COMPANY LAW

MEANING AND NATURE OF COMPANY

Company under Companies Act
Section 3(1)(i) of the Companies Act, 1956 defines the expression company with the object of
identifying association of persons to which the companies Act, 1956 is applicable. IT provides as
follows: “A company means a company formed and registered under this Act or an existing
company as defined in Section 3(1)(ii)”. Section 3(1)(ii) lays down that “an existing company
means a company formed and registered under any of the previous company law.

Characteristic features of a company:

CASE STUDIES
Smith v. Anderson
Sheffield v. S.Y.Society
Palmer
Companies Act- 1956
It is an association of persons & it is
an artificial person created by Law.
It is an association of persons who contribute money
in a common stock & who share profits or loss.
It is a company formed under this law or
any previous Law applicable in India
1. Incorporated Association
A company must be incorporated or registered under the Companies Act. Minimum number
required for the purpose is 7, in case of a public company, and 2, in case of a private company
(Section 12).
2. Artificial Person
A company is created with the sanction of law and is not itself a human being, it is, therefore,
called artificial; and since it is clothed with certain rights and obligations, it is called a person.
3. Separate Legal Entity
Unlike partnership, company is distinct from the persons who constitute it. Section 34(2) says that
on registration, the association of persons becomes a body corporate by the name contained in
the memorandum.
In Lee v. Lee Air Farming Limited (1960), a company was formed for the purpose of
manufacturing aerial topdressing. Lee, a qualified pilot, held all but one of share in the company,
and by the articles was appointed governing director of the company and chief pilot. Lee was
killed while piloting the company’s aircraft, and his widow claimed compensation for his death
 Co is separate legal person. Members are different from the company constituting it.
Co has a different legal persona & it is independent from it’s members
Transfer of some assets by shareholders to company is valid transfer between two persons
Income of a company was agriculture income but income of shareholder was not agriculture
income

under the Workmen Compensation Act. The company opposed the claim on the ground that Lee
was not a ‘worker’ as the same person could not be employer and the employee.
Held: There was a valid contract of service between Lee and the company, and Lee was,
therefore, a worker, Mrs. Lee’s contention was upheld.
In Bacha F. Guzdar v. The Commissioner of Income-Tax, Bombay (1955), the facts of
the case were as follows:
The plaintiff (Mrs. Guzdar) received certain amounts as dividend in respect of shares held by her
in a tea company. Under the Indian Income-tax Act, agricultural income is exempt from payment
of income-tax. As income of a tea company is partly agricultural, only 40 per cent of the
company’s income is treated as income from manufacture and sale and, therefore, liable to tax.
The plaintiff claimed that the dividend income in her hands should be treated as agricultural
income up to 60 per cent, as in the case of a tea company, on the ground that dividends received
by shareholders represented the income of the company.
Held by the Supreme Court, that though the income in the hands of the company was partly
agricultural yet the same income when received by Mrs Guzdar as dividend could not be
regarded as agricultural income.

