COMPANY LAW

(UNIT-I)

BY
Navjyot Saluja Sethi
 History of Company Law
• In 1850, Company Law was introduced with the Joint Stock Companies Act of 1850 based
on British Company Legislation Act, 1844. This mainly used to deal with Unlimited Liability
Company only.
• Company Law was amended many times between 1852 to 1883 because there was a lot
of conflict on its implementation in India.
• Then after amendment a new act i.e. Joint Stock Companies Act, 1857 which used to deal
with Unlimited an Limited Liability Company. But, incase of Limited Liability, Banking
Companies were excluded.
• Then Joint Stock Company Act, 1860, it deals with limited and unlimited liability company
properly.
• In 1862 this act was again amended by adding some of the provisions in it and the title
“Companies Act” was given. With the implementation of this new amendments two new
documents were introduced: namely the memorandum of association and article of an
association. These two documents were the basis of the indebtedness’ company.
• Indian Companies Act, 1913, based on British Company Act, 1908, in this act
functions of companies were explained in detail but, no detail about functions of
member.
• In Indian Companies Act, 1936, this Act explained in detail about the functions of
the company and of the members like managing directors and agents etc.
• After independence, HC Bhabha Committee (also known as Company Law
Committee) whose head was HC Bhabha, the committee constituted with 12
members and submitted a report in 1952 on new Companies Act. Henceforth,
Companies Act, 1956 was formed.
• The Companies Act, 1956 was introduced to consolidate and amend the provision
laws. This act come into force on 1st of April, 1956
• The current Companies Act, 2013 has 470 sections, 29 chapters and 7 Schedules.
•Companies Act, 2013 aims to improve corporate governance, simplify regulations,
strengthen the interests of minority investors and for the first time legislates the
role of whistle-blowers.
WHAT IS A COMPANY?
 Origin of the Word Company
• Before the inception of Company two modes of carrying out business
were:-
– Monopoly
– Partnership
• In Monopoly, great risk involved as single person invested capital and he
bear the loss and entire burden.
• In Partnership, it was suitable for small scale business which could be
financed and managed by a limited number of people.
• But, these devices were not sufficient to fulfill needs of large scale
business which needed greater capital resources. Therefore, company
came a new device in the form of company.
 WHAT IS A COMPANY?
• Company denotes an association of like minded persons
formed for the purpose of carrying some business or
undertaking.
• A company is a body corporate and a legal person
having the status and personality distinct and separate
from that of 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 a legal
personality.
• Company means an incorporated association of Person.
PERSON

NATURAL PERSON ARTIFICIAL PERSON

 COMPANY
• Voluntary Association of Persons.
• Formed for the purpose of Doing Business.
• Having a Distinct Name.
• Limited Liability
• Having Separate Legal Entity
• Capable of Rights and Duties of its own
• Endowed with potential of Perpetual Succession

• V Fil Hal Locked at Home due to Covid-19

Emergency.
 NATURE OF COMPANY
• Company is creation of law.
• It is not a human being.
• It is an artificial person created by law.
• It is clothed with may rights, duties and powers prescribed by law.
• So, we can say that a company is an association of many persons
who contribute money to a common stock and employ it in some
trade or business and who share the profit and loss arising
therefrom.
• This common stock is called the capital of the company.
• The person who forms it or to whom it belongs are members.
• The proportion to which each member is entitled is his share.
 CHARACTERSTICS OF A COMPANY

