Introduction of Companies

SR. TOPIC
NO.
1 DEFINITION AND MEANING OF COMPANY
2 CHARACTERISTICS OF COMPANY
3 LIFTING OF CORPORATE VEIL
4 LIFTING OF CORPORATE VEIL UNDER STATUTORY PROVISIONS
5 LIFTING OF CORPORATE VEIL UNDER JUDICIAL INTERPRETATIONS
6 DIFFERENCE BETWEEN COMPANY AND PATNERSHIP
7 ILLEGAL ASSOCIATION
8 IS COMPANY A CITIZEN?

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Section 2(20) of the companies Act, 2013 defines-
“Company means a company
 formed and
 Registered under this Act or an existing company.”

{ }
Company means –
 “an association of persons
 who contribute money or money’s worth to a common trade or business, and
 Who share the profit or loss arising there from
 The common stock so contributed is denoted in money and is the capital of the
company.
 The persons who contribute it, or to whom it belongs are members.
 The proportion of capital to which each member is entitled is his share.
Shares are always transferable although the right to transfer them is often more or less
restricted.”

Voluntary association
A company is a voluntary association of persons.

Separate legal Entity

A company is a separate legal entity distinct from its members.
It means –
 The assets of the company are not the assets of its members.
 Conversely, the assets of the members are not the assets of the company.
 A creditor of a company can look only to the assets of the company for the satisfaction of
his claims.
He cannot look beyond the company and make the assets of the members liable for his claims.

QUESTION
Q] Two companies are incorporated with the same set of shareholders. Are
they same or distinct under the Companies Act, 2013? Discuss.

Salomon Vs Salomon & Co Ltd.

Meaning
A company in the eyes of law is separate from its members. The company at law is a different
person altogether from the subscribers to the memorandum. The company is an independent
legal entity.

Facts
Aron Salomon, carrying on business as leather and shoe manufacturer sold his solvent business

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to a company. The consideration was 38,782 pounds of which Aron Salomon took 20,000 shares
of 1 pound each, secured debentures worth 10,000 pounds and balance in cash. His wife,
daughter and four sons took 1 share each. A year later the company wound up on which date
the assets were worth 6050 pounds and liabilities were 18,000 pounds. Payment was made to
Salomon first as he was a secured creditor.

Contention
The contention of the unsecured creditors was that, the vast possession of shares made him
absolute master of the company which was conducted solely to him. They claimed that
Salomon was liable to indemnify the company against claim of ordinary creditors.

Decision
The court held, the company was not an agent or a trustee for Salomon. The company is entirely
different from the individual. The creditors’ contention could not be upheld.

Limited Liability
Nature of company Extent of liability of member
company limited by the liability of members is limited to the unpaid value of
shares the shares
company limited by The liability of members is limited-
guarantee
 To such amount as the members may undertake to
contribute to the assets of the company,
 In the event of its being wound up.
Company limited by Aggregate of amount unpaid on the share held by a
guarantee and member and the amount guaranteed by him
having share capital
Unlimited company Every member is liable to contribute to the assets of the
company until all the debt of the company are paid in
full

Perpetual Succession
“Perpetual” means- “forever”.
 Since the process of law creates the company, only the process of law can kill it.
 Putting an end to the legal status of the company is called dissolution. Until it is
dissolved it continues to be a legal person.

Perpetual succession, therefore, means-

 That a company’s existence persists irrespective of the change in the composition of its
membership.
 Life of the company does not depend on the life of its members.
 It continues to exist even if all its human members are dead.
 It is generally said that ‘member may come and go, but the company goes on forever’.
Thus, a company never dies.

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 Q] A Company incorporated under the companies Act, 2013 never dies except
when it is wound-up as per the law.

Transferability of shares
 The capital of the company is divided into parts, called shares.
 These shares are, subject to certain conditions, freely transferable,
 So that no shareholder is permanently or necessarily wedded to a company.
 In Public company shares are freely transferable
 In case of Private company, the right to transfer the share is restricted

Separate Property
 A company can own and enjoy property in its own name.
 Members are not owner or co-owners of the company’s property
 Members have no insurable interest in the property of the company

Macura Vs Northern Assurance Co. Ltd

Meaning
Company is a legal person. It holds and owns property in its own name. The property of the
company Is not the property of the shareholders.