CASE STUDIES
4. Limited Liability
The company being a separate person, its members are not as such liable for its debts. Hence, in
the case of a company limited by shares, the liability of members is limited to the amount
remaining unpaid on shares held by them. Thus, if the shares are fully paid up, their liability will
be nil.
5. Separate Property
Shareholders are not, in the eyes of the law, part owners of the undertaking. In India, this
principle of separate property was best laid down by the Supreme Court in Bacha F. Guzdar v.
The Commissioner of Income-Tax, Bombay.
6. Transferability of Shares
The shares of a company are transferable in the manner provided in the Articles of the company
(Sec. 82). However, in a private company, certain restrictions have to be placed on such transfer
of shares but the right to transfer is not taken away absolutely.
7. Perpetual Existence
A company being an artificial person death, insolvency or retirement of its members leaves the
company unaffected. Members may come and go but the company can go on forever.
8. Common Seal
A company cannot sign like natural persons. Common seal is the official signature of a company.
The articles of association of the company may provide for putting the seal of the company on
documents.
9. Company may sue and be sued in its own name
Another fall-out of separate legal entity is that the company, if aggrieved by some wrong done to it
may sue or be sued in its own name.
 Lifting of the Corporate Veil
• The advantages of incorporation are allowed to be enjoyed only by those who want to make
an honest use of the ‘company’.
• In case of a dishonest and fraudulent use of the facility of incorporation, the law lifts the
corporate veil and identified the persons who are behind the scene and are responsible for
the perpetration of fraud.
• In Cotton Corporation of India Ltd. v. G.C. Odusumathd (1999), the Karnatake
High Court observed that lifting of the corporate veil of a company as a rule is not
permissible in law unless otherwise provided by clear words of the statute or by very
compelling reasons such as where fraud is intended to be prevented or trading with enemy
company is sought to be defeated.
The circumstances under which the courts may lift the corporate veil may broadly be grouped
under the following two heads:
(A) Under statutory provisions
(B) Under judicial interpretations

UNDER 1. Reduction of If, at any time, the number of members of a

membership [Sec. company is reduced below the statutory minimum
STATUTORY 45] (seven in the case of a public company and two in
PROVISIONS the case of a private company), and the company
carries on business for more than six months while
the number is so reduced, every person who is a
member of the company at the time the company
so carries on business after those six months and
is aware of that fact shall be severally (individually)
liable for the payment of company’s debts,
contracted during that time.

2.Misrepresentatio In case of misrepresentation in a prospectus, every

n in Prospectus director, promoter and every other person, who
[Sections 62 & 63] authorizes such issue of prospectus incurs liability
towards those who subscribed for shares on the faith
of untrue statement (Sec. 62).
3. Failure To – In case of issue of shares by a company to the
Return Application public, if minimum subscription, as stated in the
Money [Sec. 69] prospectus, has not been received within 120 days
of the first issue of prospectus, the company must
refund the entire application money within next 10
days failing which directors shall be personally liable to
return the money with interest @ 6% per annum.
4. Misdescription – Where an officer of a company signs on behalf of
of Name [Sec. 147] the company any contract, bill of exchange,
promissory note, cheque such person shall be
personally liable to the holder if the name of the
company is either not mentioned, or is not
properly mentioned.
5. Holding- – A holding company is required to disclose to its
Subsidiary members the accounts of its subsidiaries. Sec. 212
Company provides that every holding company shall attach to
[Sec.212] its balance sheet, copies of the balance sheet,
profit and loss account, directors report and auditors
report etc. in respect of each subsidiary company.
 6. For facilitating – Section 239 provides that if it is necessary for the
the task of an satisfactory completion of the task of an inspector
inspector appointed to investigate the affairs of the company
appointed under for alleged mismanagement, or an inspector
appointed to investigate the affairs of the company for
section 235 or 237
alleged mismanagement, or oppressive policy towards
to investigate the its members, he may investigate into the affairs of
affairs of the another related company in the same management or
company group.
[Sec.239]

7. For – Under section 247, the Central Government may

investigation of appoint one or more inspectors to investigate and
ownership of report on the membership of any company for the
company purpose of determining the true persons who are
financially interested in the company and who control
[Sec.247]
its policy or materially influence it.
8. Fraudulent – Where in the case of winding-up of a company it
conduct [Sec. 542] 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, those who are knowingly parties to such
conduct of business may, if the Court thinks it proper
so to do, be made personally liable without any
limitation as to liability for all or any debts or other
liabilities of the company.
9. Liability for – Directors and other officers of a company will be
Ultra Vires Act personally liable for all those acts which they have
done on behalf of a company if the same are ultra
vires the company.
10. Liability under – Besides the Act, directors and other officers of the
other Statutes company may be held personally liable under the
provisions of other statutes.

