• Definition

• Characteristics,
• Lifting of Corporate Veil ;
• Types of Companies ;
• Formation of a Company:
• Promoters,
• Pre-incorporation contracts

The Companies Act 2013 of India defines a company as-

A registered association which is an artificial legal person, having an independent
legal, entity with a perpetual succession, a common seal for its signatures, a common
capital comprised of transferable shares and carrying limited liability.
A more precise, global and modern definition of a company could be:
A business entity which acts as an artificial legal person, formed by a legal person or a
group of legal persons to engage in or carry on a business or industrial enterprise.
Few points that should be noted in this definition:

Legal Person: A legal person could be human or a non-human entity which is

recognised by law as having legal rights and is subject to obligations.
A person or a group of persons: It is no more required to be an association of
persons to form a company. A company can also be started as a single person
company (one-person company).
Since the definition, features, characteristics, and types of companies differ in
different countries (especially in the United States), all the following sections will be
focused on an Indian and UK perspective of a company. Visit this article for the US
perspective of the types of companies.

Features & Characteristics Of A Company

Incorporated association: A company comes into existence when it is registered
under the Companies Act (or other equivalent act under the law). A company has to



 fulfil requirements in terms of documents (MOA, AOA), shareholders, directors, and

share capital to be deemed as a legal association.
Artificial Legal Person: In the eyes of the law, A company is an artificial legal
person which has the rights to acquire or dispose of any property, to enter into
contracts in its own name, and to sue and be sued by others.

Separate Legal Entity: A company has a distinct entity and is independent of its
members or people controlling it. A separate legal entity means that only the company
is responsible to repay creditors and to get sued for its deeds. The individual members
cannot be sued for actions performed by the company. Similarly, the company is not
liable to pay personal debts of the members.
Perpetual Existence: Unlike other non-registered business entities, a company is a
stable business organisation. Its life doesn’t depend on the life of its shareholders,
directors, or employees. Members may come and go but the company goes on forever.
Common Seal: A company being an artificial legal person, uses its common seal
(with the name of the company engraved on it) as a substitute for its signature. Any
document bearing the common seal of the company will be legally binding on the
company.
Limited Liability: A company may be limited by guarantee or limited by shares. In a
company limited by shares, the liability of the shareholders is limited to the unpaid
value of their shares. In a company limited by guarantee, the liability of the members
is limited to the amount they had agreed upon to contribute to the assets of the
company in the event of it being wound up.
Types of companies
A company can be classified into various types depending upon the following
requirements:



 Classification of Companies by Mode of Incorporation

Royal Chartered Companies
These companies are formed under a special charter by the monarch or by a special
order of a king or a queen. Few examples of royal chartered companies are BBC, East
India Company, Bank Of England, etc.

Statutory Companies
These companies are incorporated by a special act passed by the central or state
legislature. These companies are intended to carry out some business of national
importance. For example, The Reserve Bank of India was formed under RBI act 1934.

Registered or Incorporated Companies

These companies are formed/incorporated under the companies act passed by the
government. These companies come into existence only after these are registered
under the act and the certificate of incorporation is passed by the Registrar of
companies.

Classification of Companies based on the liability of the members

The registered companies can be classified into the following categories based on the
liabilities of members:

Companies Limited By Shares

These companies have a defined share capital and the liability of each member is
limited by the memorandum to the extent of the face value of shares subscribed by
him.

Companies Limited By Guarantee

These companies may or may not have a share capital and the liability of each
member is limited by the memorandum to the extent of the sum of money (s)he had
promised to pay in the event of liquidation of the company for payments of debts and
liabilities of the company.



 Unlimited Companies
There is no formal restriction to the amount of money that the shareholder/member of
the company has to pay in the event of the liquidation of an unlimited company.

Classification of Companies based on The Number of Members

Public Company (or Public Limited Company)

A public company is a corporation whose ownership is open to the public. In other
words, anyone can buy the shares of a public company. There are no restrictions to the
number of members of a public company or to the transferability of shares. However,
there are some other restrictions:

▪ (In UK) A public limited company should have at least 2 shareholders and 2
directors, have allotted shares to the total value of at least £50,000, be registered
with company house, and have a qualified company secretary.
▪ (In India) A public company should have at least 7 members and 3 directors, and
issue a prospectus or file a statement in lieu of prospectus with the Registrar
before allotting shares.
Private Company (or Private Limited Company)
A private company cannot be owned by the public; it restricts the number of
members, the right to transfer its shares and prohibits any invitation to the public to
subscribe for any shares or debentures of the company.

(In UK) A private company is a separate legal entity with a suitable company name,
an address, at least one director, at least one shareholder, and memorandum of
association and article of association.

(In India) A private company is a separate legal entity with a suitable company name,
an address, at least 2 members and at most 200 members, and at least two directors
with one being an Indian resident.

One Person Company

A one-person company is an Indian private limited company which has only one
founder/promoter. The founder should be a natural person who is a country resident.



 There is also a threshold of paid-up capital (₹ 50 lakh) and average turnover (₹ 2

crores in 3 immediate preceding financial years) for a one-person

Lifting of Corporate Veil

• From the juristic point of view, a company is a legal person distinct from its
members [Salomon v. Salomon and Co. Ltd. (1897) A.C 22]. This principle may
be referred to as the ‘Veil of incorporation’.

The courts in general consider themselves bound by this principle. The effect of this
Principle is that there is a fictional veil between the company and its members. That
is, the company has a corporate personality which is distinct from its members.

But, in a number of circumstances, the Court will pierce the corporate veil or will
ignore the corporate veil to reach the person behind the veil or to reveal the true form
and character of the concerned company.
The rationale behind this is probably that the law will not allow the corporate form to
be misused or abused. In those circumstances in which the Court feels that the
corporate form is being misused it will rip through the corporate veil and expose its
true character and nature disregarding the Salomon principal as laid down by the
House of Lords.

