitted under the new Companies Act.

Independent Directors –

One-third of the number of directors of every listed public company must be independent directors.
Certain classes of public (non-listed) companies will also have to appoint such number of independent
directors as may be prescribed.

According to the draft Rules, such companies will be public companies having a paid up share capital of
INR 100 Crore (c. US$16m); or a turnover of INR 300 Crore (c. US$50m); or which have in aggregate,
outstanding loans or borrowings or debentures or deposits, exceeding INR 200 Crore (c. US$30m). Also
note that once appointed the draft Rules state that the obligation to maintain an independent director
continues during the director’s tenure, even if the share capital, turnover or borrowings fall below the
limits referred to above.

The new Companies Act also prescribes what attributes a person must have to be an independent
director. These include that an independent director must (a) be a person of integrity and possess relevant
expertise and experience; (b) not be a promoter of the company, or its holding, subsidiary or associate
company; (c) not be related to promoters or directors in the company, its holding company or associate
company; (d) have no pecuniary relationship with the company, its holding company or associate
company, or their promoters or directors, during the two previous years or the current year (e) have no
relatives that have such a pecuniary relationship (subject to certain thresholds); (f) not be or have been in
a key managerial position with the company or an employee; (g) not be a chief executive officer of any
non-profit organization that receives 25% or more of its receipts from the company; and (h) must not be
a holder, individually or together with his relatives, of 2% of more of the voting shares of the company.
A nominee director cannot be an independent director.

Companies have one year from commencement of these provisions to implement these changes.

Every independent director must give a declaration when he commences office and at the first board
meeting in each financial year that he meets the criteria for an independent director.

Independent directors shall hold office for a term of up to five consecutive years and shall then be up for
re-appointment for a further term of five consecutive years. No independent director may hold office for
more than two five year terms, but may be re-appointed after three years following retirement.

Independent directors are not entitled to stock options. It is unclear how previously granted stock options
will be dealt with.

Related Party Transactions –

Under the previous Companies Act, the approval of Central Government was required before a company
could enter into certain related party transactions.

Under the new Companies Act directors can approve the entry into by the company of related party
transactions provided that certain financial conditions are not exceeded.

These conditions are set out in the draft Rules which prescribe that a special resolution is required if a
company has a paid-up share capital of INR 1 Crore or more (c. US$160k) and is proposing to enter into
a contract with a related party, or if the transaction to be entered into with a related party (a) exceeds the
higher of 5% of the annual turnover or 20% of the net worth of the company (as per the last audited
financial statements of the company, and is in relation to the sale, purchase and supply of goods and
materials, the selling or buying of property, the leasing of property, the availing or rendering services, or
the appointment of an agent for the sale or purchase of goods, services or property; (b) relates to an
appointment to any office with a monthly remuneration exceeding INR 1 Iakh (c. US$1.5k); or (c) is for
remuneration for underwriting any subscription of any securities or derivatives exceeding INR 10 lakh
(c. US$15k).

Loans to Directors –
The new Companies Act contains restrictions on advancing any loan to any director or to “any other
person in whom the director is interested”. For these purposes, persons in whom the director is interested
includes (a) any private company of which such director is a director or member; and (b) any body
corporate, the board (or the managing director or manager) or which is accustomed to act in accordance
with the instructions of the board of the lending company.

Although, similar provisions were contained in the old Companies Act, the old Act also included an
exemption for loans from holding companies to its subsidiaries. This exemption has not been carried
forward into the new Companies Act meaning that a holding company will no longer be able to give a
loan, or guarantee or provide security on behalf of its subsidiary if they have common directors.

Note that this provision is now in force following notification on 12 September 2013.
Investments –

The new Companies Act introduces a new requirement that a company cannot make an investment
through more than two layers of investment companies (being a company whose principle business is the
acquisition of shares, debentures and other securities). However, this will not apply to the acquisition of
companies outside of India if the target has investment subsidiaries beyond two layers according to the
laws of that jurisdiction, or to any subsidiary from having any investment company for the purposes of
meeting any requirement of any law for the time being in force.

Mergers and Amalgamations –

Under the new Companies Act, mergers between two or more small companies (as defined) and between
holding companies and their wholly owned subsidiaries will no longer require the prior approval of the
National Company Law Tribunal, subject to compliance with certain other prescribed procedures.
Mergers of Indian companies with companies from certain other jurisdictions to be determined from time
to time by the Central Government are also permitted on a similar basis. No further guidance has been
provided in the draft Rules.
 Provisions have also been introduced permitting an acquirer of 90% or more of the issued share capital
of the target company to compulsorily acquire the minority shareholding at a price to be determined by a
registered valuer.

Class Actions –
Class action law suits will be introduced in the Companies Act 2013, so that members may, if they are
of the opinion that the management or the affairs of the company are being conducted in a manner
prejudicial to the interests of the company, or its members, file an application before the National
Company Law Tribunal on behalf of the members, seeking one of the orders set out in the Companies
Act, such as to restrain the company and its directors from committing certain acts, to declare a
resolution altering the memorandum and articles of association as void, or to claim compensation against
the company or any of its directors, its auditors, or any expert for improper acts, including fraudulent,
unlawful or wrongful acts.

The draft Rules have prescribed that the number of members of a company having a share capital that
can bring such a claim shall be not less that 100 members or not less than 10% of the total number of its
members, whichever is less, or any member or members holding not less than 10% of the issued share
capital of the company.

Summary
The new Indian Companies Act is a positive step towards modernising India’s company law and aligning
it to global standards. It has given increased decision making powers to the company, and introduced
provisions giving minority shareholders additional rights and protections. The introduction of one person
companies and small companies should alleviate some of the administrative burdens that small
businesses have to bear, but larger companies should prepare themselves for further administrative
burdens as a result of changes in the appointment of auditors and directors. Further clarity will be
required as the provisions of the Companies Act come into force and we will watch with interest as this
area of law develops.
2. MEANING AND NATURE OF COMPANY WITH EMPHASIS ON ITS ADVANTAGES AND
DISAGANIZATIONS OVER OTHER FORMS OF BUSINESS

Origin:
The word "company" is derived from two Latin words that are "com" & "panis" which means "together" &
"bread" respectively. So it literally means that a company is an association of a person who took their meals
together.
Meaning:

 Company simply means an incorporated association of a person.

 Here, person means there are two types of person;
 Natural Person - It is created by nature for example; human beings.
 Artificial or Legal Person - It is created by law for example; firms, companies, trusts, LLP etc.

Definition: According to section 2 clause 20 of the Companies Act, 2013 a "company" means association of a
person formed or registered under either present company laws, that is Companies Act, 2013 or previous
company laws, that is Indian Companies Act, 1956/1913/1882 etc. Here, Association of Person (AOP) belong
to two different types;

1. Incorporated AOP:
A single person distinct from the members constituted it. Having such legal rights to make a contract and
also can purchase any property etc. It can come into existence through either the company legislation
(ex- RIL, TCS, SAIL, TATA etc.) or by special act of Parliament called statutory corporation (ex- LIC,
GIC, SIDBI, ICSI, ICAI etc.)
 
2. Unincorporated AOP:
Mere collection/aggregation of individuals for example partnership firms. Means that are not registered
under the act and don't have any legal identity.
According to Haney, A company is an artificial person created by law having a separate entity with a perpetual
succession and common seal.

Important features of a company under Company Law:

Incorporated Association:
Means it must be registered under present Companies Act, 2013 or previous Indian Companies Act, 1956 and
others.

Separate Legal Entity:

It means an independent person who acquires such rights and powers as a human being. Every company,
whether private limited or public limited, must be registered and get its own legal identity. And there are veils
between the company & its members.

Perpetual Succession:
Perpetual means 'forever'. So that Once a company is created by process of law it can be ended only by the
process of law. Members of a company may transfer their shares, and the name of the transferee is entered in the
register a member may die, then his successor occupies his place, same in the case of Insolvency. This character
of the company is called perpetual succession.

Common Seal:
It is nothing but an official signature of a company just like a stamp. Company seal is affixed on the document
of the company. It can be used as evidence to sue in court.

Limited Liability:
Liabilities of members in a company are always limited upto their shares in the company. Here liability means a
legal responsibility or obligation to do a thing or to refrain from doing something.

Separate Property:
A company can hold property, acquire, sell, lease, mortgage, gift or otherwise transfer a property in its own
name because of its legal identity. It simply means that a company can be transferor or a transferee of the
property.

Company can sue or can be sued:

A company is a legal person who can file a suit against another and against whom a suit can be filed in his
name. Any one can sue the company and the company can also sue others.

Case Laws:
Mr. Salomon Vs. Salomon & Co. Ltd.

Introduction;
This is a landmark case under UK company law. To uphold doctrine of corporate personality under Companies
Act, 1862.
In this case it established the concept of separate legal personality of a company that allowed shareholders to
carry on trading with minimal exposure to the risk of personal insolvency in the event of collapse.

Facts;

 Mr. Aron Salomon has a sole proprietorship of his leather boots and shoes business.
 Later on he turned the business into a limited liability company at � 38,000. Total shares of the

company � 40,000 and value of one share � 1.

  There are total 7 subscribers;
 Salomon - owner of 20,000 shares and 10,000 debentures, his Wife has 1 share, One Daughter has 1
share, and Four Sons has 1 share each.
 After one year the company was liquidated with � 6,000 assets and � 17,000 liabilities.

 Salomon's liability � 10,000 and Unsecured Creditor's liability � 7,000.

