COMPANY LAW

Important Questions
Q1. (i) Define a ‘Company’. Explain the distinguishing features of a company.
Ans. The expression ‘company law’ can be defined as a branch of law, governing the companies.
Companies are the useful device to do business, especially when the business has grown bigger, it
cannot be effectively managed by a few people, and required more amount of capital. The term
‘company’ is derived from the latin word ‘com’ and ‘panies’. ‘Com’ stands for ‘with or together’ and
‘panies’ means ‘bread’. Originally, it is referred to a group of persons who would take their meals
together. A company is nothing but an assemblage of people who have come together for some specific
economic purpose.
Under Section 2(20) of the Companies Act, 2013, a company means a company formed and registered
under this Act or an existing company. Section 2(20) states, an existing company means a company
formed and registered under any of the previous companies laws. Section 2(20) of the Act does not
explain the literal meaning of a company, however, from the decisions of various competent courts, a
company is an association of many persons who contribute money or money’s worth to a common
stock and employs it in some common trade or business and who share the profit or loss arising
therefrom. The common stock so contributed is denoted in terms of money and is the capital of the
company. The person who contributes it or to whom it pertains to are considered as members of the
company. The proportion of capital to which each member is entitled in his share. Shares are always
transferable albeit the right to transfer them is often more or less restricted.
NATURE AND CHARACTERISTICS OF A COMPANY
Since a body corporate (i.e. a company) is the creation of law, it is not a human being, it is an artificial
judicial 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:
1. CORPORATE PERSONALITY
A company incorporated under the Act is vested with a corporate personality so it bears its own
name, acts under name, may 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 shareholders are its notional owners and do not own anything in it except
ownership of shares issued and 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 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].

CASES –
a) Salomon v. Salomon and Co. Ltd., 1897 A.C. 22
b) Lee v. Lee Air Farming Ltd. (1961) A.C. 12 (P.C.)
c) New Horizons Ltd. v. Union of India (AIR 1994, Delhi 126)

2. 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 who 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.

CASE –
 Union Bank of India v. Khader International Construction and Other [(2001) 42 CLA 296
SC]

3. 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 Ltd. v. C.T.O., AIR 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”, eg., 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.

CASES –
a) R.C. Cooper v. Union of India, AIR 1970 SC 564
b) Bennet Coleman Co. v. Union of India, AIR 1973 SC 106

4. 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.”

CASE –
Tulika v. Parry and Co., (1903) I.L.R. 27 Mad. 315, Kelly C.B.

5. LIMITED LIABILITY
“The privilege of limited liability for business debts is one of the principal advantages of doing
business under the corporate form of organization.” 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 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.
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.

(ii) Write a note on Lifting of Corporate Veil.

Ans. Piercing of the Corporate Veil

Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it
incurs and the sole beneficiary of the credit it is owed. Common law usually upholds this principle of
separate personhood, but in exceptional situations may “pierce” or “lift” the corporate veil.
Piercing the corporate veil or lifting the corporate veil means ignoring the separate entity of the
company and looking into the realities. It is an important doctrine in the company law according to
which under certain circumstances the separate legal entity or corporate veil of the company may lift
or pierce and the company and its members are treated as one person.
Principle of corporate veil was established in the famous case of Salomon v. Salomon Co. Ltd. The
effect of this principle is that there is a fictional veil between the company and its members. All
dealings with the company will be in the name of the company, and the persons behind the company
will be disregarded however important they may be. Normally, the doctrine of separate entity of the
company is respected. But sometimes, the persons behind the veil start using the company for some
fraudulent purposes. In these circumstances, the courts are compelled to disregard this veil and to
determine the real beneficiaries hiding behind the veil. This phenomenon is called ‘lifting of corporate
veil’.
The circumstances under which the ciurts may lift the corporate veil may be discussed under the
following two broad headings, namely:
(a) Statutory exceptions
(b) Common law exceptions

(A) STATUTORY EXCEPTIONS

1. Reduction of number of members below statutory limit –
Under Section 45 of the Companies Act, 1956, when the company carries on business for
more than six months after its number of members is reduced below seven in the case of a
public company and below two in the case of a private company, every member who is
aware of this fact, shall be jointly and severally liable for all the debts of the company which
were contracted during that period.

