COMPANY LAW-

INTRDOUCTION
RAJKUMAR
COMPANY LAW
• Company Act 1956 was enacted based on UK companies Act 1948. It is the mother of most
corporate laws.
• Corporate regulations are significant because they has huge impact on economy.
• Now the administration of companies is governed and regulated by Company Act 2013.
• Company Act 2013 under which the formation, registration or incorporation, governance,
and dissolution of a firm is administered and controlled.
• Company come in to existence not only under the Companies Act. Companies may also be
created by Act of Parliament.

An incorporated company owes its existence either to special act or company law.
• Eg., LIC, SBI
MEANING OF COMPANY
• The word ‘Company’ has not strictly technical or legal meaning
•Company in normal sense means an association of persons.
• When I am lecturing to my students, I can say I am in an intellectual company of my students.
•Originally referred to an association of persons who took their meal together. Merchants come
together during festive gatherings and discuss business matters.
•Today business matters have become complicated and cannot be discussed during festive
gatherings.
•Again a company denotes an association of likeminded persons formed for the purpose of
carrying on some business.
• Company is a voluntary association of persons formed for the purpose of doing business.
MEANING OF COMPANY
•In common parlance the word ‘Company’ is normally reserved for those associated for economic
purposes, i.e., to carry on a business for gain.
• But it would be wrong to say that a company law is concerned with those associations which
people use to carry on business for gain for two reasons.
• 1. First companies are not the only legal vehicles which people may use in order to associate for
gainful business. Eg., Partnership-Partnership Act 1932
• 2. Companies incorporated under the companies act may be used for carrying on not-for-profit
businesses.
LEGAL MEANING
• In the legal sense, as per the Company Act 2013, “Company” means a company incorporated
under this act or under any previous company law.
•Finally for the purpose of commercial venture people can come together and form an
association and register it under companies act.
NATURE OF A COMPANY
• A company is a body corporate and legal person
• The word ‘Corporation’ is derived from latin word corpus which means body.
• Persons comprising it are made in to one body by incorporating it according to the law and
clothing it with legal personality.
• Corporation is a legal person created by a process of law other than natural birth. It is for this
reason it is sometimes called artificial legal person.
•Company is a artificial person created by the process of law clothed with legal personality.
• As a legal person a corporate is capable of enjoying many of the rights and incurring many of
the liabilities.
• In common law, a company is a legal persons or legal entity separate from and capable of
surviving beyond the lives of its members.
CHARACTERISTICS OF A COMPANY
LEGAL PERSON
• A company is an artificial legal person created by the process of law and hence can be
destroyed only by the process of law.
• It is called artificial person since it is invisible, intangible, existing only in the contemplation of
law.
• Like a natural person it can sue or can be sued by others.
• A company can hold property, acquire property, sell, lease, mortgage, gift etc…
CHARACTERISTICS OF A COMPANY
SEPARATE LEGAL ENTITY
• Separate legal personality of a company represents one of the most fundamental principle of
company law.
• The core principle of company law is, company is distinct from its members.
• Once the registrar issues the certificate of incorporation , the company comes into existence with its
separate legal personality .
• The consequences of this separate legal personality are several. As a person separated from its
members, it is the company that conducts its business, owns its property, enters into contracts, incurs
debts, sues and it is sued, not its members.
•Company is a distinct legal person different from its subscribers to the memorandum. It means the
assets of the company are not the assets of the members. Again 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. [Solomon Vs. Solomon & Company Limited]
CHARACTERISTICS OF A COMPANY
SEPARATE LEGAL ENTITY
•One of the most practical benefit for company’s members is that they are not responsible for
the company debt’s except for the extent of their investment in the company.
• A share holder cannot be held liable for the acts of the company even if he holds virtually the
entire share capital.
•Once a company is incorporated, it is entirely different from the persons who are shareholders
of the company.
CHARACTERISTICS OF A COMPANY
PERPETUAL SUCCESSION
•An incorporate company never dies.
• Members can come and go but the company can go on forever (Eg., APPLE)
• Company created by the process of law can be killed only by the process of law.
• Perpetual succession denotes the ability of a company to maintain its existence by the succession of
new individuals who step in to shoes of those who cease to be members..
• A company life is determined by the terms of the memorandum of association. It may be perpetual
or continue for a specified time to carry on a task or object.