Issue Raised:

 Was the formation of Salomon's company a fraud intended to defraud the creditor?
 Whether the company is considered to be an artificial person created by law?
 Whether the person can be liable for debts of the company?
 Whether the company purchases its own separate properties?
 Whether the limited liabilities of a company falls to whom?

Arguments;
Unsecured creditor claim as a first right to receive because there is no separate legal existence and the company
was acting as Salomon's agent.

Judgment;
The court said that on incorporation the company becomes an independent legal person and not an agent of
Salomon. Salomon, as a debenture holder of the company, was ought to get priority in payment over the
unsecured creditor.

3. Kinds Of Company:
There are a variety of companies in the Indian market which may contribute to economic growth and
development towards the nation. According to section 2 of the Companies Act, 2013 defines the various kinds
of Company and their classification based on factors such as incorporation, liabilities, number of members,
control, transferability of shares etc.

 On the basis of incorporation; There are three different kinds of company such as follows;

o Royal Charter Company

o Statutory Companies
o Registered Companies
 
 On the basis of liabilities; There are three different kinds of company such as follows;
 o Companies Limited by Shares
o Companies Limited by Guarantee
o Unlimited Liability Companies
 
 On the basis of number of members; There are three different kinds of company such as follows

o Public Company
o Private Company
o One Person Company
 
 On the basis of domicile; There are two different kinds of company such as follows;

o Foreign Company
o Indian Company
 
 On the basis of other new kinds of company; There are eight different kinds of company such as
follows;
MEANING AND DEFINITION OF A COMPANY

The word ‘company’ is derived from the Latin word (Com=with or together; panis =bread), and it
originally referred to an association of persons who took their meals together. In the leisurely past,
merchants took advantage of festive gatherings, to discuss business matters. Nowadays, the business
matters have become more complicated and cannot be discussed at festive gatherings. Therefore,
the company form of organization has assumed greater importance. In popular parlance, a company
denotes an association of likeminded persons formed for the purpose of carrying on some business
or undertaking. A company is a corporate body and a legal person having status and personality
distinct and separate from the members constituting it.

It is called a body corporate because the persons composing it are made into one body by
incorporating it according to the law and clothing it with legal personality. The word ‘corporation’
is derived from the Latin term ‘corpus’ which means ‘body’. Accordingly, ‘corporation’ is a legal
person created by a process other than natural birth. It is, for this reason, sometimes called artificial
legal person. As a legal person, a corporate is capable of enjoying many rights and incurring many
liabilities of a natural person.

An incorporated company owes its existence either to a Special Act of Parliament or to company
law. Public corporations like Life Insurance Corporation of India, SBI etc., have been brought into
existence through special Acts of Parliament, whereas companies like Tata Steel Ltd., Reliance
Industries Limited have been formed under the Company law i.e. Companies Act, 1956 which is
replaced by the Companies Act, 2013.

In the legal sense, a company is an association of both natural and artificial persons and is
incorporated under the existing law of a country.

In terms of the Companies Act, 2013 (Act No. 18 of 2013) a “company” means a company
incorporated under this Act or under any previous company law [Section 2(20)].
In common law, a company is a “legal person” or “legal entity” separate from, and capable of
surviving beyond the lives of its members. A company is rather a legal device for the attainment of
social and economic end. It is, therefore, a combined political, social, economic and legal
institution. Thus, the term company has been described in many ways. “It is a means of cooperation
and organisation in the conduct of an enterprise”. It is “an intricate, centralised, economic and
administrative structure run by professional managers who hire capital from the investor(s)”.

Lord Justice Lindley has defined a company as “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 arising therefrom. The common stock so contributed is denoted in money and is
the capital of the company. The persons who contributed in it or form it, or to whom it belongs, are
members. The proportion of capital to which each member is entitled is his “share”. The shares are
always transferable although the right to transfer them may be restricted.”

NATURE AND CHARACTERISTICS OF A COMPANY

Since a corporate body (i.e. a company) is the creation of law, it is not a human being, it is an
artificial juridical person (i.e. created by law) and it is clothed with many rights, obligations, powers
and duties prescribed by law.

The most striking characteristics of a company are discussed below:

(i) Corporate personality

A company incorporated under the Act is vested with a corporate personality so it redundant bears
its own name, acts under name, has a seal of its own and its assets are separate and distinct from
those of its members. It is a different ‘person’ from the members who compose it. Therefore it is
capable of owning property, incurring debts, borrowing money, having a bank account, employing
people, entering into contracts and suing or being sued in the same manner as an individual. Its
members are its owners however they can be its creditors simultaneously. A shareholder cannot
be held liable for the acts of the company even if he holds virtually the entire share capital.

The shareholders are not the agents of the company and so they cannot bind it by their acts. The
company does not hold its property as an agent or trustee for its members and they cannot sue to
enforce its rights, nor can they be sued in respect of its liabilities. Thus, ‘incorporation’ is the act of
forming a legal corporation as a juristic person. A juristic person is in law also conferred with rights
and obligations and is dealt with in accordance with law. In other words, the entity acts like a
natural person but only through a designated person, whose acts are processed within the ambit of
law [Shiromani Gurdwara Prabandhak Committee v. Shri Sam Nath Dass AIR 2000 SCW 139].

CASE EXAMPLE

The case of Salomon v. Salomon and Co. Ltd., (1897) A.C. 22

The above case has clearly established the principle that once a company has been validly
constituted under the Companies Act, it becomes a legal person distinct from its members and for
this purpose it is immaterial whether any member holds a large or small proportion of the shares,
and whether he holds those shares as beneficially or as a mere trustee.

In the case, Salomon had, for some years, carried on a prosperous business as a leather merchant
and boot manufacturer. He formed a limited company consisting of himself, his wife, his daughter
and his four sons as the shareholders, all of whom subscribed to 1 share each so that the actual cash
paid as capital was £7. Salomon sold his business (which was perfectly solvent at that time), to the
Company formed by him for the sum of £38,782. The company’s nominal capital was £40,000 in £1
shares. In part payment of the purchase money for the business sold to the company, debentures of
the amount of £10,000 secured by a floating charge on the company’s assets were issued to
Salomon, who also applied for and received an allotment of 20,000 £ 1 fully paid shares. The
remaining amount of £8,782 was paid to Salomon in cash. Salomon was the managing director and
two of his sons were other directors.

The company soon ran into difficulties and the debentureholders appointed a receiver and the
company went into liquidation. The total assets of the company amounted to £6050, its liabilities
were £10,000 secured by debentures, £8,000 owing to unsecured trade creditors, who claimed the
whole of the company’s assets, viz., £6,050, on the ground that, as the company was a mere ‘alias’
or agent for Salomon, they were entitled to payment of their debts in priority to debentures. They
further pleaded that Salomon, as a principal beneficiary, was ultimately responsible for the debts
incurred by his agent or trustee on his behalf.

Their Lordships of the House of Lords observed:

“…the company is a different person altogether from the subscribers of the memorandum; and
though it may be that after incorporation the business is precisely the same as before, the same
persons are managers, and the same hands receive the profits, the company is not, in law, their agent
or trustee. The statute enacts nothing as to the extent or degree of interest, which may, be held by
each of the seven or as to the proportion of interest, or influence possessed by one or majority of the
shareholders over others. There is nothing in the Act requiring that the subscribers to the
memorandum should be independent or unconnected, or that they or any of
CASE EXAMPLE

The case of Lee v. Lee’s Air Farming Ltd. (1961) A.C. 12 (P.C.),

The above case illustrates the application of the principles established in Salomon’s case (supra). In
this case, a company was formed for the purpose of aerial top-dressing. Lee, a qualified pilot, held
all but one of the shares in the company. He voted himself the managing director and got himself
appointed by the articles as chief pilot at a salary. He was killed in an air crash while working for
the company. His widow claimed compensation for the death of her husband in the course of his
employment. The company opposed the claim on the ground that Lee was not a worker as the same
person could not be the employer and the employee. The Privy Council held that Lee and his
company were distinct legal persons which had entered into contractual relationships under which
he became the chief pilot, a servant of the company. In his capacity of managing director he could,
on behalf of the company, give himself orders in his other capacity of pilot, and the relationship
between himself, as pilot and the company, was that of servant and master. Lee was a separate
person from the company he formed and his widow was held entitled to get the compensation. In
effect the magic of corporate personality enabled him (Lee) to be the master and servant at the same
time and enjoy the advantages of both.

The decision of the Calcutta High Court in Re. Kondoli Tea Co. Ltd., (1886) ILR 13 Cal. 43,
recognised the principle of separate legal entity even much earlier than the decision in Salomon v.
Salomon & Co. Ltd. case. Certain persons transferred a Tea Estate to a company and claimed
exemptions from ad valorem duty on the ground that since they themselves were also the
shareholders in the company, it was nothing but a transfer from them in one name to themselves
under another name. While rejecting this Calcutta High Court observed: “The company was a
separate person, a separate body altogether from the shareholders and the transfer was as much a
conveyance, a transfer of the property, as if the shareholders had been totally different persons.
(ii) Company as an artificial person

A Company is an artificial person created by law. It is not a human being but it acts through human
beings. It is considered as a legal person which can enter into contracts, possess properties in its
own name, sue and can be sued by others etc. It is called an artificial person since it is invisible,
intangible, existing only in the contemplation of law. It is capable of enjoying rights and being
subject to duties.