Broadly there are two types of provisions for the lifting of the Corporate Veil- Judicial
Provisions and Statutory Provisions.
Judicial Provisions include Fraud, Character of Company, Protection of revenue,
Single Economic Entity etc. while
Statutory Provisions include Reduction in membership, Misdescription of name,
Fraudulent conduct of business,
Failure to refund application money, etc. This article at first introduces to the readers
the concept of “Veil of incorporation”, then it explains the meaning of the term-
‘Lifting Of The Corporate Veil’, it then points out the Judicial as well as the Statutory
provisions for Lifting of The Corporate Veil with the help of various case-laws.
Introduction-
Incorporation of a company by registration was introduced in 1844 and the doctrine of
limited liability of a company followed in 1855. Subsequently in 1897 in Salomon v.
Salomon & Company, the House of Lords effected these enactments and cemented
into English law the twin concepts of corporate entity and limited liability. In that case
the apex Court laid down the principle that a company is a distinct legal person
entirely different from the members of that company. This principle is referred to as
the ‘veil of incorporation’.

 The chief advantage of incorporation from which all others follow is the separate
entity of the company. In reality, however, the business of the legal person is always
carried on by, and for the benefit of, some individuals. In the ultimate analysis, some
human beings are the real beneficiaries of the corporate advantages, “for while, by
fiction of law, a corporation is a distinct entity, yet in reality it is an association of
persons who are in fact the beneficial owners of all the corporate property.” And what
the Salomon case decides is that ‘in questions of property and capacity, of acts done
and rights acquired or, liabilities assumed thereby…the personalities of the natural
persons who are the companies corporators is to be ignored”.
This theory of corporate entity is indeed the basic principle on which the whole law of
corporations is based. Instances are not few in which the Courts have successfully
resisted the temptation to break through the corporate veil.
But the theory cannot be pushed to unnatural limits. “There are situations where the
Court will lift the veil of incorporation in order to examine the ‘realities’ which lay
behind. Sometimes this is expressly authorized by statute…and sometimes the Court
will lift its own volition”.
Meaning Of Lifting Or Piercing Of The Corporate Veil–

The human ingenuity however started using the veil of corporate personality blatantly
as a cloak for fraud or improper conduct. Thus it became necessary for the Courts to
break through or lift the corporate veil and look at the persons behind the company
who are the real beneficiaries of the corporate fiction.
Lifting of the corporate veil means disregarding the corporate personality and looking
behind the real person who are in the control of the company. In other words, 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. In this regards the
court will break through the corporate shell and apply the principle of what is known
as “lifting or piercing through the corporate veil.” And while by fiction of law a
corporation is a distinct entity, yet in reality it is an association of persons who are in
fact the beneficial owners of all the corporate property. In United States V. Milwaukee
Refrigerator Co., the position was summed up as follows:
“A corporation will be looked upon as a legal entity as a general rule……but when
the notion of legal entity is used to defeat public convenience, justify wrong, protect
fraud or defend crime, the law will regard the corporation as an association of
persons.”
In Littlewoods Mail Order Stores Ltd V. Inland Revenue Commrs, Denning observed
as follows:
“The doctrine laid down in Salomon v. Salomon and Salomon Co.Ltd, has to be
watched very carefully. It has often been supposed to cast a veil over the personality
of a limited liability company through which the Courts cannot see. But, that is not
true. The Courts can and often do draw aside the veil. They can and often do, pull off
the mask. They look to see what really lies behind”.

 Judicial Provisions Or Grounds For Lifting The Veil-

FRAUD OR IMPROPER CONDUCT- The Courts have been more that prepared to
pierce the corporate veil when it fells that fraud is or could be perpetrated behind the
veil. The Courts will not allow the Salomon principal to be used as an engine of fraud.
The two classic cases of the fraud exception are Gilford Motor Company Ltd v. Horne
and Jones v. Lipman. In the first case, Mr. Horne was an ex-employee of The Gilford
motor company and his employment contract provided that he could not solicit the
customers of the company. In order to defeat this, he incorporated a limited company
in his wife’s name and solicited the customers of the company. The company brought
an action against him. The Court of appeal was of the view that “the company was
formed as a device, a stratagem, in order to mask the effective carrying on of business
of Mr. Horne” in this case it was clear that the main purpose of incorporating the new
company was to perpetrate fraud. Thus the Court of appeal regarded it as a mere sham
to cloak his wrongdoings.
In the second case of Jones v. Lipman, a man contracted to sell his land and thereafter
changed his mind in order to avoid an order of specific performance he transferred his
property to a company. Russel judge specifically referred to the judgments in Gilford
v. Horne and held that the company here was “a mask which (Mr. Lipman) holds
before his face in an attempt to avoid recognition by the eye of equity” .Therefore he
awarded specific performance both against Mr.Lipman and the company.
FOR BENEFIT OF REVENUE-“The Court has the power to disregard corporate
entity if it is used for tax evasion or to circumvent tax obligations. A clear illustration
is Dinshaw Maneckjee Petit, Re;
The assesse was a wealthy man enjoying huge dividend 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 a pretended loan. This way he divided his
income into four parts in a bid to reduce his tax liability.
But it was 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. It did no business, but was created simply as a legal entity to ostensibly
receive the dividends and interests and to hand them over to the assessee as pretended
loans”.
ENEMY CHARACTER-A company may assume an enemy character when persons
in de facto control of its affairs are residents in an enemy country. In such a case, the
Court may examine the character of persons in real control of the company, and
declare the company to be an enemy company. In Daimler Co.Ltd V. Continental Tyre
And Rubber Co.Ltd, A company was incorporated in England for the purpose of
selling in England, tyres made in Germany by a German company which held the
bulk of shares in the English company. The holders of the remaining shares, except
one, and all the directors were Germans, residing in Germany. During the First World
War, the English company commenced action for recovery of a trade debt. Held, the
company was an alien company and the payment of debt to it would amount to