UNDER 1. In case of – In Shantanu Ray v. Union of India [1989], it was

economic held that in case of economic offences a court is
JUDICIAL offences entitled to lift the veil of corporate entity and pay regard
EXCEPTIONS to the economic realities behind the legal façade. In
this case, it was alleged that the company had violated
section 11(a) of the Central Excises & Salt Act, 1944.
The Court held that the veil of the corporate entity
could be lifted by adjudicating authorities so as to
determine as to which of the directors was concerned
with the evasion of the excise duty by reason of fraud.
2. Where – Where it was found that the sold purpose for the
company is used formation of the new company was to use it as a
to avoid welfare device to reduce the amount to be paid by way of
legislation bonus to workmen, the Supreme Court upheld the
piercing of the veil to look at the real transaction –
Workmen of Associated Rubber Industry Ltd. v.
Associated Rubber Industry Ltd. [1986].
 3. Where – Courts have shown themselves willing to lift the veil
company is used where device of incorporation is used for some illegal
for some illegal or or improper purpose – PNB Finance Limited v. Shital
improper purpose Prasad Jain [1983]

4. To punish for – Company being an artificial person cannot disobey

contempt of court the orders of the court. Therefore, the persons at fault
should be identified [Jyoti Limited v. Kanwaljit Kaur
Bhasin (1987)].
5. For – The Supreme Court in New Horizons Ltd. v. Union
determination of of India [1995] held that the experience of the
technical promoters could well be considered as the experience
competence of the of the company in determining its technical
competence. Once again, you may not that the veil in
company
this case was lifted for the benefit of the company.
6. Where – In Delhi Development Authority v. Skipper
company is a Construction company (P) Ltd. [1996], the Supreme
mere sham or Court held that the fact that the director and members
cloak of his family had created several corporate bodies did
not prevent the court from treating all of them as one
entity belonging to and controlled by the director and
his family if it was found that these corporate bodies
were mere cloaks and that the device of incorporation
was really a ploy adopted for committing illegalities
and/or to defraud people.

Section 11 of the Companies Act, 1956 provides that no company,

Illegal associations or partnership consisting of more than 10 persons for the
purpose of carrying on the business of banking and more than 20
Association persons for the purpose of carrying on any other business can be
formed unless it is registered under the Companies Act or is formed in
[Sec. 11] pursuance of some other Indian Law. Thus, if such an association is
formed and not registered under either the Companies Act or any other
law, it will be regarded as an ‘Illegal Association’ although none of the
objects for which it may have been formed is illegal.
Following are the effects of an association being illegal:
Effects of an 1. Every member is personally liable for all liabilities incurred in
the business.
Illegal 2. Members are punishable with fine which may extend upto Rs.
10,000.
Association 3. Such an association cannot either into any contract.
4. Such an association cannot sue any of its members or any
outsider, not even if the association is subsequently registered
as a company.
5. It cannot be sued by a member or an outsider for any debts
due to him because it cannot contract any debt.
6. It cannot be wound-up even under the provisions relating to
winding-up of unregistered companies.
7. Can a member sue for partition or dissolution or accounts
of an illegal association? The question was brought before
the High Court of Allahabad in Mewa Ram v. Ram Gopal AIR
1926 All. 591. It was held that where an association was illegal
 and the business had been carried for some years, none of its
members could sue for partition because partition would
involve realization of the assets of the company and payment
of its debts, the very things which would be done in a suit for
dissolution of partnership or winding-up of a company.
8. The illegality of an illegal association cannot be cured by
subsequent reduction in the number of its members (Kumar
Swami Chettiar v. M.S.M. Chinnathambi Chettiar).
9. The profits made by an illegal association are, however, liable
to assessment to income-tax (Gopalji co. v. CITA).

CASE STUDIES
Similarly is following cases also Corporate Veil was lifted:
Determination of character: Daimler Co V Continental Tyre & Rubber Co
Revenue Purpose: Dinshaw Manekjee Case
Fraud : Golford Motors V Horne