Facts
Macura was the holder of all but one share of a timber company. He was also a substantial
creditor. Considering his interest in terms of shareholding and creditorship he insured the
company's timber in his own name. Later the timber was destroyed by fire, for which he
claimed insurance.

Contention
The insurers contended that the company was not a property of an individual. It refused to
compensate.

Decision
The court held that the property of the company cannot be an individual shareholders property
irrespective of the quantum of shares he possesses. The insurance company was not liable.

Capacity to sue
Any litigation by or against the company can be conducted in the company’s corporate name
In Abdul Haq v. Das Mal an employee was not paid his salary for several month. He filed a
suit against the director of the company for the recovery of the amount of salary due to him. It
was held that he will not succeed because the remedy lies against the company and not against
the directors or members of the company.

QUESTION
Q] The Separate personality of a company is a statutory privilege and it must
be used for legitimate business purposes only.
[[

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Meaning of The whole law of corporation is in fact based on this history of corporate entity.
corporate But sometimes there could be an abuse of the corporate device. This gives birth
veil to the theory called “lifting the veil of corporateness.” Where the courts and
legislature ignore the company and concern themselves directly with the
members or mangers, the corporate veil is said to have been lifted.
Judgment of Lord Mac Naghten defining on corporate veil
(Salomon v. Salomon & Co.).
 “The company is at law a different person altogether from its subscribers to the
memorandum,
 and though it may be that after incorporation the business is precisely the same as it was
before and the same persons are managers, and the same hands receive the profits,
 The company is not in law the agent of the subscribers or trustees for them.
 Nor are the subscribers, as members, liable in any shape or form,
 except to the extent and in the manner provide by the Act”.
 Further, from the juristic point of view, a company is a legal person distinct from its
members
 It has its own corporate personality.
 This principle may be referred to as ‘the veil of incorporation’.

In Life Insurance Corporation of India v. Escorts Ltd. (1986) Comp. Cas. 548 (SC), the Supreme
Court observed that while it is firmly established every since in Salomon v. Salomon and Co. Ltd. (1857)
that a company has an independent and legal personality distinct from the individuals who are its
members, it has since been held that the corporate veil may be lifted, the corporate personality may be
ignored and the individual members recognized for who they are in certain exceptional circumstances.
Effect of  The effect of this principle is that there is a fictional veil between the
corporate veil company and its members.
That is, the company has a corporate personality which is distinct from its
members.
Misuse of  This principle must be used for legitimate business purposes only.
corporate veil  Where the legal entity of a corporate body is misused for
principal - fraudulent and
- dishonest purposes,
the individuals concerned will not be allowed to take shelter behind the
corporate personality.

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Lifting of  The human ingenuity, started using this veil of corporate personality
corporate veil blatantly
- as a cloak for fraud or
- improper conduct.
 Thus it became necessary for the Courts to break through or lift the
corporate veil or crack the shell of corporate personality or disregard the
corporate personality of the company.
 Thus 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 (Gallaghar v. Germania Brewing Co.).
There are circumstances when the members, directors or certain persons can be made
personally liable for the debts or acts of the company. These circumstances can be studied
under two heads.
Lifting of corporate Veil

Under the statutory provisions Under Judicial decisions

Reduction of If -
membership  The number of members shall fall below the statutory minimum (i.e.
below statutory 2 in the case of private company and 7 in case of public company).
minimum  The company continues to carry on business for more than 6 months
{Sec 3A} after the number is so reduced, and,
(As per
Then-
Companies
 The remaining member who are aware of such fact
Amendment Act,
Shall be personally liable for debts contract after 6 months.
2017)
Failure to If –
refund  The director of a company fails to refund the application money of
application those applications who have not been allotted shares, within 75 days
money of the date of issue of the prospectus.
{Sec 39}
Then –
The directors of a company are jointly and severally liable to repay the
application money with interest at the rate of 12% p.a. from the expiry of
60 days to the applicant.
Improper use If-
of name  an officer of a company signs a cheque, bill of exchange, hundi,
{Sec 12} promissory note where in the name of the company is not mentioned
in its full form including where necessary, the word “Limited” or
“Private Limited”, as the case may be,
then-

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 apart from penal liability, the officer responsible for the default becomes
personally liable on those instruments, unless the company duly pays
those amounts.
Fraudulent In the course of winding up of a company-
Trading
If-
[Sec 339]
 in the winding up process it appears that certain persons have carried
on the business of the company
(i) with the intent to defraud the creditors of the company, or
(ii) for any fraudulent purpose,
Then-
Such persons can be made personally liable for all or any of the debts of
the company without any limitation as to liability, as the court may direct.