 trading with the enemy, and therefore, the company was not allowed to proceed with
the action.
WHERE THE COMPANY IS A SHAM- The Courts also lift the veil where a
company is a mere cloak or sham (hoax).
COMPANY AVOIDING LEGAL OBLIGATIONS- Where the use of an incorporated
company is being made to avoid legal obligations, the Court may disregard the legal
personality of the company and proceed on the assumption as if no company existed.
SINGLE ECONOMIC ENTITY- Sometimes in the case of group of enterprises the
Salomon principal may not be adhered to and the Court may lift the veil in order to
look at the economic realities of the group itself. In the case of D.H.N.food products
Ltd. V. Tower Hamlets, it has been said that the Courts may disregard Salomon’s case
whenever it is just and equitable to do so. In the above-mentioned case the Court of
appeal thought that the present case was one which was suitable for lifting the
corporate veil. Here the three subsidiary companies were treated as a part of the same
economic entity or group and were entitled to compensation.
Lord Denning has remarked that ‘we know that in many respects a group of
companies are treated together for the purpose of accounts, balance sheet, and profit
and loss accounts. Gower too in his book says, “There is evidence of a general
tendency to ignore the separate legal group”. However, whether the Court will pierce
the corporate veil depends on the facts of the case. The nature of shareholding and
control would be indicators whether the Court would pierce the corporate veil. The
Indian Courts have held that a ‘single economic unit’ argument could work in certain
circumstances. These circumstances would depend on the factual control exercised.
This view is strengthened by the Supreme Court decision (cited in Novartis v. Adarsh
Pharma) in New Horizons v. Union of India. State of UP v. Renusagar was decided in
1988. Back in the year 1988 also, in Renusagar case, the Court proceeded, on the
basis of prior English law which had accepted the ‘single economic unit’ argument.
Thus, Renusagar case seems to support the conclusion that a ‘single economic entity’
argument would succeed in India for lifting the corporate veil.
AGENCY OR TRUST- Where a company is acting as agent for its shareholder, the
shareholders will be liable for the acts of the company. It is a question of fact in each
case whether the company is acting as an agent for its shareholders. There may be an
Express agreement to this effect or an agreement may be implied from the
circumstances of each particular case. In the case of F.G.Films ltd, An American
company financed the production of a film in India in the name of a British company.
The president of the American company held 90 per cent of the capital of the British
company. The Board of trade of Great Britain refused to register the film as a British
film. Held, the decision was valid in view of the fact that British company acted
merely as he nominee of the American Company.
AVOIDANCE OF WELFARE LEGISLATION- Avoidance of welfare legislation is as
common as avoidance of taxation and the approach of the Courts in considering
problems arising out of such avoidance is generally the same as avoidance of taxation.

 It is the duty of the Courts in every case where ingenuity is expended to avoid welfare
legislation to get behind the smokescreen and discover the true state of affairs.
PUBLIC INTEREST- The Courts may lift the veil to protect public policy and prevent
transactions contrary to public policy. The Courts will rely on this ground when lifting
the veil is the most ‘just’ result, but there are no specific grounds for lifting the veil.
Thus, where there is a conflict with public policy, the Courts ignore the form and take
into account the substance.
Statutory Provisions For Lifting The Veil-

REDUCTION OF NUMBER OF MEMBERS- Under Indian Companies Act, 2013,

if a company carries on business for more than six months after the number of its
members has been reduced to seven in case of a public company and two in case of a
private company, every person who knows this fact and is a member during the time
that the company so carries on business after the six months, becomes liable jointly
and severally with the company for the payment of debts contracted after six months.
It is only that member who remains after six months who can be sued.
FRAUDULENT TRADING- Under Indian Companies Act, 2013, if any business of a
company is carried on with the intent to defraud creditors of the company or creditors
of any other person or for any fraudulent purpose, who was knowingly a party to the
carrying on of the business in that manner is liable to imprisonment or fine or both.
This applies whether or not the company has been or is in the course of being wound
up. This was upheld in Delhi Development Authority v. Skipper Constructions Co.
Ltd. (1997).
MISDESCRIPTION OF THE COMPANY- Under Indian Companies Act, 2013,
provides that if any officer of the company or other person acting on its behalf signs
or authorizes to be signed on behalf of the company any bill of exchange, promissory
note, endorsement, cheque or order for money or goods in which the companies name
is not mentioned in legible letters, he is liable to fine and he is personally liable to the
holder of the instrument unless the company has already paid the amount.
PREMATURE TRADING- Another example of personal liability is mentioned in
Section 117 (8) of The English Companies Act. Under this section a public limited
company newly incorporated as such must not “do business or exercise any
borrowing power” until it has obtained from the registrar of companies a certificate
that has complied with the provisions of the act relating to the raising of the
prescribed share capital or until it has re-registered as a private company. If it enters
into any transaction contrary to this provision not only are the company and it’s
officers in default , liable to pay fines but if the company fails to comply with its
obligations in that connection within 21 days of being called upon to do so, the
directors of the company are jointly and severally liable to indemnify the other party
in respect of any loss or damage suffered by reason of the company’s failure.
HOLDING AND SUBSIDIARY COMPANIES- In the eyes of law, the holding
company and its subsidiaries are separate legal entities.
But in the following two cases the subsidiary may lose its separate entity-

 Where at the end of its financial year, the company has subsidiaries, it must lay before
its members in general meeting not only its own accounts, but also attach therewith
annual accounts of each of its subsidiaries along with copy of the board’s and
auditor’s report and a statement of the holding company’s interest in the subsidiary.
The Court may, on the facts of a case, treat a subsidiary as merely a branch or
department of one large undertaking owned by the holding company.
Conclusion-

Thus it is abundantly clear that incorporation does not cut off personal liability at all
times and in all circumstances. “Honest enterprise, by means of companies is allowed;
but the public are protected against kitting and humbuggery”. The sanctity of a
separate entity is upheld only in so far as the entity is consonant with the underlying
policies which give it life.
Thus those who enjoy the benefits of the machinery of incorporation have to assure a
capital structure adequate to the size of the enterprise. They must not withdraw the
corporate assets or mingle their own individual accounts with those of the
corporation. The Courts have at times seized upon these facts as evidence to justify
the imposition of liability upon the shareholders.
The act of piercing the corporate veil until now remains one of the most controversial
subjects in corporate law. There are categories such as fraud, agency, sham or facade,
unfairness and group enterprises, which are believed to be the most peculiar basis
under which the Law Courts would pierce the corporate veil. But these categories are
just guidelines and by no means far from being exhaustive.
fter reading this article you will learn about:- 1. Meaning of a Promoter 2. Functions
of a Promoter 3. Legal Position 4. Rights 5. Duties 6. Liabilities 7. Preliminary
Contracts.

