CHAPTER COMPANY MEANIHG

AND FEATURES

eanng otCompany
Chorctenistis of CoOpany
Doctrne of Lting ihe

Meaning of Company
The term'company' isderived from two Latinwords--comn means with or together,
take
panis means bread, andoriginally referred to an association of persons whoAAMANN )
their meals together. n general, company means an association of persons for
a coinmon object. Company as a form of business is traditionally called
joint
stock company. "By a company is meant an association of many persons who
-cOntribute money or money's worth to a commOn stock and employit for a
money and
cominon purpose. The common stock so contributed is denoted in
belongs
is capital of the company. The persons who contribute it or to whom it
entitled is his
are members. The proportion of capital which each member is
share. Shares are always transferable, although right to transfer them is often
more or less restricted."1
However, joint çontribution of capital is not sufficient to describe a company. In
partnership firms² also, the capital is brought jointly by the partners. Company
different from partnership firms, is not merely an associatjon of persons, it is an
incorporated association of persons created by law to carry on the expressly laid
down objects. A company exists only in the contemplation of law. Lawicreates
it and law alone can dissolve it: It may be formed by an Act of Pariament, or
by Royal Charter, or by registration under the company law.
The essential feature of company is that it is an incorporated association created
by the law. Chief Justice Marshal of U.S.A. has defined a company as "a person,
1. Lord Justice LindBey
2. In fact, one maycome.across apartrership firm or sole proprietorship frmusing the word 'Company.
as a part of its name, eg. Frank Brothers &Company, Gokuldass &Company. Legally such'irris are
not companies.
-2
COMPANY : MEANING AND FEATURES

a d i , invisible, intangible, and existing onlv in the eyes of the law. Beinga
mere creature of law, it possesses only those properties which the charer
cration confers upon it, either expressly or as incidental to its very existee
the
unpany as a form of doing business has its origin in 1600 A.D. when
la Gompany was established by way of a Royal Charter in England.
S
Subsequently, the legisiative developments in the mid-nineteenth century in the
Uk give rise.to the modern form of company, At present, company has becothe
a pre-dominant form of doing the business. This is on account of numerOus
advantages which a çompany has. Corporate laws worid over has regulations
regarding formation and functioning of companies.
Indian Companies At, 2013
In india, the Indian Companies Act of 2013 contains the Indian law relating to
companies. The Companies Act being the. Act ef the Central Legislature (i.e.
Parliament) applies to companies throughout India on a uniform basis.
The Companies Act, 2013 which replaced the Companies Act, 1956, became
applicable from the financial'year 2014-15. It comprises of 7 schedules, 29
chaptèrs and 470 sections.

Nature and Scope of Act

The Companies Act is the Act of the Central Legisiature which applies to com
panies throughout India on a uniform basis subject to special provisions in
specified states andUTS madeand notifications issued by theCentral Governmnent.
The provisions of this Act appiy to:
fa) Companies incorporated under this Act or under any previous company
law;
(b) Insurance companies, except insofar as the said provisipns are incon
sistent with the.provisions of the ansurance Act, 1938 ot the insurance
Reguiatory and Development Authority Act, 1999;
(c Banking companies, except insofar as thesaid provisions are inconsistent
with the provisions of the Bankinig Regulation Act, 1949;
() Companies engaged in the generation or supply of electricity, except
incafr as the said provisions are inconsistent with the provisions of the
Electricity Act, 2003;
(e Any other company governed by any. spetiaB Actfor the.tine being. in
force. except. insofar as the said proVisions are inconsistent with the
provisions of _uch specialAct; and
 COMPANY: MEANING AND FEATURES 3