• A change in composition of membership does not affect the existence of the company. This
characteristics of the company is called perpetual succession. (Eg., Cairn India)
• Perpetual succession means that the membership of a company may keep changing from time to
time, but that does not affect the company’s continuity.
CHARACTERISTICS OF A COMPANY
•COMMON SEAL
•Like we sign, company being a legal person have its own signature. The signature of the
company is called common seal. Official signature of the company.
• Name of the company engraved on its common seal.
• Common seal is used on share certificates, debenture bonds and power of attorney.
• Since the company has no physical existence, it must act through its agents and all contracts
entered in to by its agents must be under the seal of the company.
• The document not bearing common seal of the company, is not authentic and no legal force.
• Every holder of shares in a company may at any time nominate in the prescribed manner a
person to whom his shares in the company shall vest in the event of death.
CHARACTERISTICS OF A 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 a court of law. A company has a
right to seek damages where a defamatory material published about it, affect its business.
CHARACTERISTICS OF A COMPANY
CONTRACTUAL RIGHTS
• A company can enter in to contracts for the conduct of business in its own name.
• A share holder cannot enforce a contract made by his company.
• Company is not a trustee for its share holders.
• Likewise a share holder cannot be sued on contracts made by his company.
CHARACTERISTICS OF A COMPANY
LIMITED LIABILITY
• The company being a separate person is the owner of its assets and bound by its liabilities.
• Members are neither the owners of the company’s undertaking nor liable for its debts.
• The members liability is limited to the values of the shares taken.
• No member is bound to contribute anything more than value of the shares held by him.
• In a partnership on the other hand, the liability of the partners for the debt of the business is
unlimited.
• The whole fortune of a partner is at stake, as the creditors can levy even on his private property.
COMPANY IS NOT CITIZEN
• It may be added that a company though a legal person is not a citizen neither under the
constitution of India nor under the Citizenship Act. This has been the conclusion of a special
bench of the Special Bench of the Supreme Court in State Trading Corpn of India Ltd., V CTO.
• In the striking words of Justice Hidayatullah “ If all of them (the members) are citizens of India
the company does not become a citizen of India any more than, if all are married the company
would be a married person”
• A company is however a person in the eyes of law and it can claim the protection of such
fundamental rights as are guaranteed to all persons whether citizens or not. A company cannot
claim the protection of such fundamental rights as are expressly guaranteed to citizens only.
• Refer: State Trading Corporation Ltd., v CTO 1963
DIFFERENCE BETWEEN COMPANY AND
PARTNERSHIP
• Company is a distinct legal person but a partnership firm is not distinct from the several persons who
form the partnership
• Company is created through registration, on the other hand partnership firm is created through
agreement. Registration is not at all compulsory. But if an partnership firm is not registered, it cannot
enforce its rights in the court of law.
• Each partner is jointly and severally liable for the act of the firm. But in case of a company member of
the company cannot be sued for the act of the company. In case of assets of a company, it is owned
by the company itself not by the member.
• A partner cannot transfer his shares to the assignee or transferee of the firm without the consent of
the other partners.
• A company has perpetual succession survives in case of death/transfer of shares . But in case of
partnership death dissolves a firm unless other wise provided in the partnership deed.
• Company is dissolved only through law (winding up). But partnership firm can be dissolved any time
by an agreement among the partners.
DIFFERENCE BETWEEN COMPANY HINDU
UNDIVIDED FAMILY (HUF)
• Only coparceners through birth became members of the joint family. Karta, head of the family
is the sole authority to contract. It does not require registration.
• A company consists of heterogeneous members. It is a juristic person created by law.
DIFFERENCE BETWEEN COMPANY AND
LIMITED LIABILITY PARTNERSHIP (LLP)
• LLP is a hybrid between a company and a partnership . LLP is a body corporate and a legal
entity separate from its partner and liable to full extent of its assets. But the liability of the
partners is limited to their agreed contribution in the LLP. There is no joint liability as in normal
partnership. No partner is liable on account of the independent or unauthorised action of other
partners.
• LLP has the character of perpetual succession.
• LLP business model operates on the basis of an agreement.
• Internal governance structure in the company is regulated by the statute and in LLP it is by
contractual agreement between partners. (LLP agreement)
• This vehicle has the benefit of limited liability company but the internal structure is like a
partnership.