Meaning of a Promoter:
The idea of carrying on a business which can be profitably undertaken is conceived
either by a person or by a group of persons who are called promoters. After the idea is
conceived, the promoters make detailed investigations to find out the weaknesses and
strong points of the idea, to determine the amount of capital required and to estimate
the operating expenses and probable income.

The term ‘promoter’ is a term of business and not of law. It has not been defined
anywhere in the Act, but a number of judicial decisions have attempted to explain it.

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 According to L.J. Brown. “The term promoter is a term not of law but of business,
usefully summing up in a single word a number of business operations familiar to the
commercial world by which a company is generally brought into existence.”

According to Justice C. Cockburn. “Promoter is one who undertakes to form a

company with reference to a given object and to set it going, and who takes the
necessary steps to accomplish that purpose.”

According to Palmer, “Company promoter is a person who originates a scheme for the
formation of the company, has the memorandum and the articles prepared, executed
and registered and finds the first directors, settles the terms of preliminary contracts
and prospectus (if any) and makes arrangement for advertising and circulating the
prospectus and placing the capital.”

According to Guthmann and Dougall. “Promoter is the person who assembles the
men, the money and the materials into a going concern.”

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From these definitions of promoter it is concluded that:

“Promoter is the person who originates the idea for formation of a company and gives
the practical shape to that idea with the help of his own resources and with that of
others.”

A person cannot be held as promoter merely because he has signed at the foot of the
Memorandum or that he has provided money for the payment of formation expenses.

The promoters, in fact, render a very useful service in the formation of the company.
A promoter has been described as ”a creator of wealth and an economic prophet.” The
promoters carry a considerable risk because if the idea sometimes goes wrong then
the time and money spent by them will be a waste.

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In the words of Henry E. Heagland, “A successful promoter is a creator of wealth. He

is an economic prophet. He is able to visualise what does not yet exist and to organise
business enterprise to make the products available to the using public.”

A promoter may be an individual, a firm, an association of persons or even a

company.

 Functions of a Promoter:
The Promoter Performs the following main functions:
1. To conceive an idea of forming a company and explore its possibilities.

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2. To conduct the necessary negotiation for the purchase of business in case it is

intended to purchase as existing business. In this context, the help of experts may be
taken, if considered necessary.

3. To collect the requisite number of persons (i.e. seven in case of a public company
and two in case of a private company) who can sign the ‘Memorandum of
Association’ and ‘Articles of Association’ of the company and also agree to act as the
first directors of the company.

4. To decide about the following:

(i) The name of the Company,

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(ii) The location of its registered office,

(iii) The amount and form of its share capital,

(iv) The brokers or underwriters for capital issue, if necessary,

(v) The bankers,

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(vi) The auditors,

(vii) The legal advisers.

5. To get the Memorandum of Association (M/A) and Articles of Association (A/A)

drafted and printed.

6. To make preliminary contracts with vendors, underwriters, etc.

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 7. To make arrangement for the preparation of prospectus, its filing, advertisement

and issue of capital.

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

incorporation.

9. To defray preliminary expenses.

10. To arrange the minimum subscription.

Legal Position of a Promoter:

The promoter is neither a trustee nor an agent of the company because there is no
company yet in existence. The correct way to describe his legal position is that he
stands in a fiduciary position towards the company about to be formed.

Lord Cairns has correctly stated the position of promoter in Erlanger V. New
Semberero Phophate Co. “The promoters of a company stand undoubtedly in a
fiduciary position. They have in their hands the creation and moulding of the
company. They have the power of defining how and when and in what shape and
under what supervision, it shall start into existence and begin to act as a trading
corporation.”

From the fiduciary position of promoters, the two important results follow:
(1) A promoter cannot be allowed to make any secret profits. If it is found that in any
particular transaction of the company, he has obtained a secret profit for himself, he
will be bound to refund the same to the company.

(2) The promoter is not allowed to derive a profit from the sale of his own property to
the company unless all material facts are disclosed. If he contracts to sell his own
property to the company without making a full disclosure, the company may either
repudiate/rescind the sale or affirm the contract and recover the profit made out of it
by the promoter.

A promoter who wishes to sell his own property to the company must make a full
disclosure of his interest.

The disclosure may be made:

(i) To an independent Board of Directors, or

(ii) In the articles of association of the company, or

 (iii) In the prospectus, or

(iv) To the existing and intended shareholders directly.

If the promoter fails to discharge the obligation demanded of his fiduciary position the
company may rescind the contract or may in the alternative choose to take advantage
of the contract and sue the promoter for damages for breach of his duty to the
company.

Secret profits on the sale of property can be recovered from a promoter only when the
property was bought and sold to the company while he was acting as a promoter.

Rights of Promoter:
The rights of promoters are enumerated as follows:
1. Right of indemnity:
Where more than one person act as the promoters of the company, one promoter can
claim against another promoter for the compensation and damages paid by him.
Promoters are severally and jointly liable for any untrue statement given in the
prospectus and for the secret profits.

2. Right to receive the legitimate preliminary expenses:

A promoter is entitled to receive the legitimate preliminary expenses which he has
incurred in the process of formation of the company such as cost of advertisement, fee
of solicitor and surveyors. The right to receive the preliminary expenses is not a
contractual right. It depends upon the discretion of the directors of the company. The
claim for expenses should be supported by vouchers.

3. Right to receive the remuneration:

A promoter has no right against the company for his remuneration unless there is a
contract to that effect. In some cases, articles of the company provide for the directors
paying a specified amount to promoters for their services but this does not give the
promoters any contractual right to sue the company. This is simply an authority vested
in the directors of the company.

However, the promoters are usually the directors, so that in practice the promoters
will receive their remuneration.

The remuneration may be paid in any of the following ways:

(i) A commission may be paid to the promoter on the purchase price of the business or
property taken over by the company through him.

 (ii) The promoters may be granted by the company a lumpsum amount.

(iii) The promoters may be given fully or partly paid shares in consideration of their
services rendered.

(iv) The promoter may be given a commission at a fixed rate on the shares sold.

(v) The promoter may purchase the business or other property and sell the same to the
company at an inflated price. He must disclose this fact.

(vi) The promoters may take an option to subscribe within a fixed period for a certain
portion of the company’s unissued shares at par.