) Such body corporate, incorporaed by any Act for the time being in force,
"subject to such exceptions, modifications or adaptation, as may be spec
ified in the notification issued by the Central Government.
Machinery for Administration of the Act
The Central Government has the overall responsibility for administration and
enforcement of the Companies Act. The Ministry of Corporate Affairs (MCA) of
the Government of India is the nodal agency/authority which has been given
various powers under the Act. Most of the powers are vested to the authorities
created under the Act:
1. Tribunal: National Company Law Tribunal (NCT) and the National
Company Law Appellate Tribunal (NCLAT) are quasi-judicial bodies to
administer the provisions of the Companies Act. The Tribunal exercises
such powers which are conferred on-it by the.Companies Act, 2013 and
any other law for the time being in force.
2. Regional Directors: The Regional Directors are appointed by the Central
Government who are in-charge of the respèctive regions, each region
comprising anumber of States and Union Territories. They supervise
the'working of the offices of the Registrars of Companies.and the Official
Liquidators working in their regions. They also maintain liaison between
the respective State Governmentsand the Central Government in matters
relating to the administration of the Compantes Act, 2013.
3. Registrar of Companies (ROC): Registrars of Companies (ROCS) ap-.
pointed by the Central Government under the Companies Act, 2013 are
the full-time officers appointed in various States and Union Territories
who are vested with the primary duty of registering companies floated
in the respective States and the Union Territories and ensuring that
such companies compBy with. statutory requirements under the Act. The
offices of ROC function as registry of records relating to the companies
registered with them, which are available for inspection by members of
the public on payment of the prescribed fee. The CentralGovernment
exercises administrativ control over these offices.
4. Special Courts: TheCentral Government may estblish as many Special
Courts as may be necessary, for the purpose of providing speedy trial of
offences under this Act. Special Court consists of asingle judge who is
appointed by the Central Government with the concurrence of the Chief
Tustice of the HËgh Court-within whose jurisdiction the judge to be ap
pointed is working.
 4
COMPANY: MEANING AND FEATURES

2013
Definition of Company under the Companies Act,
features. Section 2(20) of the
The Act does not define acompany in terns of its company incorporated
Companies Act defines a company as "company means a company formed
under this Act or under any previous company law?". Thus, a
and registered under the Companies Act, 1956 or the under any former Indian
Companies Act, 2013.
Companies Act is a company within the meaning of
YRSSAETARtheIndian
RCOmpanymeans (a Company lormied and tompaES
Act, 2013 Qr uder a mOus cÖIDDany a w

Company and Body Corporate.

Body corporate' means a corporate entity which is incorporated under a statute
and has a perpetual succession with a common seal, and is a legal entity separate
from the memnbers constituting itt. The term body corporate' is wider than the
'company' and it includes:
Companies registered under the Companies Act, 2013 or any former
Indian Companies Act
TAXMANN Foreign Companies
Corporations formed under special Act of the Parliament or gf State
Legislatures or of a foreign country
Public financial institutions as defined in section 2(72) of Companies Act,
2013
Nationalised Banks
Limited Liability Partnerships registered under the Limited Liability
Partnership Act, 2008.
However, 'body corporate' does not include:
(a) A co-operative society registered'under any law relating to co-operätive
societies, and
(b) Any other body which the Central Government may, by notifjcation in the
Official Gazette, specify in' this behalf.
may be notedthat cRIHPany coporate but all body coporates are
COmpanies

the Indian Companies Act;

3. Before passing of the Conpanies Act, 2013, lndian Cornpanies Act, 1956,
and the Indian Companjes
1850, the indián Companies Act, 1866, the Indian Companies Act, 1882,companies. Thesehave since
Act, 1913 were the enactments in ndia for registration and regulation of
been repealed.
4. Ramaiya A., "Guide to the Comparies Act,
Sixth edition.
 5
COMPANY:MEANING AND FEATURES

Characteristics of Company
ofpersons
Incorporated Association: Company is an incorporated association
1.
registration under the Companies Act, 2013 (or any former indian
created by conpany at least seven persons and for
Companies Act). For, forming a public subscribe
company at least two persons are required. These persons
a private memorandum of association and comply with other legal
their names to the to incorporate a company.
requirements of the Act in respect of registration
Person: The registration of a company under the Companies
2. Artiffcial Legal
legal entity to the company enabling it to discharge functions akin
Act grants a acquire and dispose of the property, to enter
to a person such as the right to own name, and to sue and be sued inits own
contract with thirdparties in its another
company canenter partnership with oñe or more individuals or
name. A another.company.
company. It can buy shares or debentures of
the physiçal form--has no body, no soul,
Although, a company does not exist in attributes of a person. It exists but in the
and no conscience, it has most of the
as an artificial legal'person.
eyes of the law. So, a company-can be describedcannot ask for enforcement of
but
It has a nationality, domicile and residence available to national citizens.
those fundamental rights which are excusively Constitution
rights under the
Not-being a natural person, it cannot enjoy the
of India or Citizenship Act.
ransferabiity