(iii) Company is not a citizen

The company, though a legal person, is not a citizen under the Citizenship Act, 1955 or the
Constitution of India. In State Trading Corporation of India Ltd. v. C.T.O., A.I.R. 1963 S.C. 1811,
the Supreme Court held that the State Trading Corporation though a legal person, was not a citizen
and can act only through natural persons. Nevertheless, it is to be noted that certain fundamental
rights enshrined in the Constitution for protection of “person”, e.g., right to equality (Article 14) etc.
are also available to company. Section 2(f) of Citizenship Act, 1955 expressly excludes a company
or association or body of individuals from citizenship.
(iv) Company has Nationality and Residence

Though it is established through judicial decisions that a company cannot be a citizen, yet it has
nationality, domicile and residence. In Gasque v. Inland Revenue Commissioners, (1940) 2 K.B.
88, Macnaghten. J. held that a limited company is capable of having a domicile and its domicile is
the place of its registration and that domicile clings to it throughout its existence. He observed in
this case:

“It was suggested that a body corporate has no domicile. It is quite true that a body corporate cannot
have a domicile in the same sense as an individual. But by analogy with a natural person the
attributes of residence, domicile and nationality can be given to a body corporate.”

(v) Limited Liability

“The privilege of limited liability for business debts is one of the principal advantages of doing
business under the corporate form of organisation.” The company, being a separate person, is the
owner of its assets and bound by its liabilities. The liability of a member as shareholder, extends to
the contribution to the capital of the company up to the nominal value of the shares held and not
paid by him. Members, even as a whole, are neither the owners of the company’s undertakings, nor
liable for its debts. In other words, a shareholder is liable to pay the balance, if any, due on the
shares held by him, when called upon to pay and nothing more, even if the liabilities of the
company far exceed its assets. This means that the liability of a member is limited. For example, if
A holds shares of the total nominal value of `1,000 and has already paid `500/- (or 50% of the
value) as part payment at the time of allotment, he cannot be called upon to pay more than ` 500/-,
the amount remaining unpaid on his shares. If he holds fully-paid shares, he has no further liability
to pay even if the company is declared insolvent. In the case of a company limited by guarantee, the
liability of members is limited to a specified amount of the guarantee mentioned in the
memorandum.

Buckley, J. in Re. London and Globe Finance Corporation, (1903) 1 Ch.D. 728 at 731, has
observed: ‘The statutes relating to limited liability have probably done more than any legislation
of the last fifty years to further the commercial prosperity of the country. They have, to the
advantage of the investor as well as of the public, allowed and encouraged aggregation of small
sums into large capitals which have been employed in undertakings of “great public utility largely
increasing the wealth of the country”.

Exceptions to the principle of limited liability

 Where a company has been got incorporated by furnishing any false or incorrect information
or representation or by suppressing any material fact or information in any of the documents or
declaration
 filed or made for incorporating such company or by any fraudulent action, the Tribunal may, on
an application made to it, on being satisfied that the situation so warrants, direct that liability of
the members of such company shall be unlimited.

 Further under section 339(1), where in the course of winding up it appears that any business of
the company has been carried on with an intent to defraud creditors of the company or any
other persons or for any fraudulent purpose, the Tribunal may declare the persons who were
knowingly parties to the carrying on of the business in the manner aforesaid as personally
liable, without limitation of liability, for all or any of the debts/liabilities of the company.

 When the company is incorporated as an Unlimited Company under Section 3(2)(c) of the Act

 Under Section 35(3), where it is proved that a prospectus has been issued with intent to defraud
the applicants for the securities of a company or any other person or for any fraudulent purpose,
every person who was a director at the time of issue of the prospectus or has been named as a
director in the prospectus or every person who has authorised the issue of prospectus or every
promoter or a person referred to as an expert in the prospectus shall be personally responsible,
without any limitation of liability, for all or any of the losses or damages that may have been
incurred by any person who subscribed to the securities on the basis of such prospectus.

 As per section 75(1), where a company fails to repay the deposit or part thereof or any interest
thereon referred to in section 74 within the time specified or such further time as may be
allowed by the Tribunal and it is proved that the deposits had been accepted with intent to
defraud the depositors or for any fraudulent purpose, every officer of the company who was
responsible for the acceptance of such deposit shall, without prejudice to other liabilities, also
be personally responsible, without any limitation of liability, for all or any of the losses or
damages that may have been incurred by the depositors.

 Section 224(5) states that where the report made by an inspector states that fraud has taken
place in a company and due to such fraud any director, key managerial personnel, other officer
of the company or any other person or entity, has taken undue advantage or benefit, whether in
the form of any asset, property or cash or in any other manner, the Central Government may
file an application before the Tribunal for appropriate orders with regard to disgorgement of
such asset, property, or cash, and also for holding such director, key managerial personnel,
officer or other person liable personally without any limitation of liability.

(vi) Perpetual Succession

An incorporated company never dies, except when it is wound up as per law. A company, being a
separate legal person is unaffected by death or departure of any member and it remains the same
entity, despite total change in the membership. Perpetual succession, means that the membership of
a company may keep changing from time to time, but that shall not affect its continuity.

The membership of an incorporated company may change either because one shareholder has
sold/transferred his shares to another or his shares devolve on his legal representatives on his death
or he ceases to be a member under some other provisions of the Companies Act. Thus, perpetual
succession denotes the ability of a company to maintain its existence by the succession of new
individuals who step into the shoes of those who cease to be members of the company. Professor
L.C.B. Gower rightly mentions, “Members may come and go, but the company can go on forever.
During the war all the members 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 it”.
(vii) Separate Property

A company being a legal person and entirely distinct from its members, is capable of owning,
enjoying and disposing of property in its own name. The company is the real person in which all its
property is vested, and by which it is controlled, managed and disposed off. Their Lordships of the
Madras High Court in R.F. Perumal v. H. John Deavin, A.I.R. 1960 Mad. 43 held that “no member
can claim himself to be the owner of the company’s property during its existence or in its winding-
up”. A member does not even have an insurable interest in the property of the company.

(viii) Transferability of Shares

The capital of a company is divided into parts, called shares. The shares are said to be movable
property and, subject to certain conditions, freely transferable, so that no shareholder is permanently
or necessarily wedded to a company. When the joint stock companies were established, the object
was that their shares should be capable of being easily transferred, [In Re. Balia and San Francisco
Rly., (1968) L.R. 3 Q.B. 588]. Section 44 of the Companies Act, 2013 enunciates the principle by
providing that the shares held by the members are movable property and can be transferred from
one person to another in the manner provided by the articles. If the articles do not provide anything
for the transfer of shares and the Regulations contained in Table “F” in Schedule I to the
Companies Act, 2013, are also expressly excluded, the transfer of shares will be governed by the
general law relating to transfer of movable property.

A member may sell his shares in the open market and realise the money invested by him. This
provides liquidity to a member (as he can freely sell his shares) and ensures stability to the
company (as the member is not withdrawing his money from the company). The Stock Exchanges
provide adequate facilities for the sale and purchase of shares.

Further, as of now, in most of the listed companies, the shares are also transferable through Electronic
mode
i.e. through Depository Participants in dematerialised form instead of physical transfers.

However there are restrictions with respect to transferability of shares of a Private Limited
Company which are dealt in chapter 2.

(ix) Capacity to Sue and Be Sued

A company being a body corporate, can sue and be sued in its own name. To sue, means to institute
legal proceedings against (a person) or to bring a suit in a court of law. All legal proceedings against
the company are to be instituted in its name. Similarly, the company may bring an action against
anyone in its own name. A company’s right to sue arises when some loss is caused to the company,
i.e. to the property or the personality of the company. Hence, the company is entitled to sue for
damages in libel or slander as the case may be [Floating Services Ltd. v. MV San Fransceco
Dipaloa (2004) 52 SCL 762 (Guj)]. A company, as a person distinct from its members, may even
sue one of its own members.
A company has a right to seek damages where a defamatory material published about it, affects its
business. Where video cassettes were prepared by the workmen of a company showing, their
struggle against the company’s management, it was held to be not actionable unless shown that the
contents of the cassette would be defamatory. The court did not restrain the exhibition of the
cassette. [TVS Employees Federation v. TVS and Sons Ltd., (1996) 87 Com Cases 37]. The
company is not liable for contempt committed by its officer. [Lalit Surajmal Kanodia v. Office
Tiger Database Systems India (P) Ltd., (2006) 129 Com Cases 192 Mad].

(x) Contractual Rights

A company, being a legal entity different from its members, can enter into contracts for the conduct
of the business in its own name. A shareholder cannot enforce a contract made by his company; he
is neither a party to the contract, nor be entitled to the benefit derived from of it, as a company is not
a trustee for its shareholders. Likewise, a shareholder cannot be sued on contracts made by his
company. The distinction between a company and its members is not confined to the rules of privity
but permeates the whole law of contract. Thus, if a director fails to disclose a breach of his duties
towards his company, and in consequence a shareholder is induced to enter into a contract with the
director on behalf of the company which he would not have entered into had there been disclosure,
the shareholder cannot rescind the contract.

Similarly, a member of a company cannot sue in respect of torts committed against the company,
nor can he be sued for torts committed by the company. [British Thomson-Houston Company v.
Sterling Accessories Ltd., (1924) 2 Ch. 33]. Therefore, the company as a legal person can take
action to enforce its legal rights or be sued for breach of its legal duties. Its rights and duties are
distinct from those of its constituent members.