Whatever be the nature of remuneration, it must be disclosed in the prospectus if paid

within the preceding two years from the date of prospectus.

Duties of Promoter:
The duties of promoters are as follows:
1. To disclose the secret profit:
The promoter should not make any secret profit. If he has made any secret profit, it is
his duty to disclose all the money secretly obtained by way of profit. He is
empowered to deduct the reasonable expenses incurred by him.

2. To disclose all the material facts:

The promoter should disclose all the material facts. If a promoter contracts to sell the
company a property without making a full disclosure, and the property was acquired
by him at a time when he stood in a fiduciary position towards the company, the
company may either repudiate the sale or affirm the contract and recover the profit
made out of it by the promoters.

3. The promoter must make good to the company what he has obtained as a
trustee:
A promoters stands in fiduciary position towards the company. It is the duty of the
promoter to make good to the company what he has obtained as trustee and not what
he may get at any time.

4. Duty to disclose private arrangements:

It is the duty of the promoter to disclose all the private arrangement resulting him
profit by the promotion of the company.

 5. Duty of promoter against the future allottees:

When it is said the promoters stand in a fiduciary position towards the company then
it does not mean that they stand in such relation only to the company or to the
signatories of memorandums of company and they will also stand in this relation to
the future allottees of the shares.

Liabilities of Promoter:
The liabilities of promoters are given below:
1. Liability to account in profit:
As we have already discussed that promoter stands in a fiduciary position to the
company. The promoter is liable to account to the company for all secret profits made
by him without full disclosure to the company. The company may adopt any one of
the following two courses if the promoter fails to disclose the profit.

(i)The company can sue the promoter for an amount of profit and recover the same
with interest.

(ii) The company can rescind the contract and can recover the money paid.

2. Liability for mis-statement in the prospectus:

Section 62(1) holds the promoter liable to pay compensation to every person who
subscribes for any share or debentures on the faith of the prospectus for any loss or
damage sustained by reason of any untrue statement included in it. Sec. on 62 also
provides certain grounds on which a promoter can avoid his liability. Similarly Sec.
63 provides for criminal liability for mis-statement in the prospectus and a promoter
may also become liable under this section.

The promoter may also be imprisoned for a term which may extend to two years or
may be punished with the fine upto Rs. 5,000 for untrue statement in the prospectus.
(Sec. 63).

3. Personal liability:
The promoter is personally liable for all contracts made by him on behalf of the
company until the contracts have been discharged or the company takes over the
liability of the promoter.

The death of promoter does not relieve him from liabilities.

4. Liability at the time of winding up of the company:

 In the course of winding up of the company, on an application made by the official

liquidator, the court may make a promoter liable for misfeasance or breach of trust.
(Sec. 543).

Further where fraud has been alleged by the liquidator against a promoter, the court
may order for his public examination. (Sec. 478).

Preliminary Contracts/Pre-Incorporation Contracts Made by the Promoters:

Preliminary contracts are those contracts which are made by the promoters with
different parties on behalf of the company yet to be incorporated. Such contracts are
generally entered into by promoters to acquire some property or right for and on
behalf of the company to be formed.

The promoters enter into preliminary contracts, generally as agents or trustees of the
company. Such contracts are not legally binding on the company because two
consenting parties are necessary to a contract whereas the company is nonentity
before incorporation.

The company has no legal existence until it is incorporated. It therefore follows:

1. That when, the company is registered, it is not bound by the preliminary contract.

2. That the company when registered cannot ratify the agreement. The company was
not a principal with contractual capacity at the time of contract. A contract can be
ratified only when it is made by an agent for a principal who is in existence and who
is competent to contract at the time when the contract is made.

3. That if the agent undertook any liability under the agreement, he would be
personally liable notwithstanding that he is described in the agreement as an agent and
that the company may have attempted to ratify the agreement.

4. The company cannot enforce the preliminary agreement.

The preliminary contracts made by promoters generally provided that if the company
adopts the agreement the promoter’s liability shall cease and if the company does not
adopt the agreement within a certain time either party may rescind the contract. In
such a case promoter’s liability would cease after the lapse of fixed time.

Salomon v A Salomon and Co Ltd [1897] AC 22 Case Summary

The requirements of correctly constituting a limited company
Introduction

 Separate Legal Personality (SLP) is the basic tenet on which company law is
premised. Establishing the foundation of how a company exists and functions, it is
perceived as, perhaps, the most profound and steady rule of corporate jurisprudence.
Contrastingly, the rule of “SLP” has experienced much turbulence historically, and is
one of the most litigated aspects within and across jurisdictions.1 Nonetheless, this
principle, established in the epic case of Salomon v Salomon,2 is still much prevalent,
and is conventionally celebrated as forming the core of, not only the English company
law, but of the universal commercial law regime.
Commonly known as: Salomon v Salomon
FACTS
Salomon transferred his business of boot making, initially run as a sole proprietorship,
to a company (Salomon Ltd.), incorporated with members comprising of himself and
his family. The price for such transfer was paid to Salomon by way of shares, and
debentures having a floating charge (security against debt) on the assets of the
company. Later, when the company’s business failed and it went into liquidation,
Salomon’s right of recovery (secured through floating charge) against the debentures
stood aprior to the claims of unsecured creditors, who would, thus, have recovered
nothing from the liquidation proceeds.
To avoid such alleged unjust exclusion, the liquidator, on behalf of the unsecured
creditors, alleged that the company was sham, was essentially an agent of Salomon,
and therefore, Salomon being the principal, was personally liable for its debt. In other
words, the liquidator sought to overlook the separate personality of Salomon Ltd.,
distinct from its member Salomon, so as to make Salomon personally liable for the
company’s debt as if he continued to conduct the business as a sole trader.
ISSUE
The case concerned claims of certain unsecured creditors in the liquidation process of
Salomon Ltd., a company in which Salomon was the majority shareholder, and
accordingly, was sought to be made personally liable for the company’s debt. Hence,
the issue was whether, regardless of the separate legal identity of a company, a
shareholder/controller could be held liable for its debt, over and above the capital
contribution, so as to expose such member to unlimited personal liability.
RULING
The Court of Appeal, declaring the company to be a myth, reasoned that Salomon had
incorporated the company contrary to the true intent of the then Companies Act, 1862,
and that the latter had conducted the business as an agent of Salomon, who should,
therefore, be responsible for the debt incurred in the course of such agency.
The House of Lords, however, upon appeal, reversed the above ruling, and
unanimously held that, as the company was duly incorporated, it is an independent
person with its rights and liabilities appropriate to itself, and that “the motives of
those who took part in the promotion of the company are absolutely irrelevant in
discussing what those rights and liabilities are”.3 Thus, the legal fiction of “corporate
veil” between the company and its owners/controllers4 was firmly created by the
Salomon case.