• A company is voluntary association for profit with

capital divisible into transferable shares with limited
liability having corporate entity and a common seal
with perpetual succession.
 CORPORATE PERSONALITY
• It has separate legal entity
• Once Registered, it has a separate legal personality.
• Its existence is separate from its members.
• It can own property, have a bank account, raise loans, incur liabilities and enter
into contracts.
• Only creditors can sue company for debts, not its members.
• The Indian Companies Act 2013 also recognizes principle of separate legal
personality of the company. Section 9 of the Companies Act 2013 says the “ from
the date of the incorporation mentioned in the certificate, such the subscribers to
the memorandum and all other person who may from time to time, become the
members of the, shall a body corporate by the name contained in the
memorandum, capable of exercising all the functions of an incorporated company
and having perpetual succession with power to acquire, hold and dispose of
property both movable and immovable, tangible and intangible to contract and to
sue and be sued by the said name”.
• From the date mentioned in the Certificate of Incorporation, a Company acquires a
legal personality distinct and separate from its members.
 Salomon v Salomon Co Ltd (1897) AC 22
•A businessman named Mr. Aron Solomon, who used to specialize in manufacturing leather
boots.
•He made a Ltd Company named Salomon & Co Ltd and sold his business to this company at
38000 pounds.
•Total share capital of this company was 40000 shares and the value of share was 1 pound
each.
•The Memorandum of the company had 7 subscribers they were- Salomon, his wife, daughter
and his four sons. Salomon had 20000 shares and 10000 debentures.
•After 1 year, the company goes into liquidation.
•On looking at the assets and liabilities, the company had 6000 pounds as assets and 17000
pounds as liabilities. Out of 17000 pounds, 10000 pounds was to be given to Salomon and
rest 7000 pounds to unsecured creditors.
•Issues :-
–Ques- 1- Whom to pay first? The unsecured creditor or Salomon?
–Ques-2- The control, administration and management everything was in the control of
the family, so, the identity of the company and of the family is same or will it be
separate?
Salomon v Salomon Co Ltd (1897) AC 22
• The unsecured creditors said that they should get the money first because the
Company has no separate legal entity of its own and was just acting as a legal
agent of Salomon. They further said that Salomon is a shareholder and has
control over company. Henceforth, they should get the money first as Salomon
is not a creditor.
• Complying with all the legal requirements of incorporation. And therefore it
had a separate legal existence from its members.
• Court said it is difficult to understand how a body corporate created by statute
can loose its individuality by issuing bulk of its capital to one person. The
company is at law a different person altogether from the subscribers and
though it may be that after incorporation the business is precisely the same;
the same persons are managers; and the same hand receive profits, the
company is not their agent or trustee.
• Court said, after the incorporation of the company becomes an independent
legal person and salomon being the debenture holder will get the priority
above the unsecured creditor. Therefore, Salomon will be paid first.
 LEE Vs LEE Air Farming Co Ltd. (1961)
• The Total share capital is 3000 shares and Lee has 2999 shares.
• Lee himself becomes the shareholder, managing director and the chief pilot of
the company. So, he is a salaried employee of the company.
• While working for the company, a plane crashes in which Lee is also there and he
dies.
• Here we have to focus that there is a master-servant relationship between
company and its employees i.e. during the course of employment if the servant
gets harmed or any injury is suffered then Master has to compensate him.
• So, Mrs. Lee asks for compensation from the Company.
• Issue- That whether Lee vs Lee Farming Co. Ltd were separate entity or same
because Lee was managing director and chief pilot. Also, Mr. Lee had all the
share capital of the company.
• Insurance company said that when this accident happened Lee was a Master also
and he was a managing director of the company and at the same time employee
also. So, Mrs. Lee is not entitled to any compensation
• Based on the principle of Salomon, the Court said
even though Mr. Lee was controlling the Company
but, Lee and the Company are two separate legal
entities as considering this he could act as a Master
and as a servant as well. This compensation is being
as asked when Lee was serving as a servant of the
Company and hence, Mrs. Lee is entitled to the
compensation.
• So, this is the concept of Corporate Personality of
Legal Personality which says that post-
incorporation company and its members become
two separate legal entities.
• In India, this concept was recognized in the case of Re. Kondali Tea Co.Ltd
Case i.e. of Legal Personality that members and company are two
separate legal entities.
• The 2nd concept recognized was that the company was of perpetual
succession, it means from the existence of its members it doesn’t affect
the company. If any member dies or incase of insanity or insolvency, it
doesn’t affect the company’s existence. The existence of the Company is
perpetual i.e. continuous.
• The 3rd Concept is Company can sue and can be sued by its own name.
Company can file a case by it’s own name and can also file case on
company.
• The 4th concept it has is of limited liability, the members of the company
have limited liability
• In Tata Engineering & locomotive company ltd. V. State of Bihar, described the
legal position of company in following words: “the corporation in law is equal to
a natural person and as a legal entity of its own. The entity of the corporation is
entirely separate from that of its shareholders” recently in State Of Karnataka V.
Salve J. Jayalalitha, the supreme court emphasized that the company is a
separate entity from members subject to the exception when company is a mere
sham or clock used to misdirect shareholders and authorities.
 LIMITED LIABILITY
• The company, being a separate person, is the owner of its assets and bound by
its liabilities. Members, even as a whole, are neither the owners of the
company's undertaking, nor liable for its debts. Where the subscribers exercise
the choice of registering the company with limited liability, the members‘
liability becomes limited or restricted to the nominal value of the shares taken
by them or the amount guaranteed by them. No member is bound to
contribute anything more than the nominal value of the shares held by him.
• Company limited by Guarantee: Liability of shareholders is limited to a certain
amount of guarantee mentioned in the memorandum payable only at the time
of wind up and losses occurred by the company.
• Company limited by Shares: Liability of the members shall be limited to the
extent of unpaid money or shares held by them.
• A- 50%
• B-30%
• C-20%
• Company XYZ pvt ltd paid-up capital is Rs. 1
Lac
 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.
• The property of the company is not the property of the
shareholders; it is the property of the company'.
• The property, however much, the shareholders may come
and go, remains vested in the company, and the company
can convey, assign, mortgage, or otherwise deal with it
irrespective of these mutations."
 PERPETUAL SUCCESSION
("Members may come and go but the company can go on
forever.“)