(xi) Limitation of Action

A company cannot go beyond the power stated in its Memorandum of Association. The
Memorandum of Association of the company regulates the powers and fixes the objects of the
company and provides the edifice upon which the entire structure of the company rests. The actions
and objects of the company are limited within the scope of its Memorandum of Association. In
order to enable it to carry out its actions without such restrictions and limitations in most cases,
sufficient powers are granted in the Memorandum of Association. But once the powers have been
laid down, it cannot go beyond such powers unless the Memorandum of Association, itself altered
prior to doing so.

(xii) Separate Management

As already noted, the members may derive profits without being burdened with the management of
the company. They do not have effective and intimate control over its working and they elect their
representatives as Directors on the Board of Directors of the company to conduct corporate
functions through managerial personnel employed by them. In other words, the company is
administered and managed by its managerial personnel.

(xiii) Voluntary Association for Profit

A company is a voluntary association for profit. It is formed for the accomplishment of some stated
goals and whatsoever profit is gained is divided among its shareholders or saved for the future
expansion of the company. Only a Section 8 company can be formed with no profit motive.

(xiv) Termination of Existence

A company, being an artificial juridical person, does not die a natural death. It is created by law,
carries on its affairs according to law throughout its life and ultimately is effaced by law.
Generally, the existence of a
 company is terminated by means of winding up. However, to avoid winding up, sometimes
companies adopt strategies like reorganisation, reconstruction and amalgamation.

To sum up, “a company is a voluntary association for profit with capital divisible into transferable
shares with limited liability, having a distinct corporate entity and a common seal with perpetual
succession”.

COMPANY VIS-A-VIS OTHER FORMS OF BUSINESS

Though there are a number of similarities between a limited company and other forms of
associations, there are a great number of dissimilarities as well. In the following paragraphs, a
limited company is distinguished from a partnership firm, a Hindu Undivided Family (HUF)
business and a LLP.

Distinction between Partnership Firm and Company

The principal points of distinction between a partnership firm and a company are as follows:

Partnership Firm Company

A partnership firm is not distinct from the

A company is a distinct legal person.
several persons who form the partnership.

In a partnership, the property of the firm is the In a company, it belongs to the company and
property of the individuals comprising it. not to the individuals who are its members.

Creditors of a partnership firm are creditors of The creditors of a company can proceed only
individual partners and a decree against the firm against the company and not against its
can be executed against the partners jointly members.
and
severally.

Partners are the agents of the firm. A partner Members of a company are not its agents. A
can dispose of the property and incur member of a company cannot dispose of the
liabilities as long as he acts in the course of the property and incur liabilities in the course of
firm’s business. the
company’s business.
A partner cannot contract with his firm. A member can contract with his company.

A partner cannot transfer his share and make A company’s share can ordinarily be transferred
the transferee a member of the firm without the
consent
of the other partners.

The liability of shareholder may be limited either

A partner’s liability is always unlimited.
by shares or a guarantee.

The death or insolvency of a partner dissolves A company has perpetual succession, i.e. the
the firm, unless otherwise provided. death or insolvency of a shareholder or all of
them does
not affect the life of the company.

The accounts of a firm are audited at the A company is required to have its accounts
discretion of the partners. audited annually by a chartered accountant.

A partnership firm, on the other hand, is the A company, being a creation of law, can only
result of be dissolved as laid down by law.
an agreement and can be dissolved at any time
by agreement among the partners.
Distinction between a Hindu Undivided Family Business and a Company

Hindu Undivided Family Business Company

A Hindu Undivided Family Business consists A company consists of heterogeneous (varied or

of homogenous (unvarying) members since it diverse) members.
consists
of members of the joint family itself.

In a Hindu Undivided Family business the There is no such system in a company.

Karta (manager) has the sole authority to
contract debts for the purpose of the business,
other coparceners
cannot do so.

A person becomes a member of a Hindu

There is no provision to that effect in the
Undivided Family business by virtue of birth.
company.

No registration is compulsory for carrying on Registration of a company is compulsory.

business for gain by a Hindu Undivided Family
even if the number of members exceeds twenty
[Shyamlal
Roy v. Madhusudan Roy, AIR 1959 Cal. 380
(385)].

Distinction between Limited Liability Partnership (LLP) and a Company

LLP is an alternative corporate business form that gives the benefits of limited liability of a
company and the flexibility of a partnership. LLP can continue its existence irrespective of changes
in partners. It is capable of entering into contracts and holding property in its own name. LLP is a
separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to
their agreed contribution in the LLP.

Further, no partner is liable on account of the independent or un-authorized actions of other

partners, thus individual partners are shielded from joint liability created by another partner’s
wrongful business decisions or misconduct.

Mutual rights and duties of the partners within a LLP are governed by an agreement between the
partners or between the partners and the LLP as the case may be. The LLP, however, is not relieved
of the liability for its other obligations as a separate entity.

Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’
LLP is called a hybrid between a company and a partnership.

LLP is a body corporate and a legal entity separate from its partners, having perpetual succession.
LLP form is a form of business model which :(i) is organized and operates on the basis of an
agreement.(ii) provides flexibility without imposing detailed legal and procedural requirements (iii)
enables professional/technical expertise and initiative to combine with financial risk taking capacity
in an innovative and efficient manner.

A basic difference between an LLP and a company lies in that the internal governance
structure of a company is regulated by statute (i.e. Companies Act) whereas for an LLP it would be
by a contractual agreement between partners.

The management-ownership divide inherent in a company is not there in a limited liability

partnership. LLP have more flexibility as compared to a company. LLP have lesser compliance
requirements as compared to a company.
DEVELOPMENT OF COMPANY LAW IN INDIA

Company Law in India, is the cherished child of the English parents. Our various Companies Acts
have been modelled on the English Acts. Following the enactment of the Joint Stock Companies
Act, 1844 in England, the first Companies Act was passed in India in 1850. It provided for the
registration of the companies and transferability of shares. The Amending Act of 1857 conferred the
right of registration with or without limited liability. Subsequently this right was granted to banking
and insurance companies by an Act of 1860 following the similar principle in Britain. The
Companies Act of 1856 repealed all the previous Acts. That Act provided inter alia for
incorporation, regulation and winding up of companies and other associations. This Act was recast
in 1882, embodying the amendments which were made in the Company Law in England upto
that time. In 1913 a consolidating Act was passed, and major amendments were made to the
consolidated Act in 1936. In the meantime England passed a comprehensive Companies Act in
1948. In 1951, the Indian Government promulgated the Indian Companies (Amendment) Ordinance
under which the Central Government and the Court assumed extensive powers to intervene directly
in the affairs of the company and to take necessary action in the interest of the company. The
ordinance was replaced by an Amending Act of 1951.

The Companies Act 1956 – Based on Bhaba Committee Recommendations

The Companies Act, 1956 was enacted with a view to consolidate and amend the earlier laws
relating to companies and certain other associations. The Act came into force on 1st April, 1956.
This Companies Act was based largely on the recommendations of the Company Law Committee
(Bhabha Committee) which submitted its report in March, 1952. This Act was the longest piece of
legislation ever passed by our Parliament. Amendments have been made in this Act periodically.
The Companies Act, 1956 consisted of 658 Sections and 15 Schedules.

Full and fair disclosure of various matters in prospectus; detailed information of the financial affairs
of company to be disclosed in its account; provision for intervention and investigation by the
Government into the affairs of a company; restrictions on the powers of managerial personnel;
enforcement of proper performance of their duties by company management; and protection of
minority shareholders were some of the main features of the Companies Act, 1956.

The Companies Act, 1956 was enacted with the object to amend and consolidate the law relating to
companies. This Act provided the legal framework for corporate entities in India and was a
mammoth legislation. As the corporate sector grew in numbers and size of operations, the need for
streamlining this Act was felt and as many as 24 amendments had taken place since then.

The Companies Act, 1956 had undergone changes by amendments in 1960, 1962, 1963, 1964, 1965,
1966,
1967, 1969, 1971, 1977, 1985, 1988, 1996, 1999, 2000, 2002 (Amendment), 2002 (Second
Amendment),
and 2006. The Companies Act, 1956 was also amended pursuant to the enactment of the
Depositories Act, 1996. Unsuccessful attempts were made in 1993 and 1997 to replace the present
Act with a new law. Companies (Amendment) Bill, 2003 containing important provisions relating
to Corporate Governance and aimed at achieving competitive advantage was also introduced.

 Based on the recommendations of Shastri Committee, the Companies (Amendment) Act, 1960
introduced several new provisions relating to various aspects of company management which
were overlooked in the 1956 Act.

 The Companies (Amendment) Act, 1963 provided for the appointment of a Companies Tribunal
and constitution of the Board of Company Law Administration. It also empowered the Central
Government to remove managerial personnel involved in cases of fraud, etc.
 Based on the recommendations of the Vivian Bose Commission, the Companies (Amendment)
Act, 1965 introduced some major changes, such as clear definition of the main and subsidiary
objects of a company in its Memorandum of Association; Strengthening the provisions relating
to investigation into the affairs of the company, etc. The Companies Act was further amended
twice in 1966.

 Two important changes were introduced by the Companies (Amendment) Act, 1969. The
institutions of managing agents and secretaries and treasurers were abolished with effect from
April 3, 1970. Secondly, contributions by companies to any political party or for any political
purpose were prohibited.

 The Companies (Amendment) Act, 1974 which came into force from February 1, 1975 had
introduced some important and major changes in the Companies Act, 1956. The object of the
Amendment Act was to inject an element of public interest in the working of the corporate
sector.

 The Companies (Amendment) Act of 1977 brought about certain changes in Sections 58A, 220,
293, 620 and 634A of 1956 Act.