 IMPLICATIONS
Commencing with the Salomon case, the rule of SLP has been followed as an
uncompromising precedent5 in several subsequent cases like Macaura v Northern
Assurance Co.6, Lee v Lee’s Air Farming Limited,7 and the Farrar case.8
The legal fiction of corporate veil, thus established, enunciates that a company has a
legal personality separate and independent from the identity of its
shareholders.9 Hence, any rights, obligations or liabilities of a company are discrete
from those of its shareholders, where the latter are responsible only to the extent of
their capital contributions, known as “limited liability”.10 This corporate fiction was
devised to enable groups of individuals to pursue an economic purpose as a single
unit, without exposure to risks or liabilities in one’s personal capacity.11 Accordingly,
a company can own property, execute contracts, raise debt, make investments and
assume other rights and obligations, independent of its members.12 Moreover, as
companies can then sue and be sued on its own name, it facilitates legal course
too.13 Lastly, the most striking consequence of SLP is that a company survives the
death of its members.14
The Exception of Veil Piercing
Notably, similar to most legal principles, the overarching rule of SLP applies with
exceptions, where the courts may look through the veil to reach out to the insider
members, known as “lifting or piercing of the corporate veil“.15
It is worthwhile here to refer to the case of Adams v Cape Industries16, which
examined the common law grounds, primarily evolved through case law as an
equitable remedy,17 namely- (a) agency, (b) fraud, (c) façade or sham, (d) group
enterprise, and (e) injustice or unfairness. The exception has been invoked widely by
English courts, including in the recent cases of Caterpillar Financial Services (UK)
Limited v Saenz Corp Limited, Mr Karavias, Egerton Corp.18, Beckett Investment
Management Group v Hall,19 Stone & Rolls v Moore Stephens,20 and Akzo Nobel v
The Competition Commission,21 to cite a few. Needless to mention, the journey of
English law in defining the contours of the SLP doctrine and carving out these
exceptions has been quite topsy-turvy. Moreover, veil piercing is now also rampant as
a statutory exception.22
So, considering the gamut of statutory and judge made exceptions above, has the
Salomon rule become redundant?
March back to the Salomon rule
While the Salomon rule appears to have been eroded substantially, a reversal in the
judiciary’s approach, commencing with the Adams case, is now visible.
For instance, in Bank of Tokyo v Karoon,23 the Court of Appeal rejected the “single
economic unit” theory arguing that “we are concerned not with economics but with
law. The distinction between the two is, in law, fundamental and cannot here be
abridged”. Further, in the case of VTB Capital Plc v Nutritek International
Corporation,24 the court reiterated the restricted scope of veil piercing as only a
limited equitable remedy.

 On a similar note, in the most recent judgment of Prest v Petrodel25, Sumption J.

confined the lifting of veil to only two situations, namely, (a) the “concealment
principle”, akin to the sham or façade exception; and (b) the “evasion principle”,
being the fraud exception.26 Deciding not to pierce the corporate veil on the facts, this
case once again reinstated the Salomon rule.
Conclusion
All in all, the Salomon ruling remains predominant and continues to underpin English
company law. While sham, façade and fraud primarily trigger the invocation of the
veil piercing exception in limited circumstances, these grounds are not exhaustive,
and much is left to the discretion and interpretation of the courts on case-to-case basis.
Important caselaws on Company law Vinay Raja on 04 December 2010 Leading
Cases on Company Law As the trend of asking questions have been changed by ICAI,
I thought this might be useful. I compiled these decided case laws from various
sources like RTP, study module, compilation of suggested answers. I am laying down
only those which I feel important from examination point of view. These caselaws
make the concept even clearer because example is a better teacher.

Cases on separate legal entity Kandoli tea company Ltd(1886) Facts Certain persons
transferred their properties in the name of company on which tax was payable.
Petition Petitioners claimed exemption from such tax on the ground that the transfer
was from them individually to themselves in another name. Judgment Company is
separate from its shareholders and this should be treated as transfer.

Saloman Vs. Saloman & Co. Ltd. (1895 - 99) Facts- Saloman sold his business to a
company named Saloman & Company Ltd., which he formed. Saloman took 20,000
shares. The price paid by the company to Saloman was 30,000, but instead of paying
him, cash, the company gave him 20,000 fully paid shares of 1 each &10,000 in
debentures. The company wound up & the assets of the company amounted to 6,000
only. Debts amounted to 10,000 due to Saloman & Secured by debentures and a
further 7,000 due to unsecured creditors. The unsecured creditors claimed that as
Saloman & Co. Ltd., was really the same person as Saloman, he could not owe money
to himself and that they should be paid their 7,000 first.

Judgment- 1. A Company is a "legal person" or "legal entity" separate from and

capable of surviving beyond the lives of, its members. 2. The company is not in law
the agent of the subscribers or Trustee for them. 3. Saloman was entitled to 6,000 as
the company was an entirely separate person from Saloman. 4. The unsecured
creditors got nothing.

Lee Vs. Lee's Farming Co. Ltd. (1960)

Facts- Lee incorporated a company of which he was the managing director. In that
capacity he appointed himself as a pilot of the company. While on the business of the
company he was lost in a flying accident. His widow claimed compensation for

 personal injuries to her husband while in the course of his employment. It was argued
that no compensation was due because L & lee's Air Farming Ltd. were the same
person.

Judgment-

1.L was separate person from the company he formed and compensation was payable.
2. His widow recovered compensation under the Workmen's Compensation Act
3. A member of a company can contract with a company of which he is a shareholder.
4. The directors are not precluded from being an employee of the company for the
purpose of workmen's compensation legislation.

