Expected marks in examination: Min: Max:

Chapter 1
Introduction to Company Law

Definition of a Company

As per section 2(20) a “company” means a company incorporated under this Act or under any
previous company law.
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.

Nature and Characteristics of a Company

Corporate personality
(Separate Legal Entity) Company is not a citizen

Salomon v. Salomon and Co State Trading Corporation of India Ltd. v. C.T.O

Lee v. Lee’s Air Farming Ltd. R.C. Cooper v. Union of India

Company has Nationality and Residence

Limited Liability

Perpetual Succession

Separation of ownership
and management

Transferability of Shares

Capacity to buy property in its own Name

Capacity to Sue and Be Sued in its own name

Capacity to enter into contract in its own name

Limitation of Action

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 Corporate Personality (Separate Legal Entity)
 A company once incorporated becomes a separate legal entity in the eyes of law so it bears
its own name, acts under its own name, may have a seal of its own, 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.
 It is a different ‘person’ from the members who constitute it.
 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 concept of separate legal entity has been upheld in Salomon v. Salomon and Co and
Lee v. Lee’s Air Farming Ltd by the courts.
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. (Commercial tax officer), the Supreme
Court held that the State Trading Corporation though a legal person, was not a citizen.
 In R.C. Cooper v. Union of India, the Supreme Court held that though a company is not a
citizen but shareholders are of course citizens. In that case, the court entertained the petition
under Article 32 (Writ) of the Constitution at the instance of a director as shareholder of a
company and granted relief.
 Though it is established through judicial decisions that a company cannot be a citizen,
yet it has nationality, domicile and residence.
Perpetual Succession
 A company never dies, except when it is wound up as per law.
 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”.
Limited Liability
Members have limited liability, which means liability is limited to the amount unpaid on
shares, so if a share is fully paid up, there is no further liability to pay by a member, even if
the company goes in losses.
But in certain cases the members may be required to pay more, We can term these as
exception to limited liability:
1. If the number of members of a company is reduced, in the case of a public company,
below seven, in the case of a private company, below two, and the company carries
on business for more than six months while the number of members is so reduced,
every person who is a member of the company during the time shall be personally
liable for the payment of the whole debts of the company contracted during that
time.
2. Unlimited company.
3. Where a company has been got incorporated by furnishing any false or incorrect
information or by any fraudulent action.

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 4. Where in the course of winding up the company has been carried on with an intent to
defraud creditors of the company.
5. Where prospectus has been issued with intent to defraud the applicants.
6. Deposits had been accepted with intent to defraud the depositors.

DOCTRINE OF LIFTING OF OR PIERCING THE CORPORATE VEIL

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”.

Statutory Lifting Judicial Lifting

Cases where Corporate Veil has been lifted by the Judiciary

In case of commission of fraud or improper conduct by the company.
Where a corporate facade is really only an agency instrumentality.
Where the conduct conflicts with public policy, courts lifted the corporate veil for protecting
the public policy.
a company will be regarded as having enemy character, if the persons having control of its
affairs are resident in an enemy country.
Where it was found that the sole purpose for which the company was formed was to evade
taxes the Court will ignore the concept of separate entity and make the individuals concerned
liable to pay the taxes which they would have paid but for the formation of the company.

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 Avoidance of welfare legislation, where it was found that the sole purpose for the formation
of the new company was to use it as a device to reduce the amount to be paid by way of
bonus to workmen.
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.
If the Companies name is used for hiding Criminal Activities

Vodafone Case discussion

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 CASE LAWS

Salomon v. Salomon and Co.

In this case, Salomon formed a limited company consisting of himself, his wife, his daughter and his
four sons as the shareholders. Salomon was a shareholder as well as a secured creditor.
There were other unsecured creditors as well.
Later on the company went in losses and decides to wind up, At the time of winding up the unsecured
creditors claimed that they should be paid before Salomon (as a secured creditor) as it was his
company.

The court held that company has separate legal entity and hence member and the company are
different entities, so from companies outlook, first secured creditor (salomon) will be paid, then
unsecured creditors will be paid and then shareholders (along with salomon).
Lee v. Lee’s Air Farming Ltd.
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 court held that company has separate legal entity and a member can be an employee as well,
Hence the company has to pay the compensation.
New Horizons Ltd. v. Union of India
The experience of a shareholder of a company can be regarded as experience of a company.
Union Bank of India v. Khader International Construction and Other
CPC provides an option for a person who cannot bear the cost of litigation, to sue as an indigent
person, A company made an application as indigent person, It was argued that as the applicant is a
company, it cannot file as an indigent person.