 The Companies (Amendment) Act, 1985: The amending Act substituted Section 293A of
Companies Act, 1956 with a new section permitting Non-Government companies to make
political contributions, directly or indirectly.

 With a view that legitimate dues of workers rank pari passu with secured creditors in the event
of closure of the company and rank above even the dues to Government, Sections 529 and 530
of the Companies Act, 1956, were amended and a new Section 529A was introduced.

 The Companies (Amendment) Act, 1988: Based on the recommendations made by the Expert
Committee (Sachar Committee), the Companies (Amendment) Act, 1988 substantially amended
the Companies Act, 1956 in order to streamline some of the existing provisions of the
Companies Act, 1956 and to ensure better working and administration of the Act. The important
changes introduced by the Amendment Act of 1988 were:

(a) Definition of Secretary brought in line with the definition of ‘Company Secretary’ in the
Company Secretaries Act, 1980 and includes an individual possessing the prescribed
qualifications.

(b) The concept of company secretary in practice was introduced for the first time in the
Companies Act. The Amended Act, among other things, also set up an independent
Company Law Board to exercise such judicial and quasi-judicial functions, earlier being
 exercised either by the Court or the Central Government.

 The Depositories Act, 1996 made the following major amendments to the Companies Act, 1956:-

(a) Every person holding equity share capital of a company and whose name is entered as
beneficial owner in the records of the depository shall be deemed to be a member of the
concerned company.

(b) Stamping of transfer instruments is not required where both the transferor and transferee
are entered as beneficial owners in the records of a depository.

(c) The securities of a company other than a private company have been made freely
transferable. The transfer has to be effected immediately by the company/depository.

(d) The register of members shall indicate the shares held by a member in demat mode but
such shares need not be distinguished by a distinctive number.

(e) Company to give in the offer document option to the investor to ask for issue of securities
in demat mode.
 The Companies (Amendment) Act, 1999 made the following major changes to the
Companies Act, 1956:-

(a) Companies allowed to issue Sweat Equity shares and to buy-back their own securities.

(b) Facility for nomination provided for the benefit of share/debenture/deposit holders.

(c) An Investor Education and Protection Fund to be established.

(d) National Advisory Committee on Accounting Standards for companies to be established.

(e) Prior approval of Central Government not required for inter-corporate investment/lending
proposals subject to certain conditions.

 Further the Companies (Amendment) Act, 2000 made the following major amendments:

(a) Private Companies and Public Companies to have a minimum paid-up capital of Rupees
one lakh and five lakh respectively.

(b) Change of place of registered office from the jurisdiction of one Registrar of Companies
to another Registrar of Companies within the same state requires confirmation from the
Regional Director.

(c) Provisions relating to deemed public companies became inoperative and a new provision
relating to conversion of a public company to a private company inserted in the Companies
Act, 1956.

(d) SEBI given powers regarding issue and transfer of securities and non-payment of dividend
by listed public companies.

(e) Certain measures included for protecting the interest of small deposit holders in a company.

(f) Preferential offer/Private placement of securities to 50 (fifty) persons or more treated

as public issue. This shall not apply to a preferential offer made by public financial
institutions and NBFCs.

(g) Provisions relating to shelf-prospectus and information memorandum, issue of equity share
capital with differential rights as to dividend, voting or otherwise included.

(h) Every listed company making initial public offer of any security for a sum of Rupees ten
crores or more will have to issue the same only in a dematerialised form.

 The Companies (Amendment) Act, 2002 and Companies (Second Amendment) Act, 2002
made the following changes to the Companies Act, 1956:-
(a) New Part IXA consisting of Section 581A to 581ZT relating to Producer Companies inserted

(b) The existing Company Law Board is proposed to be dissolved and in its place a National
Company Law Tribunal (Tribunal) is to be constituted.

(c) Appeals against the orders of the Tribunal can be filed with the Appellate Tribunal.
Further appeal against the orders of the Appellate Tribunal would lie to the Supreme Court.

(d) The Board for Industrial and Financial Reconstruction is to be abolished and SICA will be
repealed.

(e) Transfer of all the powers from the BIFR to the Tribunal.

(f) Transfer of certain powers of the High Court to the Tribunal.

(g) Greater role for professionals in the administration of Company Law.

(h) Transfer of powers relating to winding up, mergers and amalgamations from Court to the
Tribunal.
  The Companies (Amendment) Act, 2006 inserted new Sections 610B, 610C, 610D and 610E
and and also certain sections pertaining to Director Identification Number (DIN). Salient
features of the provisions of Companies (Amendment) Act, 2006 are as follows:

— DIN to be obtained by all existing directors and every other person, intending to become a
director.

— The applications, balance sheet, prospectus, return, declaration, memorandum and articles
of association, particulars of charges or any other particulars or document required to be
filed or delivered, are to be filed in electronic form .

— The document, notice, any communication or intimation, required to be served or delivered

under the Act to the Registrar of Companies, should be served or delivered through
electronic form .

— Applications, balance sheet, prospectus, return, register, MOA and AOA, particulars of
charges or any other document and return filed shall be maintained by Registrar in
electronic form .

— Central Government may provide such value added services through the electronic form .

— All the provisions of Information Technology Act, 2000 relating to the electronic records,
in so far as they are not inconsistent with the Companies Act, shall apply to the records in
electronic form.

CONCEPT PAPER ON COMPANY LAW, 2004 & J.J. IRANI REPORT

To frame a law that enables companies to achieve global competitiveness in a fast changing
economy, the Government had taken up a fresh exercise for a comprehensive revision of the
Companies Act, 1956, albeit through a consultative process. As the first step in this direction, a
Concept Paper on Company Law drawn up in the legislative format was exposed for public
viewing on the electronic media so that all interested parties may not only express their opinions on
the concepts involved but may also suggest formulations on various aspects of Company Law.

The response to the concept paper on Company Law was tremendous. The Government, therefore,
felt it appropriate that the proposals contained in the Concept Paper and suggestions received
thereon be put to merited evaluation by an independent Expert Committee. A Committee was
constituted on 2nd December, 2004 under the Chairmanship of Dr. J J Irani, the then Director, Tata
Sons, with the task of advising the Government on the proposed revisions to the Companies Act,
1956 with the objective to have a simplified compact law that will be able to address the changes
taking place in the national and international scenario, enable the adoption of internationally
accepted best practices as well as provide adequate flexibility for timely evolution of new
arrangements in response to the requirements of ever-changing business models. The Committee
submitted its report to the Government on 31st May 2005.

Dr. J J Irani Expert Committee on Company Law had submitted its report charting out the road map
for a flexible, dynamic and user-friendly new company law. The Committee had taken a pragmatic
approach keeping in view the ground realities, and had sought to address the concerns of all the
stakeholders to enable adoption of internationally accepted best practices. As one wades through
the report, one finds an arduous zeal to ensure that flexibility is coupled with accountability and
transparency. Be it the role of directors in the management of the company or the role of promoters
at the time of incorporation or the responsibility of professionals in ensuring better governance, the
report had made very dynamic and balanced recommendations. The Report of the Committee had
also sought to bring in multifarious progressive and visionary concepts and endeavored to
recommend a significant shift from the “Government Approval Regime” to a “Shareholder
Approval and Disclosure Regime”.

The Expert Committee had recommended that private and small companies need to be given
flexibilities and freedom of operations and compliance at a low cost. Companies with higher
public interest which access
 capital from public need to be subjected to a stricter regime of Corporate Governance. Further,
Government companies and public financial institutions should be subject to similar parameters
with respect to disclosures and Corporate Governance as other companies are subjected to.

To attune the Indian Company Law with the global reforms taking place in the arena, the Report of
the Committee had sought to bring in multifarious visionary concepts, which if accepted and acted
upon would really simplify the voluminous and cumbersome Companies Act in the country.

Companies Bill, 2012

The Government considered the recommendations of Irani Committee and also had detailed
discussions and liberations with various stakeholders viz Industry Chambers, Professional Institutes,
Government Departments, Legal Experts and Professionals etc. Thereafter, the Companies Bill,
2009 was introduced in the Lok Sabha on 3rd August, 2009, The Bill laid greater emphasis on self
regulation and minimization of regulatory approvals in managing the affairs of the company. The
Bill promised greater shareholder democracy, vesting the shareholders with greater powers,
containing stricter corporate governance norms and requiring greater disclosures.

The Companies Bill, 2009 after introduction in Parliament was referred to the Parliamentary
Standing Committee on Finance for examination which submitted its report to Parliament on 31st
August, 2010. Certain amendments were introduced in the Bill in the light of the report of the
Committee and a revised Companies Bill, 2011 was introduced. This version was also referred to
the Hon’ble Committee, which suggested certain further amendments. The amended Bill was
passed by the Lok Sabha on 18th December, 2012 and by the Rajya Sabha on 8th August, 2013.
The Bill was retitled as Companies Bill, 2012.

