UNIT- I

INCORPORATION AND
FORMATION OF COMPAMY
TOPICS TO COVER
1. Company and other forms of business organizations
2. Different kinds of companies
3. Process of incorporation
i. nature and content
ii. Doctrine of indoor management
iii. Doctrine of ultra vires
iv. doctrine of constructive notice
4. Memorandum of Association and Articles of
Association
WHAT IS A COMPANY?
• ‘company’ derived from latin word, com- with or
together ; panis- bread
• Originally- association of the people who took their
meals together
• People discussing business over meals
• Over the period of time, it became more complicated
and got an expanded meaning
• Not the discussion of business over meals anymore
• An ‘entity’ that conducts the business
• Joint stock enterprise that works for an objective
• A group of persons associated together for the
attainment of a common end, social and economic,
and to a large extent publicly and socially responsible
DEFINITIONS

• Lindley:
Company is an association of many persons who contribute
money or money’s worth to a common stock, and employs it in
some common trade or business, and who share the profit or loss
arising therefrom
• Haney:
Company is an incorporated association, which is an artificial
person created by law, having a separate entity, with a perpetual
succession and a common seal.
• Company Act, 2013
Section 2(20) a company incorporated under this Act or under
any previous company law.
 CHARACTERISTICS OF A COMPANY
• Body corporate- persons composing it are made into one
body by incorporating it according to the law and clothing
it with legal personality
• Corporate- corporation- body- legal person created by a
process other than natural birth,
• Artificial legal person- owes its existence to the law- no
body or soul- only law can dissolve it
• Limited liability of the members
• Perpetual succession- e.g. K/9 Meat Supplies (Guildford)
Ltd., Re (1996) 3 All. E.R. 320- during a war, all the
members of a private company in the general meeting
were killed by a bomb. The Company survived. – not
even a hydrogen bomb could have destroyed it.- men
may come and go but the company stays forever.
Contd…
• It could be by an Act of Parliament (LIC, SBI
etc.) or by company law
• Enjoys certain rights and incurs liabilities- sell or
purchase property
• Organization formed with a purpose
• Separate property
• Transferable shares
• Capacity to sue and be sued
• Management divorced from capital
CORPORATE PERSONALITY
• Independent corporate existence
• Separate entity from its members (unlike partnership)
• Acquires own entity
• Belongs to an institution
• Company continues to exist even if members change
• Juristic person conferred with rights and obligations in
accordance with law
• Acts like a natural person but only through designated
persons
• Every asset and liability belongs to the company
• Because of this corporate personality- their exists a veil
between the members and company- discussed in details
later.
TATA ENGINEERING AND LOCOMOTIVE
CO. LTD. V. STATE OF BIHAR (1965) AIR
40, 1964 SCR (6) 885
Supreme Court:
The Corporation in law is equal to a natural person
and has a legal entity of its own. The entity of the
corporation is entirely separate from that of its
shareholders; it bears its name and has a seal of its
own; its assets are separate and distinct from those of
its members; it can sue and be sued exclusively for
its own purpose; its creditors cannot obtain
satisfaction from the assets of its members; the
liability of its members or shareholders is limited to
the capital invested by them; similarly, the creditors
of the members have no right to the assets of the
corporation.
 SALOMON V. SALOMON AND CO. LTD.
Gist- A company has a corporate personality which is
distinct from its members or subscribers. A single
shareholder may virtually hold the entire share capital of
the company; even in such a case, the company does not
lose its identity
• Facts: S sold business to newly formed company Salomon & Co. Ltd for
40000 pounds
20007 shares were issued and S had 20001 of them
company had 7 subscribers- S, wife, daughter, 4 sons
S shares- 20000 shares of 1 pound each and debentures of 10000
pounds
one share to the remaining members
The company went into liquidation within a year
Assets worth- 6000/-, liabilities- 17000/- out of which 10000/- were due to S
(secured) and 7000/- unsecured
• Claim of the creditors- S was the owner and thus, S and the
company is one and the same thing and company was mere agent
of S.
Hence, they should be paid prior to S
• Held:
As soon as the company is incorporated it became
a separate independent person in the eyes of law
i.e. separate from S and other owners
Did not matter if S was virtually the owner of
substantial shares of the company
He was also a secured creditor by virtue of the
debentures and was therefore entitled to the
repayment in priority to the unsecured creditors
Business belonged to the company and not to S,
so S was not liable to indemnify the company for
its debts.
Observations
• To determine whether an association is a company
or not?
• It is necessary to look at the statute itself without adding
to or taking from the requirements of the statute
(HERE- as per law, 7 or more persons required for forming a
company and atleast one share for each subscriber)- so it was
a real company
• a body corporate does not lose its individuality by
issuing the bulk of its capital to one person
• A company is a different person altogether
• Nothing in the Act which says that subscribers
should be independent or unconnected or they
cannot take substantial interest in the undertaking
• Established the concept of – One man company and
veil of corporate personality
LEE V LEE’S AIR FARMING LTD. (1961) AC 12
Application of Salomon’s case here
• Facts:
• Lee formed a company Air Farming Ltd.
• 3000 shares total- 2999 shares held by Lee, sole
governing director of the company
• Lee also the chief pilot of the company
• Company insured against the liability to pay
compensation under Workmen’s Compensation Act
• Lee died during the course of employment
• Widow claimed compensation under the WCA
• Issue: whether Lee and his company were distinct
legal entities which could enter into contractual
relationship of master and servant
Held:
• Court of Appeal- widow was not entitled to
compensation because Lee was beneficially owner of
all except one share of the company and was the
sole governing director
• Privy Council-
• Lee’s Air Farming was altogether different from the person
Lee
• Entity separate from governing director and beneficial
shareholder
• Immaterial if Lee was holding substantial shares
• Logical sequence of Salomon’s case that one person can
function in dual capacities
• As a director he appointed himself as the chief pilot of the
company- the appointment was made by the respondent
company
• As a director he was only the agent of the company
PRINCIPLE OF SEPARATE LEGAL
ENTITY IN INDIA
KONDOLI TEA CO. LTD. RE (1886) ILR 13 CAL 43
• Certain persons transferred a tea estate to a
company and claimed exemptions from ad valorem
duty on the ground that they themselves were the
shareholders in the company and, therefore, it was
nothing but a transfer from themselves
• Held- that company was a separate legal persons
and transfer was as much a conveyance, a transfer
of the property, as id the shareholders had been
totally different persons