“Men may come and men may go out but the company exists.”

• An incorporated company never dies. It is an entity with perpetual

succession. A, B and C are the only members of a company, holding all its
shares. Their shares may be transferred to, or inherited by X, Y and Z, who
may, therefore, become the new members and managers of the company.
But the company will remain the same entity. In spite of the total change in
membership, "the company will be the same entity, with the same privileges
and immunities, estates, and possessions".
• Perpetual succession, therefore, means that the membership of a company
may keep changing from time to time, but that does not affect the company's
continuity .
• The death or insolvency of individual members does not, in any way, affect
the corporate existence of the company.
 TRANSFERABILITY OF SHARES
• The capital of the company is divided into parts called
shares.
• The shares are said to be moveable property, and subject to
certain conditions, freely transferable, so that no share
holder is permanently or necessarily wedded to a company.
• Accordingly the Companies Act in Section 44 declares: "The
shares or debentures or other interest of any member in a
company shall be movable property, transferable in the
manner provided by the articles of the company." Thus,
incorporation enables a member to sell his shares in the
open market and to get back his investment without having
to withdraw the money from the company. This provides
liquidity to the investor and stability to the company.
 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 court of law. All legal proceedings against the
company are to be instituted in its own name.
• Criminal complaint can be filed by a company but it must be
represented by a natural person. It is not necessary that the
same person should act as a representative throughout.
• Example- TVS Employees Federation vs TVS Sons & Ltd
 CONTRACTUAL RIGHTS
• Company being a separate legal entity
different from its members, can enter into
contracts for the conduct of the business in its
own name.
 SEPARATE MANAGEMENT
• The members may derive profits without
being burdened with the management of the
company.
VOLUNTARY ASSOCIATION FOR PROFIT
• A company is a voluntary association formed
by an individual or group of individuals. Most
companies are formed with the motive of
profit-making except the Section 8 companies
(NGO). Profit earned is divided among the
shareholders or saved for the future
expansion of the company.
 LIMITATION OF ACTION
• A company cannot go beyond the power
stated in its Memorandum of Association. The
Memorandum of Association regulates the
power and fixes the objects of the company.
Acts done beyond the powers given in the
Memorandum of Association are ultra-vires
and hence treated void.
 TERMINATION OF EXISTENCE
• A company is created by law, throughout its
life, carries on its affairs according to the law,
and ultimately is wind up by law. A company
can be terminated only by the procedure of
winding up.
 PRIVATE COMPANY S.2(68)
• Restricts the right to transfer its shares.
• Prohibits any invitation to the public to subscribe for any
securities of the company.
• Except in case of one person company, limits the number of its
members to two hundred.
• Its minimum paid up capital is Rs. One Lac.
• Where two or more persons hold one or more shares in a
company jointly they shall, for the purposes of this clause, be
treated as a single member.
• Provided further that-
– Persons who are in the employment of the company; and
– Persons who having been formerly in the employment of the
company, were members of the company while in that employment
and have continued to be members after the employment ceased,
shall not be included in the number of members.
 Public Company S.2(71)
• As per Section. 2(71) of Companies Act, 2013
Public Company means a company which-
– Is not a private company and;
– Has a minimum paid-up share capital as may be
prescribed;
• Provided that a company which is a subsidiary of a
company, not being a private company, shall be
deemed to be a public company for the purposes
of this Act even where such subsidiary company
continue to be a private company in its articles.
This clause has been amended with effect from 29th May, 2015 so there is
no minimum capital
Transferability of Restrict the Right to Transfer Freely Transferable
Shares it shares
Number of May have 2 Directors Atleast 3
Directors
Statutory Need not to hold it Must hold the meeting and
Meeting file with the Registrar