Limted
Liability ed
ASSociation

Separation of Atiitial
Ownership and Perso
Managernent
Company

ndepenuent
Common Seal Legal Enaty

Penpetual Separate
ope
6
COMPANY :MEANING AND FEATURES

3.ndependent LegalEntity: Acompanv bas alegal entity distinct and separate

rOm 1ts constituent members (sharebolders). It is an autonomous body, seir
ControIling and self-governing. It can hold anddeal with any type of property o
which it is the owner, in any way it likes. it can enter into contracts, open a vak
account in its own nàme, sue and he sued by its members as weil as outsiders.
The rightsandobligations ofa companvaredistinct from it's constituent members.
"Shareholders are not, in the eyes of the law, part owners oí isharehoBders"
üikcí akins
The undertaking is sonmething different from the totality of the
(Short v. Treasury Commissioner, 1948). A member cannot claim any ownership
rights in the assets of the company either individually or jointly during the
existence of the company or in its winding up. The property of the company is
to be used for the benefit of the company and not for the personal benefit of
the shareholders.
Ajdirector of a_company can be the office bearer of the trade union of the
workers of the same company. Asharehoider, if otherwise qualified, can be the
auditor of the same company. At the same time, the members of the company
can enter into contracts with the' company in the same manner as any other
individual can.
Acompany can be held liable for criminal,acts. it can be held liable for breach
of law and can be made to pay fine. However, no imprisonment ofacompany
is possible. It can be charged with conspiracy to defraud or may be convicted
of making use of false documents with întent to deceive. It can also be held
iable for torts committed by its employees in the course of their employment.
On account of the independent corporate existence, the creditors of a company
are creditors of the company alone and their remedy lies against the company
and its property onty not against any of its members. Law recognises the
existence of the company quite irrespective of the motives, intentions, scheme
or conduct of the individual sharèholders. A director or a managing director
Cannot be held personaBly liable for the payment of arrears of taxes or salaries
of employees due by the company. Similarly, shareholders cannot be held liable
for the wiongs or misdeeds of the conpany.
The principle of separate legal entity of the company was judicialBy recognized by
the House of Lords in 1867 in the case of Oakes v. Turquand and Hording (1867).
It was then held that since an incorporated company has a legal personality
distinct from that of its members, a creditor of such a company h¡s remedy only
against the company and not against an individual shareholder. Thus, a Creditor
of an incorpoYated compahy h¡s remedy-only against th¹ company for his debts
ànd aot anyof the members of whom it is composed. Thè position was further
arified bythe House of Lords in the famous case of Salomon v. Salormon &Co.
Ltd.(1897).-The facts of the case' are as folows:
 COMPANY : MEANING AND FEATURES 7

Case Law: Salomon vSalomon &Ço. Ld.

Factsof the Case: Mr. Salomon was the owner of a prosperousshoe business. He floated
a company 'Salomon &Co. Ltd. with only seven shareholders - himself, his wife, daughter
andfour sons. The newly formed company purchased the sole proprietorship business
of Mr. Salomon for £ 40,000. The purchase consideration was paid by the company by.
allotment of £ 20,Ö00 shares and £ 10,000 debentures and the balance in cash to Mr.
J-hamtroe rried a flontin