Companies Act 2013

The Companies Bill, 2012 was assented to by the President of India on 29.08.2013 and notified in
the Gazette of India on 30.08.2013. It finally became the Companies Act, 2013.
Passed in Lok sabha December 18, 2012
Passed in Rajya Sabha August 08, 2013
President’s assent August 29, 2013
Total number of sections 470
Total number of chapters 29
Total number of schedules 7
The Companies Act 2013 has introduced new concepts supporting enhanced disclosure,
accountability, better board governance, better facilitation of business and so on. It includes the
following aspects:-
 Associate company

 One person company

 Small company

 Dormant company

 Independent director

 Women director

 Resident director

 Special court
  Secretarial standards

 Secretarial audit

 Class action

 Registered valuers

 Rotation of auditors

 Vigil mechanism

 Corporate social responsibility

 Cross border mergers

 Prohibition of insider training

The separate personality of a company is a statutory privilege and it must be used for legitimate
business purposes only. Where a fraudulent and dishonest use is made of the legal entity, the
individuals concerned will not be allowed to take shelter behind the corporate personality. The
Court will break through the corporate shell and apply the principle/doctrine of what is called as
“lifting of or piercing the corporate veil”. The Court will look behind the corporate entity and take
action as though no entity separate from the members existed and make the members or the
controlling persons liable for debts and obligations of the company.

The corporate veil is lifted when in defence proceedings, such as for the evasion of tax, an entity
relies on its corporate personality as a shield to cover its wrong doings. [BSN (UK) Ltd. v. Janardan
Mohandas Rajan Pillai [1996] 86 Com Cases 371 (Bom).]

However, the shareholders cannot ask for the lifting of the veil for their purposes. This was held in
Premlata Bhatia v. Union of India (2004) 58 CL 217 (Delhi) wherein the premises of a shop were
allotted on a licence to the individual licencee. She set up a wholly owned private company and
transferred the premises to that company without Government consent. She could not remove the
illegality by saying that she and her company were virtually the same person.

The Companies Act, 2013 itself contains some provisions [Sections 7(7), 251(1) and 339] which lift
the corporate veil to reach the real forces of action. Section 7(7) deals with punishment for
incorporation of company by furnishing false information, Section 251(1) deals with liability for
making fraudulent application for removal of name of company from the register of companies and
Section 339 deals with liability for fraudulent conduct of business during the course of winding up.

Ever since the decision in Salomon v. Salomon & Co. Ltd., (1897) A.C. 22, normally Courts are
reluctant or at least very cautious to lift the veil of corporate personality to see the real persons
behind it. Nevertheless, Courts have found it necessary to disregard the separate personality of a
company in the following situations:
(b) Where a corporate facade is really only an agency instrumentality.
 (b) Another instance of corporate veil arrived at by the Court arose in Kapila Hingorani v. State of
Bihar.

Thus, in appropriate cases, the Courts disregard the separate corporate personality and look
behind the legal person or lift the corporate veil.

Lifting the Corporate Veil of Small Scale Industry

Where small scale industries were given certain exemptions and the company owning an industry
was controlled by some group of persons or companies, it was held that it was permissible to lift the
veil of the company to see whether it was the subsidiary of another company and, therefore, not
entitled to the proposed exemptions. [Inalsa Ltd. v. Union of India, (1996) 87 Com Cases 599
(Delhi).]
Use of Corporate Veil for Hiding Criminal Activities

Where the defendant used the corporate structure as a device or facade to conceal his criminal
activities (evasion of customs and excise duties payable by the company), the Court could lift the
corporate veil and treat the assets of the company as the realisable property of the shareholder.

For example, in a case, there was a prima facie case that the defendants controlled the two
companies, the companies had been used for the fraudulent evasion of excise duty on a large scale,
the defendant regarded the companies as carrying on a family business and that they had benefited
from companies’ cash in substantial amounts and further no useful purpose would have been served
by involving the companies in the criminal proceedings. In all these circumstances it was therefore
appropriate to lift the corporate veil and treat the stock in the companies’ warehouses and the
companies’ motor vehicles as realisable property held by the defendants. The court said that the
excise department is not to be criticized for not charging the companies. The more complex
commercial activities become, the more vital it is for prosecuting authorities to be selective in
whom and what they charge, so that issues can be presented in as clear and short form as possible.
In the present case, it seemed that no useful purpose would have been served by initiating criminal
proceedings. [H. and Others (Restraint Order : Realisable Property), Re, (1996) 2 BCLC 500 at
511, 512 (CA).]

In order to prevent the mischief arising from large trading undertakings being carried on by large
fluctuating bodies so that persons dealing with them did not know with whom they were
contracting, the law has put a ceiling on the number of persons constituting an association or
partnership. An unincorporated company, association or partnership consisting of large number of
persons has been declared illegal.

By virtue of section 464 of the Companies Act, 2013, no association or partnership consisting of
more than such number of persons as may be prescribed shall be formed for the purpose of carrying
on any business that has for its object the acquisition of gain by the association or partnership or by
the individual members thereof, unless it is registered as a company under this Act or is formed
under any other law for the time being in force. Section further provides that the number of
persons which may be prescribed under this section shall not exceed one hundred. Accordingly,
Rule 10 of Companies (Miscellaneous) Rules, 2014 prescribes 50 persons in this regard.

Section 464 of the Act does not apply to the case of a Hindu undivided family carrying on any
business whatever may be the number of its members. However, this section is also not applicable
to an association or partnership, if it is formed by professionals who are governed by special Acts.

Since, the law does not recognize it, an illegal association:

(i) cannot enter into any contract;

(ii) cannot sue any member, or outsider, not even if the company is subsequently registered;
 (iii) cannot be sued by a member, or an outsider for recovery of any debts;

(iv) cannot be wound up by an order of the Court. In fact, the Court cannot entertain a petition
for its winding up as an unregistered company, for if it did, it would be indirectly according
recognition to the illegal association (Raghubar Dayal v. Sarafa Chamber A.I.R. 1954 All.
555).

However, an illegal association is liable to be taxed [Kumara Swamy Chattiar v. Income Tax Officer
(1957)

I.T.R. 457].

The members of an illegal association are individually liable in respect of all acts or contracts made
on behalf of the association; they cannot either individually or collectively, bring an action to
enforce any contract so made, or to recover any debt due to the association [Wilkinson v. Levison
(1925) 42 T.L.R. 97].

Under sub-section (3) of section 464, every member of an illegal association shall be punishable
with fine which may extend to one lakh rupees and shall also be personally liable for all liabilities
incurred in such business.

This section will not be applicable to LLPs as they are incorporated as bodies corporate under LLP Act.

4 CORPORATE PERSONALITY AND LIFTING THE CORPORATE VEIL

Whether Company registered under the Companies Act have corporate personality...
Corporate Personality is the creation of law. Legal personality of corporation is recognized both in English and
Indian law. A corporation is an artificial person enjoying in law capacity to have rights and duties and holding
property.

A corporation is distinguished by reference to different kinds of things which the law selects for personification.
The individuals forming the corpus of corporation are called its members. The juristic personality of
corporations pre-supposes the existence of three conditions :
(1) There must be a group or body of human beings associated for a certain purpose.
(2) There must be organs through which the corporation functions, and
(3) The corporation is attributed will by legal fiction. A corporation is distinct from its individual members[1].
It has the legal personality of its own and it can sue and can be sued in its own name. It does not come to end
with the death of its individual members and therefore, has a perpetual existence. However, unlike natural
persons, a corporation can act only through its agents. Law provides procedure for winding up of a corporate
body[2]. Besides, corporations the banks, railways, universities, colleges, church, temple, hospitals etc. are also
conferred legal personality. Union of India and States are also recognized as legal or juristic persons [3].

In certain cases, the corpus of the legal person shall be some fund or estate which reserved certain special uses.
For instance, a trust – estate or the estate of an insolvent, a charitable fund etc..; are included within the term
‘legal personality’.

Corporations are of two kinds :

1. Corporation Aggregate : Is an association of human beings united for the purpose of forwarding their certain
interest. A limited Company is one of the best example. Such a company is formed by a number of persons who
as shareholders of the company contribute or promise to contribute to the capital of the company for the
furtherance of a common object. Their liability is limited to the extent of their share-holding in the company. A
limited liability company is thus formed by the personification of the shareholders. The property is not that of
the shareholders but its own property and its assets and liabilities are different from that of its members. The
shareholders have a right to receive dividends from the profits of the company but not the property of the
company[4]. The principle of corporate personality of a company was recognized in the case of Saloman v.
Saloman & Co[5].

2. Corporation Sole : Is an incorporated series of successive persons. It consists of a single person who is
personified and regarded by law as a legal person. In other words, a single person, who is in exercise of some
office or function, deals in legal capacity and has legal rights and duties. A corporation sole is perpetual. Post –
Master- General, Public Trustee, Comptroller and auditor general of India, the Crown in England etc are some
examples of a corporation sole. Generally, corporation sole are the holders of a public office which are
recognized by law as a corporation.. The chief characteristic of a corporation sole is its “continuous entity
endowed with a capacity for endless duration”. A corporation sole is an illustration of double capacity. The
object of a corporation sole is similar to that of a corporation aggregate. In it a single person holding a public
office holds the office in a series of succession, meaning thereby that with his death , his property , right and
liabilities etc., do not extinguish but they are vested in the person who succeeds him. Thus on the death of a
corporation sole, his natural personality is destroyed, but legal personality continues to be represented by the
successive person. In consequence , the death of a corporation sole does not adversely affect the interests of the
public in general.