Quorum 2 members Unless otherwise stated in

the Article, atleast 5
 ONE PERSON COMPANY
• Why One Person Company? Why not Sole
Proprietorship?
– In sole Proprietorship, you need not register and
hence, not many compliances. But, the biggest
disadvantage was that your business liabilities also
becomes your personal liabilities.
• OPC is a concept between Sole proprietorship and
private limited company.
• In OPC, the management remains in your hand.
 ONE PERSON COMPANY (S.2(62))
• One Person Company (OPC) which has only
one person as a member.
• Company’s replacement for sole
proprietorship.
• Only ‘one’ person can be a shareholder.
• Legal And Financial Liability is Limited.
• S. 3((1)(c))- that one person company shall be
treated as Private Company.
 FORMATION OF OPC
• One Person should subscribe his name to Memorandum and comply with
the requirements of Act, 2013 in respect of Registration.
• Section. 3(1) (c ).
• Only an Indian Citizen and Resident of India is eligible to incorporate a
OPC.
• Memorandum should indicate the Name of the Person (Nominee) who
shall become the member of the company in the event of Subscriber’s
Death or his incapacity to Contract. Prior Consent of the Nominee should
be obtained.
• The Nominee person may withdraw his consent in such manner as maybe
prescribed.
• The concept of Perpetual Succession might not apply to OPC because if
the the Nominee doesn’t want to continue the company, then the
company will dissolve.
• The Member of the OPC may at anytime Change the Nominee in such
manner as maybe prescribed. The same shall be intimated to ROC within
such Time and Manner as prescribed.
• No one can make more than one OPC and cannot be a nominee in more
than one company.
• An OPC can start with minimum authorised capital of Rs. 1
Lac and no mandatory requirement of minimum Paid-up
capital.
• OPC has a minimum requirement of One director only
which can be extend up to maximum of 15 directors. The
annual general meeting is not mandatory in OPC. The OPC
is required to conduct minimum two board meetings in a
calendar year, and one meeting in each half of a calendar
year.
• If you want to extend more than 15 directors then you can
do it by passing a board resolution.

• U01110UP2020OPC135546, U01111HR2020OPC087958,
U01111MH2018OPC311992
• https://www.zaubacorp.com/company-list/nic-A/company-
type-OPC/p-1-company.html
 Convert OPC to PVT Ltd Company
• If the paid-up share capital exceeds rupees 50
lakhs or if its average turnovers exceed INR 2
crores then within two months, the OPC could
convert into a private limited company. OPC has
to communicate voluntary conversion to a
registrar of companies in form INC 5 within sixty
days.
• If Average turnover in last 3 financial year is more
than 2 Crore then in that case OPC has to
compulsorily convert to Pvt Ltd Company.
KINDS OF COMPANIES ON BASIS OF
OWNERSHSIP
 CHARTERED COMPANIES
• The ROYAL CHARTER i.e. a Document signed by the
King or Queen of a country.
• This gives an Organization Particular Rights.
• The ‘Crown’ in the exercise of the Royal
Prerogative to give assent to the person who wants
to incorporate the company.
• Such companies or corporations are known as
Chartered Companies.
• For example- East India Company (1600), Bank of
England (1694).
• Such companies do not exist post independence.
 STATUTORY COMPANIES
• A company may be incorporated by means of a special
act from the Parliament or any State Legislature.
• These companies do not require any MOA or AOA.
• To make any change in the structure of the Company it
is only possible by Amending the Act’s creating them.
• It cannot be regarded as a Department of
Government.
• The Annual Report on the working of each Statutory
Company is required to be placed on the table of the
Parliament/State Legislature.
• Examples: RBI ( RBI ACT, 1934) , LIC (LIC ACT, 1956),
Unit Trust of India, Food Corporation of India.
 REGISTERED/INCORPORATED
COMPANY
• Company registered under Companies Act,
2013 or any earlier Act. They are called as
Registered Companies Act.
• A Registered Companies may be Company
Limited by Shares, Company Limited by
Guarantee and Unlimited Liability.
 HOLDING COMPANY
&
SUBSIDIARY COMPANY
Holding Company Subsidiary Company
A Subsidiary Company is one in which another
A Holding Company is a company that owns
firm owns more than 50% of the shares and has
more than half of another company’s stock and
complete control over the company’s
hence has the capacity to control its operations.
operations.