Lifting of corporate veil (statutory provisions) summary

Reduction of
membership Fraudulent
below statutory Trading
minimum:
Failure to
refund
application
Misdescription In the course of winding
If- money up of a company-
ü no. of members fall below
of company’s If-
name ü in the winding up
the statutory minimum
process it appears that
ü company continues to carry
certain persons have
on business for > 6 months
after the number is so carried on the business
ü director of a company fails to refund the of the company
reduced If-
application money of those application who (i)with the intent to defraud
have not been allotted share, within 130 ü Any officer of a company the creditors of the
days of the date of issue of the prospectus . sign on behalf of the company, or
company any contract or any (ii)for any fraudulent
negotiable instrument but purpose,
fails to correct mention the
name of the company

The courts may ignore the corporate entity of a company where it is used for tax evasion.
Sec 179 of the Income Tax Act provides as follows:
 for any tax assessed on a Pvt. Company whether before, during or after its liquidation,
 the directors are personally liable for the payment of such tax.
 Such liability is imposed in the interest of revenue.
 Where it is desired to determine for tax purposes the residence of a company, the court will
lift the veil and find out where its central management is, and that place will determine the
residence of the company.

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 Sir Dinshaw Maneckjee Petit
Meaning
The court may ignore the status of separate legal entity of a company If it Is used for tax
evasion or reduction of tax liability.

Facts
'D' an assessee received huge dividend and interest income. With the intention of reducing his
tax liability he transferred his investments to four private companies, which were formed by
'D' himself. These four companies had no business or operation. The source of funds was these
investments. As and when required 'D' was granted loan by the company, which was never
repaid.

Contention
'D' contended that every company was a separate legal person and it had the right to act under
its own legal banner.

Decision
The court held, tax planning might be legitimate provided it is within the framework of law. The four
companies were formed for the sole intention of tax evasion or circumventing tax obligation. 'D' was
held liable to pay.

Where a company is formed to escape a legal obligation, the court will not recognize such a
company as separate entity. The legal personality of a company may also be disregarded in the
interest of justice where the machinery of incorporation has been used for some fraudulent
purpose like defrauding creditors or defeating or circumventing law.

Gilford Motor Co. Ltd Vs Horne

Meaning
The court will look behind the veil of the company If it had been used for fraudulent purposes.

Facts
'A' sold his business to 'B' and agreed not to compete with him for a given number of years
within local limits. 'A', desirous of re-entering the business, in violation of the contractual
obligation, formed a private company with majority shareholding.

Contention
'B contended that 'A' had violated the contract. He sought for an injunction on the proceedings
of the company.

Decision
The court granted an injunction restraining ‘A’ and his company, with going ahead in the competing
business.

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 A company is not a citizen.
 But it can have nationality and residence.
 The birthplace of a company, that is to say, the country where it is incorporated, is its
nationality.
 Under the Contract Act a contract with a foreign party becomes unenforceable when the
two countries are at war.
 But how would you decide whether a company is an alien enemy or not?
 You have to look behind the company and find out who are controlling the company.

Daimler Co. Ltd Vs Continental Tyre and Rubber Co. Ltd.

Meaning
A company may be called an enemy when the people controlling the affairs are residents of a
country considered as an enemy. In such a case the court may examine the character of the
persons In real control of the Company and declare It to be an enemy.

Facts
A company was incorporated for the purpose of selling tyres in England. The tyres were made
in Germany by a German company, which held all the shares of the company in England. The
holders of the shares and directors were German residents. During the First World War the
English company commenced an action for recovery of trade debts from another English
company.

Contention
The director contended that the action for recovery of trade debts was purely in the interest of
the company.