MacauraVs. Northern Assurance Co. Ltd. (1925)

Facts- M was the holder of nearly all the shares except one of a timber company. He
was also a substantial creditor of the company. He insured the company's timber in his
own name. The timber was destroyed by fire & M claimed the loss from Insurance
Company.

Judgment- 1.The Insurance Company was not held liable to him.

2.A shareholder cannot insure the company's property in his own name even if he is
the owner of all or most of the company's shares.

Lifting of corporate veil Gol ford Motor Co. Vs. Home (1933) Facts- Home was
appointed as a managing director of the plaintiff company on the condition that "he
shall not at any time while he shall hold the office of a managing director or
afterwards, solicit or entice away the customers of the company." His employment
was determined under an agreement. Shortly afterwards he opened a business in the
name of a company which solicited the plaintiffs customers. Judgment-It was held
that the company was a mere cloack or shaw for the purpose of enabling the
defendant to commit a breach of his covenant against solicitation. The court will
refuse to uphold the separate existence of the company where it is formed for a
fraudulent purpose or to avoid legal obligations.

Daimler Co. Ltd. Vs. Continental Tyre & Rubber Co. Ltd. (1916) Facts- In a company
incorporated in England for the purpose of selling tyres manufactured in Germany by
a German Company, all the shares except one was held by the German subjects
residing in Germany. The remaining one was held by a British. Thus the real control
of English Company was in German hands. Question arose whether the company had
become an enemy company due to war&should be barred from maintaining the
action. Judgment- 1.A Company incorporated in United Kingdom is a legal entity, a
creation of law with the status & capacity which the law confers. 2.It is not a natural
person with mind or conscience. It can neither be loyal nor disloyal. It can be neither
friend nor enemy. But it can assume enemy character when persons in defacto control
of its affairs are residents in any enemy country or whenever resident, are acting

under the control of enemies. 3.Held that company was an enemy company for the
purpose of trading and therefore it was, barred from maintaining the action.

Workmen employed in associated rubber industries Facts A subsidiary company was

formed wholly by the holding company with no assets of its own except those
transferred to it by the holding company, with no business or income of its own
except receiving dividend from shares transferred to it by the holding company.
Judgment Court held that the company was formed as a devide to reduce the profitsof
the holding company and thereby reduce the bonus to workmen.
F.G.Films Ltd., case Facts An American company produced a film in India actually in
the name of British company wherein 90% of the share capital was held by the
chairman of the American company which financed the production of the film.
Judgement The contention of the sensor board of films refusing to register the film on
the ground that British company has acted merely as an agent of British company was
correct. COI is conclusive evidence that all the requirements have been complied with

Moosa Goola Arif Vs Ibrahim Goola Arif Facts Company registered on the basis of
MOA&AOA signed by two persons and a guardian on behalf of 5 minor members.
Guardian signed separately for each of 5 memebers. The ROC however registered the
company and issued under his hand a certificate of incorporation. Petition Plaintiff
contended that COI should be declared as void. Judgment The court held the
certificate to be conclusive for all purposes. Jubilee Cotton Mills Ltd., Facts The ROC
issued a COI on Jan 8thbut dated it Jan 6thwhich was the date he received application.
On Jan 6ththe company made an allotment of shares to Lewis Judgment Court held
that certificate was conclusive evidence of incorporation on Jan 6thand that the
allotment was not void on the ground that it was made before the company was
incorporated. Decided case on objects clause of MOA Crowns bank case Facts A
companys objects clause enabled it to act as a bank and further to invest in securities
and to underwrite issue of securities. The company abandoned its banking business
and confined itself to investment activities. Judgment Court held that the company
was not entitled to do.

Doctrine of ultravires Ashbury railways carriage & Iron Co Ltd Vs Riche Facts A
railway company was formed with an object of selling railway wagons. The directors
entered into a contract with Richie to finance the construction of railway line. The
shareholders later rejected the contract as ultravires. Judgment The court held that the
contract was ultravires and therefore null and void.

Doctrine of indoor management / Turquand rule Royal British Bank Vs. Turquand
(1856) Facts- The Directors of a company borrowed a sum of money from the
plaintiff. The company's articles provided that the directors might borrow on bonds
such sums as may from time to time be authorised by a resolution passed at a general
meeting of the company. The shareholders claimed that there had been no such
resolution authorising the loan and, therefore, it was taken without their authority. The
company was however held bound by the loan. Once it was found that the directors
could borrow subject to a resolution, the plaintiff had a right to infer that the

necessary resolution must have been passed. Judgment- 1.Persons dealing with the
company are bound to read the registered documents and to see that the proposed
dealing is not inconsistent therewith. 2.Outsiders are bound to know the external
position of the company, but are not bound to know its indoor management.
3.Company may ratify the ultra vires borrowing by the directors if it is taken bonafide
for the benefit of the company.

Exception to Turquand rule Ruben Vs. Great Fingall Consolidated (1906) Facts- The
plaintiff was the transferee of a share certificate issued under the seal of a defendant
company. The certificate was issued by the company's secretary, who had affixed the
seal of the company & forged the signatures of two directors. Judgment- 1.It is quite
true that persons dealing with limited liability companies are not bound to enquire
into their indoor management and will not be affected by irregularities of which they
have no notice. But the doctrine of indoor management, which is well established,
applies to irregularities which otherwise might affect a genuine transaction. It can't
apply to a forgery. 2.Plaintiffs suit for damages did not succeeded because turquand's
rule did not apply where the document was forged.

Anand Biharilal Vs Dinshaw and Co., Facts The plaintiff accepted a transfer of the
companys property from its accountant. Judgment The court held that since it is
beyond the scope of an accountants authority, it was held void. The offer in
prospectus should be made to public (atleast to 50 persons)

Nash Vs Lynde Facts Some copies of documents marked strictly confidential and
containing particulars of a proposed issue of shares, were sent by the managing
director to his relatives and friends. Thus the document was passed on privately
through a small circle of friends of directors. Judgment The court held that there was
no issue to public, and it doesnot amount to prospectus as it was not offered to public.