 DIFFERENCE BETWEEN COMPANY AND
LIMITED LIABILITY PARTNERSHIP (LLP)
• A Limited Liability Partnership, popularly known as LLP combines the advantages of both the Company and Partnership
into a single form of organization.
• In an LLP one partner is not responsible or liable for another partner's misconduct or negligence, this is an important
difference from that of a unlimited partnership.
• In an LLP, all partners have a form of limited liability for each individual's protection within the partnership, similar to
that of the shareholders of a corporation.
• However, unlike corporate shareholders, the partners have the right to manage the business directly .
• Limited Liability Partnership entities, the world wide recognized form of business organization has been introduced in
India by way of Limited Liability Partnership Act, 2008.
• LLP Act 2008 gives LLP the at most freedom to manage its own affairs. Partner can decide the way they want to run and
manage the LLP, in form of LLP Agreement. The LLP Act does not regulate the LLP to large extent rather than allows
partners the liberty to manage it as per their will and fancies..
• Limited Liability Partnership is managed as per the LLP Agreement, however in the absence of such agreement the LLP
would be governed by the framework provided in Schedule 1 of Limited Liability Partnership Act, 2008 which describes
the matters relating to mutual rights and duties of partners of the LLP and of the limited liability partnership and its
partners.
LIFTING OF CORPORATE VEIL
• Separate personality of a company is a statutory privilege and it must be used for legitimate
business purpose only. The theory of corporate entity is indeed the basic principle on which the
whole law of corporation is based.
• By fiction of law, a corporate is a distinct entity, yet in reality it is an association of persons who
are in fact beneficial owners of corporate property.
• 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. Sometimes the members,
directors or certain persons can be made personally liable for the debts of the company.
• Where the member of a company uses the corporate structure as device to conceal his criminal
activities the court lift the corporate veil.
• In this regards the court will break through the corporate shell and apply the principle of what
is known as “lifting or piercing through the corporate veil."
LIFTING OF CORPORATE VEIL
• There are situations where the court will lift the veil of incorporation in order to examine the
realities which lay behind.
• In those situations, the court ignores the company and concerns itself directly with the
members of the company.
•All that can be said is that adherence to Salomon principle will not be doggedly followed where
this would cause an unjust result.
• The human ingenuity however started using the veil of corporate personality blatantly as a
cloak for fraud or improper conduct. Thus it became necessary for the Courts to break through
or lift the corporate veil and look at the persons behind the company who are the real
beneficiaries of the corporate fiction.
•Since an artificial person is not capable of doing anything illegal or fraudulent the façade of
corporate personality have to be removed to identify the persons who are really guilty.
REASON FOR LIFTING OF VEIL
• The two significant reasons as to why exceptions to the separate entity priniciple exist is that
although a company is a legal person, it cannot always be treated as any other independent
person.
• Firstly, company is not capable of committing a crime or tort or breach of contract. So the
courts disregard the separate entity and determine the intention of the members.
• Secondly, strict recognition of the corporate entity principle may lead to an unjust or misleading
outcome if interested parties can hide behind the shield of limited liability.
LIFTING OF CORPORATE VEIL
In Littlewoods Mail Order Stores Ltd V. Inland Revenue Commrs, Lord Denning observed as
follows:
“The doctrine laid down in Salomon v. Salomon and Salomon Co.Ltd, has to be watched very
carefully. It has often been supposed to cast a veil over the personality of a limited liability
company through which the Courts cannot see. But, that is not true. The Courts can and often
do draw aside the veil. They can and often do, pull off the mask. They look to see what really lies
behind".
GROUNDS FOR LIFTING THE VEIL
DETERMINATION OF CHARACTER
• Occasionally it becomes necessary to determine the character of a company. For example to see
whether it is enemy.
• A company may assume an enemy character when persons in de facto control of its affairs are
residents in an enemy country.
• In such a case, the Court may examine the character of persons in real control of the company,
and declare the company to be an enemy company.
Case Law: Daimler Co Ltd., v Continental Tyre & Rubber Co Ltd.,
GROUNDS FOR LIFTING THE VEIL
• DAIMLER CO LTD., V CONTINENTAL TYRE & RUBBER CO LTD.,
•A company was incorporated in England for the purpose of selling in England, tyres made in
Germany by a German company which held the bulk of shares in the English company. The
holders of the remaining shares, except one, and all the directors were Germans, residing in
Germany. During the First World War, the English company commenced action for recovery of a
trade debt. Held, the company was an alien company and the payment of debt to it would
amount to trading with the enemy, and therefore, the company was not allowed to proceed
with the action.