Decision
The court held that the newly incorporated company in England, though incorporated under the
English Law, was an alien company. The payment of debt would result in trading with an enemy. The
company was not allowed to proceed with the action.

Where a company is acting as agent for its shareholders, the shareholders will be liable for the
acts of the company.
F.G.Films Ltd.
Meaning
The corporate veil may be lifted Invoking the principle of agency and where the corporate
facade Is only an agency and instrumentality.

Facts
An American Film Corporation wanted to make a picture in India named "Monsoon". For this
purpose a nominal British company was formed with 100 pounds capital. The company had
three directors, of whom two were Britishers and the other was the president of the American

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film corporation. This nominal company had no staff or place of business. The entire technical
and financial assistance was provided by the American Film Corporation.

Contention
The nominal British company was considered to be a separate legal entity and did not act as an
agent

Decision
The Board of trade in England refused to recognize it as a British Film.

Where the courts find that there is avoidance of welfare legislation, it will be free to lift the
corporate veil.

Workmen of Associated Rubber Industries Ltd. Vs Associated Rubber Industries Ltd.

Meaning
It is the duty of the court in every case where ingenuity is expended to avoid welfare
legislation, to lift the veil and discover true state of affairs.

Facts
'A' Ltd had purchased shares by investing a sum of Rs 4,50,000-The annual dividend on these
shares were shown in the P&L account, which thereby was taken into account for computing
bonus payable. Sometime later, 'A' Ltd transferred these shares to 'C' Ltd, a subsidiary
company wholly owned by it. 'C' Ltd had no other capital other than these shares. It had no
other source of income or business. The dividend income was not transferred to 'A' Ltd,
thereby reducing the available surplus for payment of bonus.

Contention
An industrial dispute was raised by the workmen for including the dividend on profits of 'A'
Ltd.

Decision
The court held, it was true that 'A' Ltd and 'C' Ltd are separate legal entities, but the creation of 'C'
Ltd was solely for avoiding welfare to the workmen and ordered that the dividend income is to be taken
into account for payment of bonus.

The Courts invariably lift the corporate veil or a disregard the corporate personality of a
company to protect the public policy and prevent transactions contrary to public policy.

Connors Bros. Vs Connors.

Meaning
The corporate veil will be pierced to identify the factor that conflicts with the public policy.
The factors may be through the officer In control of the doctrines of the company.

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Facts
A managing director who was in defacto control of the company's affair was a resident of
Germany. During that period Germany was at war with England. He used his position, to
recover certain trade debts. This was intentional because the period of recovery was during
war.

Contention
The managing director contended that the act proceeded by him was purely in the interest of
the company.

Decision
The court held, even if the action of the director towards England could have been in good trust for the
company of the interest which he had carried out the action may be right, the alien company was not
allowed to give money to the enemy due to war. Moreover, the unfair use of position at the time of war
a/so contradicted to the public policy.
In quasi- The courts pierce the corporate veil in quasi-criminal cases in order to look
criminal behind the legal person and punish the real persons.
cases

QUESTION
Q] Explain clearly the meaning of ‘lifting of corporate veil’ in relation to a company
incorporated under the companies Act, 2013. Examining the Judicial decisions, state whether
‘corporate veil’ can be lifted in the following cases:
I. Where the corporate veil has been used for improper conduct; &
II. Where the acts of a company are opposed to workmen?

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 ‘ ’
Company
It is a distinct legal person.
The property of the company belongs to the
company and not individuals.
Creditors of a company can proceed only
against the company and not against its
members.
Member of a company are not its agents.
A member of a company can contract with
the company. Company’s share can be freely
transferred
Restrictions incorporated in the
Memorandum and Articles are effective and
binding.
The liability of the shareholder is limited
either by shares or a guarantee.
A company has perpetual succession i.e. the
death or insolvency of a shareholder or all of
them does not affect life of company.
A company may have any number of
members except for private company limited
to 200 members (excluding past and present
employees and members)
Company’s accounts are legally required to
be audited by a Chartered Accountant.
A company can be dissolved as laid down by
law.
‘ ’
Partnership
It is not distinct from the several persons
who compose it.
The property of the firm is the property of
the individual comprising it as partners.
Creditors of a firm are individual partners
and a decree against the firm can executed
against partners jointly severely.
Partners are agents of firm. A partner can
dispose of the property and incur liabilities
as long as he acts in the course of business.
A partner cannot contract with his firm. A
partner cannot transfer his share and make
the transferee a member of the firm without
consent of other.
Restrictions on a partners’ authority as per
contract do not bind outsiders.
A partner’s liability is always unlimited.
The death or insolvency of partner dissolves
the firm, unless otherwise provided in the
partnership deed.
A partnership firm cannot have more than
50 partners at a time.
The accountant of a firm is audited at the
discretion of the partners.
A partnership firm is the result of an
agreement and can be dissolved at any time
by agreement.