A Holding Companies in charge of the A subsidiary’s operations have little or no

management and operations of the subsidiaries control over the Company’s operations. Even
it owns, and it has the power to appoint and subsidiaries that operate independently are
remove board members, directors, and other ultimately financially controlled by their parent
key management and personnel. firm (Holding Company).

On the other hand, the Subsidiary Company is

The Holding Company has all ownership rights
dependent on the Holding Company, and major
and duties over its subsidiaries.
decisions taken by the Holding Company

To diversify its investment, minimize risk, and, When a subsidiary becomes a subsidiary of
in some cases, take advantage of shared loss another holding company, all of its subsidiaries
and tax consolidation, a Holding Company may become subsidiaries of the top holding
invest in subsidiaries in many businesses. company.

By making the company a Subsidiary, the Subsidiary Company, on the other hand,
Holding Company can benefit from its protects themselves from business uncertainty
enormous capital and limit market competition and provides a safeguard against business
for the company. loss.
 ASSOCIATE COMPANY
• S. 2(6)- “associate company”, in relation to another
company, means a company in which that other
company has a significant influence, but which is
not a subsidiary company of the company having
such influence and includes a joint venture
company.
• Significant influence means:-
– Control of atleast 20% of voting power;
– Control of or participation in business decisions under an
agreement;
Mahindra And Mahindra Limited Has Tech Mahindra Ltd. As
its associate Company With 26.04% Holding (As Per Annual
Report 2019-20).
Basis of difference Associate Company Subsidiary Company
Parent company holds minimum 20%
Parent company holds more than
% of holding but not more than 50% of the total
50% of the total voting power
voting power

Here parent company has a significantThe parent company has

influence to participate in the financial controlling power to participate
Controlling Power
and operating decisions of the associatein the financial and operating
company. decisions of the subsidiary

The composition of the

The parent and associate may have
Management decisions subsidiary is controlled by the
certain board members in common.
parent company
Here Investment is made to
Investment in associates is done to
expand the business by forming a
Purpose of investment hold significant ownership for a longer
new company or acquiring the
period of time.
business of an existing company.

The parent company may or may not getThe parent company controls the
Day to day business involved in the day-to-day business of theday to day business decisions of
associate company. the subsidiary.
Government Company
 FOREIGN COMPANY
• Whether a company is Foreign Company or Indian
Company it will mainly depend on the
incorporation of a company.
• Incorporation is the nationality of the company.
• A ‘Foreign Company’ has been defined under
section 2 (42). It defines a foreign company as any
entity that has been incorporated outside India
which a) Happens to have a place of business in
India either physically, through any other agent or
via electronic/digital means. B) Business activities
are conducted by the entity in any other manner.
 MULTINATIONAL COMPANY
• Multinational company is one which is incorporated in
one country (called the home country) but whose
operations extend beyond the home country and which
carries on business in other countries (called the host
countries) in addition to the home country.
• It must be emphasized that the headquarters of a
Multinational Company are located in the home country.
• Their main function is to provide access of different
products to different countries.
• Simply, a company with production and distribution
facilities in more than one country.
• Example- Microsoft Corporation (India), Nestle
(Switzerland)
 MNC
• Merits
– Employment Generation
– Flow of Foreign Capital
– Proper use of resources
– Technical Development
– End of Local Monopoly
– Improvement in Standard of Living

• Demerits
– Danger for domestic resources
– Repatriation of profit
– Danger to independence
– Exploitation of people
– Competition to MSME
 ADVANTAGES OF A COMPANY
• Limited Liability
• Perpetual Existence
• Professional Management
• Expansion Potential
• Ability to Transfer Shares
• Sharing the Risk
DISADVANTAGES OF A COMPANY
• Complexity in Formation
– The formation of a company involves a lengthy and complicated
procedure.
– Many legal formalities have to be completed, many documents
have to be prepared and submitted.
– Various permissions have to be obtained
– Registration/fees have to be paid to the registrar, which is again
an additional expenditure.