GROUNDS FOR LIFTING THE VEIL
DAIMLER CO LTD., V CONTINENTAL TYRE & RUBBER CO LTD.,
The house of lords laid down that a company incorporated in the UK is a legal entity, a creation
of law with the status and capacity which the law confers. It is not natural person with mind or
conscience. It can be neither loyal nor disloyal. It can be neither friend nor enemy. But it may
assume an enemy character when persons in control of its affairs are residents in any enemy
country. Accordingly the company was not allowed to proceed with the action. If the action had
been allowed the company would have been used as a machinery by which the purpose of
giving money to the enemy would be accomplished. That would be monstrous and against
public policy.
GROUNDS FOR LIFTING THE VEIL
• FRAUD
•The Courts have been more that prepared to lift and pierce the corporate veil when it fells that fraud
is or could be perpetrated behind the veil. The Courts will not allow the Salomon principal to be used
as an engine of fraud.
GILFORD MOTOR COMPANY LTD V. HORNE
• The classic case of the fraud exception is Gilford Motor Company Ltd v. Horne.In this case, Mr. Horne
was an ex-employee of The Gilford motor company and his employment contract provided that he
could not solicit the customers of the company. In order to defeat this, he incorporated a limited
company in his wife's name and solicited the customers of the company. The company brought an
action against him. The Court of appeal was of the view that "the company was formed as a device, a
stratagem, in order to mask the effective carrying on of business of Mr. Horne" in this case it was clear
that the main purpose of incorporating the new company was to perpetrate fraud. Thus the Court of
appeal regarded it as a mere sham to cloak his wrongdoings.
GROUNDS FOR LIFTING THE VEIL
FRAUD
Jones v. Lipman a man contracted to sell his land and thereafter changed his mind in order to
avoid an order of specific performance he transferred his property to a company. Russel judge
specifically referred to the judgments in Gilford v. Horne and held that the company here was " a
mask which (Mr. Lipman) holds before his face in an attempt to avoid recognition by the eye of
equity“. Under no circumstances will the court allow the any form of abuse of the corporate
form and when such abuse occurs the courts will step in.
GROUNDS FOR LIFTING THE VEIL
FOR BENEFIT OF REVENUE
• The court has the power to disregard corporate entity if it is used for tax evasion or to
circumvent tax obligations.
• BACHA F GUZDAR v CIT
• Under the Income tax Act, then in force agricultural income was exempt from tax. The income
of a tea company was exempt up to 60 percent as agricultural income and 40 per cent was taxed
as income from manufacture and sale of tea. The plaintiff was a member of a tea company. She
received certain amount as dividend in respect of shares held by her in the company and
claimed that this dividend income should be regarded as agricultural income up to 60 per cent.
But it was held that although the income in the hands of the company, was partly agricultural
yet the same income when received by the share holders as dividends could not be regarded as
agricultural income.
LIFTING OF VEIL UNDER COMPANY LAW
Failure to return application money (Section-39)
In the case of issue of share by a company, whether to the public or by way of rights if, minimum
subscription as stated in the prospectus has not been received directors shall be personally
liable to return the money with interest, in case application money is not repaid within a
prescribed period.
 LIFTING OF VEIL UNDER COMPANY LAW
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.
•Section 34-Criminal liability
• Section 35-Civil liability
LIFTING OF VEIL UNDER COMPANY LAW
Fraudulent Conduct (Section 339)
Where in the case of 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 person, or for any
fraudulent purpose, those who are knowingly parties to such conduct of business may, if the
Tribunal 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.
LIFTING OF VEIL UNDER COMPANY LAW
Investigation into affairs of Company (Section 208)
Where the central government is of the opinion, that it is necessary to investigate into the affairs
of a company-
a. on the receipt of a report of a the Registrar or Inspector under Sec.- 208
b. on information of a special resolution passed by a company that the affairs of the company
ought to be investigated; or
c. In public interest,
It may order an investigation into the affairs of the company.
LIFTING OF VEIL UNDER COMPANY LAW
Establishment of Serious fraud Investigation Office (Section 212)
The central government shall, by notification, establish an office to be called the Serious Fraud
Investigation Office to investigate fraud relating to a company.