Advantages of Incorporation
1) Independent Corporate Existence: A corporate person shall have an independent corporate existence. It is in
law a person . It is s distinct legal persona existing independent of its members. In case of a company, by
incorporation it gains a corporate personality which is separate or distinct from the members who compose it.
The property of the company belongs to it and not its members ; it may sue or be sued in its own name ; it may
enter into contracts with third parties independently and even the members themselves can enter into contract
with the company According to Section 34(2) of the Companies Act , upon issue of the certificate of
incorporation , the subscribers to the memorandum and other persons , who may from time , be the members of
the company, shall be a body corporate, which is capable of exercising all the functions of an incorporated
company and having perpetual succession and a common seal. Thus the company becomes a body corporate
which is capable immediately of functioning as an incorporated individual. With the incorporation, the entity of
the company becomes institutionalized. This principle of the independent corporate existence and the principle
of corporate personality of a company was recognized in the case of Saloman v. Saloman & Co [6]. In this case
Salomon was a boot and shoe manufacturer. He incorporated a company named Salomon & Co Ltd , for the
purpose of taking over and carrying on his business. The seven subscribers to the memorandum were Salomon,
his wife, his daughter and four sons and they remained the only members of the company. The company went
into liquidation within a year. The unsecured creditors contended that though incorporated under the Act, the
company never had an independent existence, it was in fact Salomon under another name; he was the managing
director, the other directors being his sons and under his control. It was held that Salomon & Co Ltd was a real
company fulfilling all the legal requirements . It must be treated as a company , as an entity consisting of certain
corporators , but a distinct and independent corporation. Thus it was decided in this case that a corporate body
has its own existence or personality separate and distinct from its members and therefore, a shareholder cannot
be held liable for the acts of the company even though he holds virtually the entire share capital. The case has
also recognized the principle of limited liability of a company.

The principle of distinct and independent existence of company consequent to its incorporation was recognized
in India even before the decision in Salomon case. The High Court of Calcutta in a case observed that the
company was altogether a separate person, different from its shareholders and therefore the transfer was as
much a conveyance, a transfer of the property, as if the shareholders had been totally different persons[7]. In this
case, the members transferred a Tea Estate to a company and claimed exemption from ad valorem duty on the
ground that they themselves being the shareholders in the company, it was in fact a transfer to themselves in
another name. The Court, however, rejected their contention and ruled that in the eyes of law the company was a
distinct independent person, separate from its shareholders.

The Supreme Court in M/s. Electronics Corporation of India Ltd. v. Secretary, Revenue Department [8].,
Government of Andhra Pradesh, inter-alia observed that a clear distinction must be drawn between a company
and its shareholders, even though that shareholder may be only one i.e. the Central or a State Government. In the
eyes of the law, a company registered under the Companies Act is a distinct legal entity other than the legal
entity or entities that hold its shares.

2) Limited Liability : One of the principal advantages of an incorporated company is the privilege of limited
liability. It is the main feature of registered companies which provides a special attraction to investors. The
principle of limited liability implies that the liability of a member in the event of the company's winding up, in
respect of the shares held by him is limited to the extent of the unpaid value on such shares. Thus the liability
does not fluctuate but remains limited to the amount which, for the time being remains unpaid, whether from the
original shareholder or the transferee of such shares as the case may be. limited liability of members extends
only for company's debt in the event of its winding up. The company itself, being a legal persona, is always fully
liable and therefore its liability is unlimited. In other words, it is liable to pay the debts so long as assets are
available. The order of priority for payment of debt shall, however, depend on the class of creditors as laid down
in the Companies Act. No member is bound to contribute anything more than the nominal value of the shares
held by them [9]. Section 34(2) of the Companies Act, 1956 provides that in the event of the company being
wound up, the members shall have liability to contribute to the assets of the company in accordance with the
Act, In the case of limited companies, no member is bound to contribute anything more than the nominal value
of shares held by him. The privilege of limiting the liability is one of the main advantages of carrying on
business under a corporate organization.

3) Perpetual Succession : An incorporated company has perpetual succession, that is notwithstanding any
change in its members, the company shall retain as the same entity with the same privileges and immunities,
estate and possessions. the death or insolvency of individual member does not in any way, affect its corporate
existence and the company shall continue its existence as usual until it is wound up in accordance with the
provisions of the Companies Act, The perpetual existence of an incorporated company is well illustrated by
proverbial saying, "members may come and members may go, but the company can go on for ever."

In Gopalpur Tea Co. Ltd. v. Penhok Tea Co, Ltd.[10], the court while applying the doctrine of company's
perpetual succession observed that though the whole undertaking of a company was taken over under an Act
which purported to extinguish all rights of action against the company, neither the company was thereby
extinguished nor any body's claim against it.

4) Transferability of shares : Section 82 of the Companies Act, 1956, specifically provides that the shares or
other interest of any member in a company shall be movable property, transferable in the manner provided by
the articles of association of the company. Thus the member of an incorporated company can dispose of his
share by selling them in the open market and get back the amount so invested. The transferability of shares has
two main advantages, namely it provides liquidity to investors and at the same time ensures stability of the
company. The transfer of shares of a company does not in any way affect its existence or management and the
shareholder can conveniently get relieved of his liability by transferring his shares to some other person.

5) Separate Property : Incorporation helps the property of the company to be clearly distinguished from that of
its members. The property is vested in the company as a body corporate , and no changes of individual
membership affect the title. In case of a company, it being a legal person is capable of owning , enjoying and
disposing of property in its own name. The company becomes the owner of its capital and assets. The
shareholders are not the several or joint owners of company’s property. In Bacha F Guzdar v. CIT Bombay [11]
it was held that the company is a real person in which all its property is vested , and by which it is controlled ,
managed and disposed of”. In Macaura v. Northern Assurance Co Ltd[12] it was held that “ the property of a
company is not the property of the shareholders ; it is the property of the company”.

6) Corporate Finances : The shares of an incorporated company being transferable, it can raise maximum
capital in minimum possible time. That apart, an incorporated company has the privilege of raising its capital by
public subscriptions either by way of shares or debentures. The public financial institutions willingly lend loan
to companies as it is generally secured by floating charge which is an exclusive privilege of a registered
company.

In R.T. Perumal v. John Deavin,[13] it has been observed that a company is a real person in which all its
property is vested, and by which it is controlled, managed and disposed of. Their Lordships further observed that
"no member can claim himself to be the owner of the company's property during its existence or in its winding
up."

7) Centralized Management : The shareholders have no direct concern with the management of the company.
They exercise, only a formative control. Thus the management of the company is altogether different from its
ownership. Independent functioning of managerial personnel attracts talented professional persons to work for
the company in an atmosphere of independence thus enabling them to achieve highest targets of production and
management leading to company's overall prosperity.

The management of the company generally vests in the directors who decide the policy matters in the meetings
of the Board of Directors. With skilled professional managers supported by financial resources, companies are
able to develop and carry on their business efficiently. In short, professional form of management of business
disassociates the 'ownership' from control of business and thus helps to promote efficiency. Besides, it provides
flexibility and autonomy to business undertakings within the framework of company law.

8) Capacity to sue and to be sued : A company being a body corporate can sue and can be sued in its own
name.[14]. A criminal complaint can be filed by a company , but it should be represented by a natural person. A
company has the right to protect its fair name. It can sue for such defamatory remarks against it as are likely to
damage its business or property etc. A company has the right to seek damage where a defamatory material
published about it affects its business. In TVS Employees Federation v. TVS & Sons Ltd [15] it was held that
the preparation of a video cassette by the workmen of a company showing their struggle against the company's
management and exhibition could be restrained only on showing that the matter would be defamatory. In R v.
Broadcasting Standards Commission the court of appeal held that a company can complain under the
Broadcasting Act, 1996 about unwarranted infringement of its privacy. In this case the complaint was about the
secret filming of transactions in shops by the BBC and the allegation was that this constituted an infringement of
the company’s privacy.

Disadvantages of Incorporation
1) Lifting or Piercing the Corporate Veil : A corporation is cloth with a distinct personality by fiction of law,
yet in reality it is an association of persons who are in fact , in a way , the beneficial owners of the property of
the body corporate. A company being an artificial person, cannot act on its own, it can act only through natural
persons. The whole theory of incorporation is based on the theory of corporate entity but the separate personality
of the company and its statutory privileges should be used for legitimate purposes only. Where the legal entity
of the company is being used for fraudulent and dishonest purpose, the individuals concerned will not be
allowed to take the shelter behind the corporate personality. The court in such cases shall break through the
corporate shell and apply the principle of what is known as “lifting or piercing the corporate veil”. The corporate
veil of a company may be lifted to ascertain the true character and economic realities behind the legal
personality of the company. Undoubtedly, the theory of corporate entity of a company is still the basic principle
on which the whole law of corporations is based. But the separate personality of the company, being a statutory
privilege, it must always be used for legitimate business purposes only. Where the legal entity of a corporate
body is misused for fraudulent and . dishonest purposes, the individuals concerned will not be allowed to take
shelter behind the corporate personality. In such cases, the court will break through the corporate shell and apply
the principle of what is known as "lifting or piercing the corporate veil". That is, the court will look behind the
corporate entity.

In New Horizons Ltd. v. Union of India and others,[16] the appellant company when seen through the veil
covering the face of New Horizons Ltd. was found to be a joint venture created as a result of reorganization in
1992. Sixty per cent of its share capital was owned by an Indian group of companies and forty per cent share
capital was owned by a Singapore based foreign company. The Government had invited tenders for distribution
of State largesse. The appellant's tender was not considered on the ground that the experience of its constituents
was not the same as that of the appellant and because of inadequate experience, the respondent's tender was
accepted as they had long experience and had also offered a much lower amount of royalty. The appellants
pleaded the experience of constituents of the joint venture company should be treated as its own experience and
corporate veil should be seen through for this purpose. Allowing the appeal, the Supreme Court ruled that the
action of the State Government in determining the eligibility of tender’s was not in consonance with the
standards or norms and was arbitrary and irrational. The Court further observed that in case of a joint venture
corporation, the Court can see through the corporate veil to ascertain the true nature of a company. The doctrine
of lifting the corporate veil is invoked when the corporate personality is found to be opposed to justice,
convenience or interest of revenue.