Forms ROC (checks)

MCA 21 + + then send it again
If any error
Attachments fees

Then you have to

Certificate of rectify the error and
Incorporation fill it again and send
it back
 Lack of Secrecy

– As per companies act 1956 and 2013, the

company is required to provide a lot of
information to the office of Registrar of
Companies.
– Such information is available to general public
also. So it is therefore difficult to maintain
complete secrecy about the operation of
company.
 Lack of Personal Interest
• Company is not managed by owners but it is
managed by the professional managers. These
managers get salary for their service.
• The increase in company’s profit will not
increase the income of managers. Hence,
there is lack of motivation and incentive to
perform efficiently.
 Numerous Regulations
• The company form of business has to comply with
various legal formalities at different stages and there
is penalty if the company fails to meet any of the
formalities.
• Example of some Regulations- company has to hold
minimum four Board of Director Meetings in a year,
one AGM throughout the year, any change in the
company has to be informed to ROC in 30 days,
Annual returns has to be filed
• A company has to file returns and annual reports
with the Registrar.
 DELAY IN DECISIONS
• In company all the important decisions are
taken in the board meeting or after consulting
various persons.
• And once decisions are taken, these have to be
communicated to everyone which is again a
lengthy process.
• So taking and implementing decisions is a
lengthy process in a company.
 Oligarchic Management
• Although we say that there is a democratic
setup in the company form of business but this
democratic setup exists only on paper
• In real practice, company is in the hands and
control of few people i.e. the directors.
• These directors have complete control over the
company.
• These people take all the decisions keeping in
mind their personal interest and benefit,
ignoring the interest of shareholders and the
company.
 Conflicts In Interests
• In company various groups of people are involved
such as shareholders, debenture holders,
employees, directors etc.
• Each group has different interests, for example
debenture holders want their rate of interest to
increase whereas shareholders want to reduce it
so that leftover income is more.
• There is possibility of conflicts between various
groups.
 COMPANY IS NOT A CITIZEN
• Though a company is a legal person, it is not a citizen under the constitutional law
of India or the Citizenship Act, 1955. The reason as to why a company cannot be
treated as a citizen is that citizenship is available to individuals or natural persons
only and not to juristic persons.
• The question whether a corporation is a citizen was decided by the Supreme Court
in “State Trading Corporation of India v. Commercial Tax Officer”. Since a company
is not treated as a citizen, it cannot claim protection of such fundamental rights as
are expressly guaranteed to citizens, but it can certainly claim the protection of
such fundamental rights as are guaranteed to all persons whether citizens or not.
• In Tata Engineering Company v. State of Bihar it was held that since the legal
personality of a company is altogether different from that of its members and
shareholders, it cannot claim protection of fundamental rights although all its
members are Indian citizens.
• Though a company is not a citizen, it does have a nationality, domicile and
residence.
• In case of residence of a company, it has been held that for the purposes of
income tax law, a company resides where its real business is carried on and the real
business of a company shall be deemed to be carried on where its Central
management and control is actually located.
 LIFTING OF A CORPORATE VEIL