Who can sue on a false and misleading prospectus Only primary market allotees Peek
Vs Gurney Facts A fraudulent prospectus was issued by the directors. Peek received a
copy of it and did not took any shares. After several months Peek bought few shares
from the stock exchange. Judgment His action against the directors for fraudulent
prospectus was rejected as he took the shares throughthe secondary market. Misc.

Case laws Needle Industries Ltd. Vs. Needle Industries ly (India) Holding Ltd. (1981)
Facts-The articles of a private company contained a clause that when the directors
decided to increase the capital of the company by the issue of shares the same should
be offered to the shareholders, and if they failed to take, may be offered to others. The
company was a wholly owned subsidiary of an English Company. The Govt, of India
adopted a policy of diluting foreign holdings. The company accordingly issued shares
to its employees and relatives reducing the foreign holding to 60%. The company
became a deemed public company because more than 28% of its share capital was
held by a body corporate. Judgment- 1.A deemed public company is neither a private
company nor a public company but a company in a third category. 2.If the power of

 appointing additional directors is delegated to the Board by the articles, the Board can
appoint additional directors without taking this item on the agenda of its meeting.

Gramophone Ltd. Vs. tanley (1908) 1."Even a resolution of a numerical majority, at a

general meeting cannot impose its will upon the directors. When the articles have
confided to them the control of the company's affairs." 2.A company will be regarded
as an Indian Company even if it is incorporated in India by promoters of foreign
nationality. T.R. PRATT Ltd. Vs. Sasson & Co. Ltd. (1936) Facts- There were three
companies, namely, 'S\ 'MT' & 'P' Company. S company had been financing P
Company for a number of years and all transactions of loans were entered into
through the agency of MT Company which held almost all the shares of P Company.
The Directors of MT Company were also the Directors of P Company and this fact
was known to S Company. An equitable mortgage was created on the property of 'P'
Company for a loan granted by S to MT Company. In the winding up of P Company,
it was held that the official liquidator was entitled to avoid the equitable mortgage as
S Company had the knowledge of the facts through its directors. Judgment- 1.Just as
in case of agency, a notice to agent will amount to a notice to the principal, in the
same way a notice to director will be deemed as a notice to the company. 2.Money
having borrowed and used for the benefit of the principal, i.e. company in either
paying off debts or for its legitimate business, the company could not repudiate its
liability on the ground that the agents i.e., directors had no authority from the
company to borrow. 3. "Under the law an incorporated company is a distinct entity,
and although all the shares may be practically controlled by one person, in law a
company is a distinct entity and it is not permissible or relevant to enquire whether the
directors belonged to the same family or whether it is compendiously described as one
man company.

EwingVs. Butter Cut Margarine Company Ltd. (1917) Facts- The plaintiff was an
incorporated firm carrying on substantial business under the trade name of Butter Cap
Dairy Company. The defendant company was registered to trade in similar
commodities and selected the name bonafide believing that there was no other
company in existence with a similar name. The plaintiff alleged that the name of the
company would lead to confusion and was detrimental to the plaintiffs business.
Judgment-Plaintiff was entitled to restrain the ly registered company from carrying on
business on the ground that the public might reasonably think that the registered
company was connected with his business.

Mackinnon Mackenzee & Co. Re, (1967) Facts- A Company desired to shift its
registered office from the State of West Bengal to Bombay. The Company's petition
was resisted by the state on the grounds of loss of revenue. Judgment- Held that there
is no statutory right of the state, as a state, to intervene in an application made u/s 17
for alteration of the place of the registered office of a company. To hold that the
possibility of the loss of revenue is not only relevant, but of persuasive force in regard
to the change is to rob the company of the statutory power conferred on it by Sec. 17.
The question of loss of revenue to one state would have to be considered in the total
conspectus of revenue for the Republic of India and no parochial consideration should

be allowed to turn the scale in regard to change of registered office from one state to
another within India. Scientific Poultry Breeder's Association, Re (1933) Facts-
Memorandum of the company prohibited payment of any remuneration to the
directors. When the business of the company increased it was found that the directors
could not pay sufficient attention unless some remuneration was paid to them.
Judgment-Company was allowed amendment to enable it to pay remuneration to its
managers, which was formerly forbidden, being necessary for efficient management.

Re Cyclists Touring Club. (1907) Facts- The Company's business was to promote,
assist & protect cyclists on the public roads. The company by altering the object
clause desired to include among the persons to be assisted all tourists including
motorists. Judgment- 1.The club not allowed to undertake protection of motorists
also, as cyclists had to be protected against motorists. 2.It was impossible to combine
the two business as one of the objects of the company was to protect cyclists against
motorists. Peveril Gold Mines Ltd. Re (1898) Facts- The articles provided that no
winding up petition could be presented without the consent of two directors or unless
a resolution to wind up was passed at a general meeting or the petitioner held one-
fifth of the share capital. None of these conditions was fulfilled. Judgment-
1.Restriction was invalid & the petition could be presented. 2.Sec. 439 of the
Companies Act, 1956 confers the right on a shareholder to petition for winding up of
the company in certain circumstances. This right can't be excluded or limited by the
articles. 3.Each member is entitled to say that there shall be no breach of the Articles
and he is entitled to an injunction to prevent breach. Hulton Vs. Scarborough Cliff
Hotel Co. (1865) Facts- A resolution passed at a general meeting of a company altered
the articles by inserting the power to issue shares with preferential dividend. The
memorandum contained no such power. Judgment- The alteration was inoperative.

Erlanger Vs. Sombrero Phosphate Co. (1878) Facts- Erlanger was the head of a
syndicate who purchased an Island containing mines of Phosphate for 55,000 pounds
Then formed a company to buy this Island. A contract was made between X a
nominee of the syndicate and the company for its purchase at 1,10,000 pounds. A
prospectus was then issued. Many persons took shares. The company failed & the
liquidator sued the promoter for the refund of the profit. Judgment- 1.Promoters stand
in a fiduciary position. They have in their hands the creation & moulding of the
company. 2.The promoters is in the situation a kin to that of a trustee of the company,
& his dealings with it must be open and fair. 3.Promoter is guilty of breach of trust if
he sells property to the company without informing the company that the property
belongs to him or he may commit a breach of trust by accepting a bonus or
commission from a person who sells property to the company.