2. Fraudulent conduct of business –

Under Section 339 of the Companies Act, 2013, if in the course of the winding up of a
company it appears that any business of the company has been carried on with intent to
defraud creditors, the court may device that persons who were knowingly parties to the
carrying on of such business will be fact personally liable for the debts and other liabilities
of the company.

3. Mis-description of company’s name –

Under section 12 of the Companies Act, 2013, where name of the company is not properly
used in any contract or negotiable instrument, and there is no indication that the acts are
done on behalf of the company, the responsible directors or other officers of the company
will be personally liable (Hendon v. Adelman and Others, 1973).

4. Misstatement in the prospectus –

According to section 7 of the Companies Act, 2013, if a prospectus contain a
misrepresentation, every director, promoter, and every other person who authorizes issue of
such prospectus incurs liability towards those who subscribe for shares on the faith of
untrue statement of the prospectus.

5. Failure to refund application money –

Under section 17 of the Companies Act, 2013, where the minimum subscription has not been
received by the company within 120 days from the first issue of prospectus, all application
money received from applicants for shares shall be returned. If the amount is not duly
returned within 130 days the directors shall be jointly and severally liable to penalty for
each default of one thousand rupees per day during which such default continues or one lakh
rupees whichever is less interest as per the SEBI guidelines.

6. Crop accounts of holding and subsidiary companies –

Under section 128 of the Companies Act, 2013, a holding company is required to disclose to
its members copies of Balance Sheet, Income Statements, and Auditor’s Report of each
subsidiary company be attached to the Balance Sheet of the holding company. Hence,
companies under the same group are treated as an entity disregarding the rule that each
 subsidiary company has a separate legal entity. Sometimes, the court may also treat the
subsidiary company as an agent of holding company.

7. For investigation into affairs of related companies –

Section 134, 136 and 216 of the Act provides that if duly appointed inspector by the Central
Government to investigate the affairs of a company, he shall also have the power to lift the
corporate veil of incorporation for the purpose to investigate the affairs of related
companies in the same management.

8. Liability of pre-incorporation contracts –

A pre-incorporation contract is one which is entered into by the promoters before the
formation of the company. If pre-incorporation contracts are not adopted by the company,
the promoters shall be personally liable for all such un-adopted pre-incorporation contracts.

9. Ultra-vires contracts –
Contracts which are beyond powers and are not the authorized acts such contracts may be:
 Ultra-vires the directors
 Ultra-vires the company
The directors of a company are personally liable for the acts which are in the nature of civil
wrong (tort).

Judicial Exceptions
Following are some of the judicially decided cases in which the corporate veil is lifted i.e., the separate
legal entity of the company is ignored:
1. Determination of the character of the company –
A company may assume an enemy character when persons in de facto control of its affairs are
residents in an enemy country or wherever residents are acting under the control of enemies.
In the legal case of Daimler Co. Ltd. v. Continental Tyre & Rubber Co., 1916, a company was
incorporated in England for the purpose of selling tyres made in Germany by a German
Company. The real control of the English Company was in German hards because majority of
its shareholders and all the directors were German residents. When the First World War broke
out, the company filed a suit to recover a trade debt. Held, that the company had become an
enemy company as it was controlled by Germans who were alien enemy. The suit was dismissed
on the ground that such permission would be against the public policy.

2. Protection of Revenue –
The court is empowered to lift the corporate veil in the interest of revenue e.g. where the
separate entity of the company is used for evasion of tax. In such cases, individual shareholders
may be held liable to pay income tax. In the legal case of Sir Dinshaw Maneckjee Petit Re,
1927, the assessee Sir Dinshaw was a millionaire enjoying a huge dividend and interest income;
he formed four private companies and transferred his interest to them in lieu of shares. The
income was received by the companies and thereafter handed down to the assessee as a
 pretended loan. Held, the company is not carrying on any business. Sir Dinshaw was held the
owner of total income and liable to pay tax.

The court is entitled to lift the mask of corporate entity if the conception is used for tax evasion
or to circumvent tax obligation r to perpetrate fraud; Juggilal Kamlapat v. Commissioner of
Income Tax, 1969.

3. Prevention of fraud or improper conduct –

If the corporate veil has been used for improper conduct or fraudulent purpose e.g., to defraud
creditors, to avoid legal obligations or to defeat the provisions of law, courts have lifted the
corporate veil and looked at the realities of the situation.