• 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.
• Lifting up of a corporate veil is possible in following
scenarios:-
Fraud or Improper Conduct
• Jones v Lipman: Facts of the case
– Lipman had a contract with Jones regarding a property he owned
but, later Lipman changes his mind and to save from specific
performance of contract. He sold his property to his own
Company.
– When Jones demand the property to fulfill the initial contract
between Jones and Lipman had regarding the property.
– Lipman tells Jones that he has sold that particular property to his
Company.
– Jones filed a case against Lipman.
– The Court then saw that the Company has only 2 members one
Lipman and one his clerk. The Court stated that to save himself
from specific contract. He used company as a mask which is not a
legitimate use of Corporate Personality. So the Court ruled that
Lipman has to perform the contract with Jones.
COMPANY IS CLOAK or SHAM
– This means that Company is made for false activities or
representation.
• Gilford Co. Ltd v Horne
– Facts- Gilford Co. Ltd is a company whose employee is
Horne. The Company enters into a contract with Horne
that he will never solicit (entertain) our customers
separately outside for your own beneficial purpose. Horne
agrees and signs the contract. Later, Horne opens his own
company and his working is similar to Gilford. Horne’s
Company starts to approach the customers of Gilford.
– Gilford goes to the court. The Court using the principle of
Corporate veil and said that the Company was made only
for unlawful activities and this act is invalid. So, the Court
had put an injunction on Horne and his company.
 Evasion of Tax
• If Corporate Personality is being used to evade taxes or to
save yourself from paying taxes then Courts can use principle
of Lifting of Corporate Veil.
• Case- Workmen of Associated Rubber Industry Ltd vs
Associated Rubber Industry Ltd.
Determination of Enemy Character
• If in any scenario India enters into war with a country, so the
citizens of that country will be alien enemy for India.
– Daimler Co. Ltd v Continental tyre & Rubber Co. Ltd
German Tyre & Rubber
Citizens Manufacturing

During this time World War 1 started between Germany and England
Damler Co Ltd
(Incorporated in England where only 1 Continental Tyre
partner is of England and rest of them & Rubber Co.
are Germans)
• So when Daimler asked for money from
Continental Tyre. They said that Daimler is a
German Country and amidst the war giving
money to an enemy country will be an offence.
• So, Daimler approached the Court regarding the
same. The Court applying the principle of
Corporate Veil, realized that the management
and administration is being managed by German
Citizens. The entire transaction was also related
to Germany. So, during the war Continental Tyre
Co need not deal in any transactions with
Daimler Co.
STATUTORY PROVISION FOR LIFTING
OF CORPORATE VEIL
• Misrepresentation In Prospectus (Section- 34 and
35)
– In case of misrepresentation in a prospectus,every
director, promoter and every other person who
authorize such issue of prospectus incurs liability towards
those who subscribed for shares on the faith of untrue
statement.
• Misdescription Of Company’s Name (Section.
12(8)):
– An officer of an organization (company) who signs any
bill of trade (cheque) wherein the name of the
organization isn’t referenced in the recommended way,
such official can be held personally liable to the holder of
the bill of trade etc. except if it is properly paid by the
company.
• Failure To Refund Application Fee (Section. 39)
– The directors of the company shall be jointly and
severally liable to repay the money (application money)
with an interest of six percent per annum from the date
of expiry of one hundred and thirtieth day if they fail to
repay the application money without interest within one
hundred and twenty days when the company fails to
allot shares.
• For Investigating Company’s Ownership:
(Section.216)
– The Central Government may appoint Inspectors to
investigate and report on the membership of the
company for the purpose of determining the true
individuals who are financially interested in the
company and who control its policy.
• Fraudulent Trading (Section 339)
– 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 of the company
or any other persons or for any fraudulent purpose.
– the Tribunal, on the application of the Official Liquidator,
or the Company Liquidator or any creditor or contributory
of the company, may, if it thinks it proper so to do, declare
that any person, who is or has been a director, manager,
or officer of the company or any persons who were
knowingly parties to the carrying on of the business in the
manner aforesaid shall be personally responsible, without
any limitation of liability, for all or any of the debts or
other liabilities of the company as the Tribunal may direct.
– Every person who had the knowledge of such fraud will be
punishable with imprisonment for a term which may
extend to two years or with a fine which can extend up to
fifty thousand or with both
• Liability Of Ultra Vires Act
– Every Director and Office of the Company will be personally
liable for the Ultra Vires Act (act done beyond one’s Legal
Power)
• Reduction Of Number Of Members Below The Statutory
Minimum:
– If at any time the minimum number of members of a company
falls below two, in case of Private company or below seven, in
case of Public company; then the company can carry on the
business for a period of six months while the number is so
reduced.
– Every person who is a member of the company during the time
that it still continues to carry on the business, knowing the fact
that the minimum number of members is reduced and the grace
period of six months is also finished, then as the case may be,
the company and its members will be held liable and can sue an
amount which they made during those six months or else the
company may be severally sued, therefore.