The principle of 'lifting the corporate veil' has found statutory recognition in certain provisions like Sections 45,
147, 212, 247 and 542 of the Companies Act. Corporate veil is said to be lifted when the court ignores the
company and concerns itself directly with the members or managers. The courts have found it necessary to
disregard the separate personality of a company,4 in the following situations :—

(a) Determination of Real character of a company

At the time of war, it may become necessary to lift the corporate veil of a company to determine whether the
company has an enemy character. In such a case the courts may in their discretion examine the character of
persons who are in real control of the corporate affairs of the company.

In a case[17] a company was incorporated in England for the purpose of selling tyres manufactured in Germany
by a German company, all the shares except one were held by the German subjects residing in Germany. The
remaining one share was held by a British subject who was the Secretary of the company. Thus the real control
of the English company was in German hands. During World War I, the company commenced an action to
recover trade debts. The question therefore was whether company had become an enemy company consequent
to World War I. The House of Lords, inter alia observed :

“But it can assume enemy character when persons in de facto control of its affairs are residents in any enemy
country or, wherever resident, are acting under the control of enemies. therefore held that the company was an
enemy company for the purpose of trading and therefore it was barred from maintaining the action.”

In an American case [18] it was held that the Courts may refuse to pierce the corporate veil where there is no
danger to public interest. In this case certain lands were transferred by an Englishman to another perpetually
restraining the transferee from selling the said property to coloured persons i.e. Negroes. The transferee,
however, transferred the land to a company which was exclusively composed of Negroes. Thereupon, the
petitioners brought an action against the company for annulment of the conveyance on the ground of breach of
condition. Rejecting the contention of the petitioners the court held that members individually or employment
was terminated under an agreement. Thereafter he started a new company to carry on the business of solicitation
and solicited plaintiffs customers. The court held that the defendant company was a mere cloak or sham and
channel used by defendant to obtain advantage of the customers of the plaintiff company for his own benefit and
therefore it ought to be restrained from carrying on the business.

The Supreme Court in Subhra Mukherjee & Another v. M/s. Bharat Coking Coal Ltd. (BCCL) & others[19] has
observed that the Court will be justified in piercing the veil of incorporation in order to ascertain the true nature
of the transaction as to who were the real parties to the sale and whether it was between husbands and wives
behind the facade of separate entity of the company.

(b) For the benefit of revenue : The court has the power to disregard corporate entity if it is used for tax evasion
or to circumvent the tax obligation[20]. In this case the assessee was a wealthy man , enjoying huge dividends
and interest income. He formed four private companies and agreed with each to hold a block of investment as an
agent for it. Income received was credited in the accounts of the company, but the company handed back the
amount to him as pretended loans. The court held that the company was formed by the assessee purely and
simply as a means of avoiding super – tax and the company was nothing more than the assessee himself.

(c) Fraud or improper conduct : The courts will refuse to uphold the separate existence of the company where it
is formed to defeat or circumvent law, to defraud creditors or to avoid legal obligations. In Gilford Motor Co v.
Horne [21] , Horne was appointed as a managing director of the plaintiff company on the condition that he shall
solocite or entice away the customers of the company at any point of time. He was employed under an
agreement. Shortly he opened a business in the name of a company which solicited the plaintiff’s customers. It
was held that the company was mere cloak or sham for the purpose of enabling the defendant to commit a
breach of his covenant against the solicitation.

In P.N.B. Finance Ltd. v. Shital Prasad Jain,[22] the court held that "the doctorine of piercing the corporate veil
may be invoked whenever necessary by the court in the interest of justice, to prevent the corporate entity from
being used as an instrument of fraud, and the fundamental principle of corporate personality itself may be
disregarded having regard to the exigencies of the situation and for the ends of justice.

(d) Government Companies : A company at times loose their individuality in favour of its principal and ,may be
treated as an agent or trustee. In Re F.G. (Films) Ltd.[23], an American company produced a film called
'MANSOON' in India technically in the name of a British company. This British company had a capital of £ 100
out of which majority was held by the President of the American company which financed the production of the
film. In these circumstances the Board of Trade refused to register the film as a British film on the ground that in
the instant case the British company acted merely as the nominee or agent of the American company. This view
was upheld by the Court. The court may, in some circumstances, treat a holding company and its subsidiary as a
single entity. This inference does not flow automatically from the relationship of holding and subsidiary
company. There must be evidence that the business of the two is combined.

In Smith Stone & Knight Ltd. v. Birmingham Corporation, it was observed that the courts find it difficult to go
behind the corporate entity of a company to determine whether it is really independent or is being used as an
agent or trustee. If a parent company and a subsidiary company are distinct legal entities under the ordinary
rules of law and in the absence of an agency contract between the two companies one cannot be said to be the
agent of the other. If one company is held liable as a principal for the acts of another company, the relationship
of agency should be substantially established, as was the case in the instant decision.

In India, a large number of private Companies have a tendency to register themselves as Government companies
under the Companies Act with President and few other officers as the shareholders. They do so with a view to
availing certain advantages in their commercial ventures. The Courts are, therefore, confronted with the problem
of deciding the true nature of a Government company in a number of cases. The Supreme Court has decided
once for all that a Government company is neither an extension of the State, nor its agent.

The Supreme Court has ruled that Life Insurance Corporation cannot be treated as an instrumentality of the State
when it is exercising its ordinary right as a majority shareholder in a company for removing the existing
management and reconstituting the Board of Directors of that company[24]

(e) To punish the real persons in Quasi-Criminal cases against the Company
The courts have sometimes applied the doctrine of lifting the corporate veil in quasi-criminal cases relating to
companies in order to look behind the legal person and punish the real persons who have violated the law.

(f) To prevent abuse of Process of Law

The doctrine of lifting the corporate veil can also be used to prevent abuse of process of Court. Thus in Bijay
Kumar Agarwal & others v. Ratanlal Bagaria & others,[25] the Court observed that although broadly speaking
the principle of lifting the corporate veil will be available in the statute like Companies Act, and other financial
and taxing statutes etc. but admittedly one cannot rule out the applicability of the principle elsewhere if the
situations are falling under the following categories : (a) depend upon the relevant statutory or other provisions;
(b) the object sought to be achieved; (c) the impugned conduct; (d) the involvement of the element of public
interest; (e) the effect on parties who may be affected. It, therefore, logically follows that the doctrine of lifting
the corporate veil or principle analogous thereto cannot be ruled out from being used as a tool of judiciary in
adjudicating over the dispute between two parties. Thus the "Lifting of corporate veil' or principle analogous
thereto cannot be monopoly of any particular statute. It can well be used by the judiciary or the Court to prevent
the abuse of process of Court of Law.

The Supreme Court in Delhi Development Authority v. Skipper Construction Co. (P.) Ltd[26]has observed that
the lifting or piercing the corporate veil can be undertaken by Court to see the real men behind the veil who are
involved in defrauding others by corrupt and illegal means in deliberate defiance of Court's order. In the instant
case, the company was defrauding others in deliberate disobedience of Supreme Court's orders which amounted
to contempt of Court. Disposing of the appeal, the Supreme Court observed that imposition of punishment for
contempt would not denude the Court of its power to issue directions and make appropriate orders to grant relief
to the persons aggrieved in order to do complete justice. For this purpose, the Court can lift the corporate veil of
the company to took into the misdeeds of its officials and punish them i.e. the contemnors. That apart, the Court
may also order the contemnors to restore the illegally derived benefit to the persons who are defrauded so that
the contemnors are not able to retain the fruits of the contempt. The Court may also order forfeiture/attachment
of the properties acquired by the illegal and corrupt means by the real men behind the corporate as also the
properties of their family members.

[1] Section 34 of Companies Act, 1956.

[2] Section 433 to 526 of Companie Act, 1956.
[3] Art 300 of Constitution of India.
[4] Colonial Bank v. Whilley, (1885) 30 Ch. D. 261.
[5] (1887) AC 22.
[6] [1895 – 99] All ER Rep 33.
[7] Re Kondoli Tea Co. Ltd, (1886) ILR 13Cai. 43.
[8] AIR 1999 SC 1734.
[9] J.H. Rayner Ltd v. Deptt of Trade and Industry , (1989) 3 WLR 969 HL.
[10] (1982) 52 Comp. Out. 238,
[11] (1955) 1 SCR 876.
[12] 1925 AC 619 HL.
[13] AIR 1960 Mad. 43.
[14] Union Bank of India v. Khaders International Constructions Ltd , [1993] 2Comp Lj 89 Ker.
[15] (1996) 1 WLR 132 (CA).
[16] (1995) 1 SCC 478
[17] Daimler Co. Ltd. v. Continental Tyre & Rubber Co., (1916)2 AC 307.
[18] People's Pleasure Park Co. v. Rohleder, (1908) 109 Va 439.
[19] AIR 2000 SC 1203.
[20] Juggilal v. CIT , (1969) 2 SCC 376.
[21] [1944] 1 Ch 935.
[22] (1983)53Comp. Cas.66.
[23] (1953) All ER 615,
[24] Life Insurance Corporation v. Escorts Ltd., (1986) 1 SCC 264.
[25] AIR 1999 Cal. 106, (107).
[26] AIR 1996 SC 2005.
[27] AIR 1963 SC 1811.
[28] AIR 1965 SC 40.