Meaning of Section 464 of Companies Act 2013 read with Rule 10 of Companies
Illegal (Miscellaneous) Rules 2014.
association In layman's language, we can say that, no association or partnership
(Sec 464) consisting of more than fifty persons (rule 10) shall be formed for carrying
on any business with object of acquisition of gain, by association or
partnership or by the individual members, unless it is registered as a
company under this act or is formed under any other law for the time being

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 in force.
**Excludes**:
a) HUF; or
b) An association or partnership, if it is formed by professionals who
are governed by special acts.

**Penalty for Contravention**:

Fine which may extend to one lakh rupees and shall also be personally liable
for all liabilities incurred in such business.

Simply means any form of business entity (association or partnership) other

than company, formed to gain anything, shall not exceed more than 50 in
number.

** It excludes professionals governed by special acts, our 3 professional

institutes are exempted.
 The Institute of Company Secretaries of India,
 The Institute of Chartered Accountants of India, &
 The Institute of Cost Accountants of India.
Effects of  Cannot enter into any contract;
illegal  Cannot sue any member, or outsider, not even if the company is
association subsequently registered;
 Cannot be sued by a member, or an outsider for, it cannot contract any
debts;
 Cannot be wound up by order of the Court.

In BabuLal v. Laxmi Bharat Trading Co., A.I.R. 1966 Raj. 14 (D.B.), an unregistered
association consisting of 65 members was alleged to be formed at the instance of
Government to help it in distribution of grain among public. It was established from
evidence that an element of acquisition of gain was present in its formation. It was,
therefore, held that it was an illegal association and came within the purview of Section
464 of the Act.

QUESTION
Q] The competent Court/ tribunal of law can entertain a petition for winding-up of an
illegal association under company law.

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A Company Citizenship under the Citizenship Act is available only to an individual.
is NOT a Therefore, no company can be a citizen of India.
citizen
No rights of The Constitution of India grants certain fundamental right to citizens. Since
citizens a company is not a citizen, the fundamental rights which are available only
to a citizen, are not available to a company.
A company The Constitution of India grants certain fundamental rights to every person,
has other whether a citizen or not. Thus, a company registered in India can enjoy all
fundamental the fundamental rights which are available to all persons.
rights

“A company has nationality but not citizenship.” Comment.

ANS: Nationality vs. Citizenship of Company

The company, through a juristic person, does not possess the body of a
natural being. It exists only in contemplation of law. Being an artificial
person, it has to depend upon natural persons, namely, the directors, officers, shareholders,
etc., for getting its various work done. However, individuals only represent the company
and accordingly whatever they do within the scope of authority Conferred upon them and
in the name and on behalf of the company, they bind the company and not themselves.

Although company is regarded a legal person (though artificial), it is not a citizen either
under the Constitution of India or the Citizenship Act 1955 [Heavy Engineering Mazdoor
Union V. State of Bihar (1969)].

The Supreme Court of India in State Trading Corporation of India Ltd. V. C.T.O. (1963)
held that a corporation (including company) cannot have the status of a citizen under the
Constitution of India. Thus, under the Constitution, a company has no fundamental rights
which are expressly available to citizens only. It can, however, claim the protection of those
fundamental rights available to all person, whether citizens or not, for example, the right to
own property.

In Narasarapote a Electric Corpn. Ltd. V. State of Madras (1951), the Madras High Court
observed that company incorporated under the Indian Company Act does not satisfy the
requirements of the definition of ‘citizens’ in Article 5 of the constitution and therefore is not
a citizen.

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 SPACE FOR NOTES

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