The court held that company is a person (artificial person) and hence company can also file an
application as an indigent person.
State Trading Corporation of India Ltd. v. C.T.O.
A company is not a citizen of India.
Although a company is not a citizen of India, still it has residential/domicile status.
R.C. Cooper v. Union of India
Although a company is not a citizen and does not have all the fundamental rights, still individual’s
right is not lost by reason of the fact that he is a shareholder of the company.
In this case the court allowed the shareholder to file a writ application under Article 32 (one of the
fundamental right)
Tulika v. Parry and Co
“A joint stock company resides where its place of incorporation is, where the meetings of the whole
company or those who represent it are held and where its governing body meets in bodily presence
for the purposes of the company and exercises the powers conferred upon it by statute and by the
Articles of Association.”

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 Lalit Surajmal Kanodia v. Office Tiger Database Systems India
The company is not liable for contempt committed by its officer.
In Jones v. Lipman
A agreed to sell certain land to B. Pending completion of formalities of the said deal, A sold and
transferred the land to a company which he had incorporated and he and a clerk were the only
shareholders and directors. This was done in order to escape a decree for specific performance in a
suit brought by B.

The court held that if any company is incorporated for any improper conduct or for any fraudulent
activity, the corporate veil will be lifted, In this case, A must complete the contract with B as he is in
full control of the company.
R.G. Films Ltd. case
An American company produced a film in India technically in the name of a British Company, 90% of
whose capital was held by the President of the American company which financed the production of
the film. Board of Trade refused to register the film as a British film which stated that English
company acted merely as the nominee of the American corporation.
Sir Dinshaw Maneckjee case
The facts of the case are that the assesse was a wealthy man enjoying large 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 in four parts in a bid to
reduce his tax liability.

The Court decided to lift the corporate veil as it was being used for tax evasion.
Kapila Hingorani v. State of Bihar
In this case, the petitioner had alleged that the State of Bihar had not paid salaries to its employees in
PSUs etc. for long periods resulting in starvation deaths. But the state government took the stand that
the undertakings are companies under the provisions of the Companies Act, 1956, hence the rights
etc. of the shareholders should be governed by the provisions of the Companies Act and the liabilities
of the PSUs should not be passed on to the State Government as there is no ground for lifting of
corporate veil.

The Court held that the State may not be liable in relation to the day-to-day functioning of the PSUs
but its liability would arise on its failure to perform the constitutional duties and the functions of
these undertakings. It is so because, “life means something more than mere ordinal existence”.
Inalsa Ltd. v. Union of India
Small scale industries are given certain exemptions by the government for various reasons.
The court held that if various small scale industries have common ownership, then the purpose stands
defeated and hence they are not entitled to proposed exemptions.

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 PRACTICE QUESTIONS
1. Write a short note on: the separate personality of a company is a statutory privilege and it must
be used for legitimate business purpose only. (Dec 2008)

2. Write a short note on lifting of corporate veil. (Dec 2014)

3. A shareholder is personally liable for the acts of the company, if he virtually holds the entire
share capital of the company. Comment. (Dec 2013)

4. Separate personality of a company is a special privilege. In case of dishonest or fraudulent use of

privilege, corporate veil can be lifted. Discuss (June 2014)

5. A company incorporated under the companies Act, 2013 never dies except when it is wound up
as per law. Discuss. (Dec 2015)

6. Explain clearly meaning of lifting of corporate veil in relation to a company incorporated under
companies Act, 2013. Examining Judicial decisions, state whether ‘corporate veil’ can be lifted in
the following cases:
a) In case of improper conduct
b) Where the acts of the company are oppose to workman. (Dec 2015)

7. Members of a company incorporated under companies Act, 2013 are the agents of the
company. Therefore, the company can be held liable for the acts. Comment. (Dec 2017)

8. Rani is a wealthy lady enjoying large dividend and interest income. She has formed 3 pvt. Ltd
companies and agreed with each of them to hold the 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 her as a pretended loan. This way, she divided her income in 3 parts in a bit to
reduce her tax liability. Discuss the legality of the purpose for which the 3 companies were
formed. (June 2010)

9. A shareholder who holds 99% of the share capital of a company can be held liable for the acts of
the company. Comment. (June 2012)

10. Six persons are only the members of tab (pvt) Ltd .All of them went to U.S.A. On a pleasure trip
by aeroplane. On the way the plane crashed and all the six members died. Does Tab (pvt) Ltd.
still exist? Decide. (Dec 2016)

11. In an annual general meeting of Amar (pvt) Ltd., all the shareholders were killed in a bomb blast.
State whether the company is still in existence? (Dec 2014)

12. Three companies incorporated with the same set of shareholders are treated as same
companies under the Companies Act, 2013. Comment. (Dec 2017)

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