The company went into liquidation within a year due to trade depression. On winding
up, assets of the conpany were, runningshort of its liabilities by £11,000. The un_ecured
creditors of the company contended that the company, though incorporated under the
Act, had never an independent existence; it was in fact Salomon under the name of à
company. On this ground, the creditors claimed priority for the payment of their debts
over the debenture-holders (Mr. Salomon), whereas as per the law secured creditors are
given precedence for the payment when acompany is woundup.
Decision: The Court.(House of Lords) held that the existence of a company is-quite
independent and distinct from its members. Shareholders may also be the creditors of
the company. "The company is at law a different person altogether from the subscribers
to the memorandum, and tthough it may be thát after.incorporation the business is
precisely the same as'before, the same persons are managers, and the same hands
receive the profits, the company is not in law their agent or..trustee. There is nothing
in the Act requiring that the subscribers to th Memorandum should be independent TAXMANN
for unconnected, or that they or any of them should take a substantial interest in the.
undertaking, or that they should have a mind or wi!l of their own, or that there should
be anything like a balance of power in the constitution of the comnpany.
Hence the plea of the unsecured creditors that Mr. Salomon and Salomon & Co. are
one and the same was not accepted by the court. And the claim of the creditors for
precedence wasalso rejected bythe Court.
Theconcept of separate corporate ëntity was again confirmed in the case of Lee
V: Lee's Air Farming Ltd (1961).
Case aw
Facts of the Case: Lee formed a company, for the purpose of carrying on his own
business of aerial top-dressing, He was the beneficial owner of the shares and thà sole
"governing director" of the company. He also got himself appointed as the chief pilot of .
the company andunder statutory obligations caused the çompany to insure himagainst
liability to pay compensation under the Workmen's Compensation Act. He was killed in
a flying accident. His widow filed a suit for clairhing the compensation.
Decision of the Case: It was held that Lee and his company were distinct legal.entiies
which had entered into contractual relationships under which he became the chief pilot,
a servant of the company. In his capacity.of goyerning director, he could, on behalf of the
company, gave orders tohimseBfin his other capacity of pilot, and hence the relationship
between himself as pilot, and the cômpany was that of a servant and master. In effect the
magic of corporate personality enabled him to be amaster and servant at the.same time
and to get all the advahtages of both £nd of limited liability. It was held that widow ofLee
is entitled toclaim the comnpensation.
 8 COMPANY: MEANING AND FEATURES

entity
The lndian Courts have also unequivocally upheld the independent legal
of acompany in various cases.
ase CAw: Keondolea
R Co Lt·s
Facts of the Case: Certain persons owned atea estate. They transferred it to acompany,
and claimed exemption from ad valorem (according to value) duty on the ground that
it is simply a transfer from them to themselves 9 sharehotders of the company) under
a different name.

Deci_ion: The court rejected this contention and observed. "The company was a
separate body altogether from the shareholders and the transfer was as much a
conveyance, atransfer ofproperty, as the shareholders had beentotaly different persons."
A company is different from,its directors: The claim of the third partíes is
maintainable against the company not against its directers or employees. The
liability of an individual member or director is not increased by the fact that he
is the sole person beneficially interested in the property of the company and that
the other mémbers have become members merely for the purpose of enabling
the company to become inmcorporated and possess only a nominal interest in- its
property or hold it in trust for him. Directors or members also cannot enforce
TAKMANNO
any right of the company in their individual capacity.
h Haq V Das Mal {19103
Facts of the Case: Abdul Haqwas an employee in acompany. He had not been paidhis
salary fer several months. He sued Das Mal, a director of the company forrecovery of the
amount of salary due to him.
Decisiou: t was held that he would not succeed, because the remedy lies against the
company and not against the directors or members of the company.
The concept of independent corporate entity or the Salomon principle is also
known as the veil of incorporation. The law. wil not go behind the separate
personality of the company to get at members except in certain exceptional
situations.This is explained laterin the chapter whieexplaining the circumstances
under which the corporate veil may be pierced or lifted up.
4. Separate Property:The corporate property is dearly distinguished from the
members' property. Members have no direct proptietary rights tothe coinpany's.
property but merly their 'shares. Company cannot be the property of the
person who owns all the shares in the company, nor can it be considered to be
his agent5 No member can either individually or jointly claim any ownership
rights in the assets of companý during its existence or on itswìnding up.
"No shareholder has any right to any item of property owned by the company,
for-he has nÏ legal or equitable interests therein" Amember cannot have any
insurable interest in the property of the company The leadingcas is:
5. EBM. Co. Ltd v Dominion Bank (1937).
6. Mrs.BE Gazdar v. The Commíssioner of IncomeTax, Bombay (1955).
7. -Macaurà v. Northern As_urance Co. Ltd. (1925).
 9
COMPANY: MEANING AND FEATURES

NorhernAssurance Co. LtdI19251

EMacaun
Case L
nearly allthe shares, except one, of a
Facts of the Case: Macaura was the holder of
creditor of the company. He insured the
timber company. He was also the substantial destroyed by fire after a while. He
company's timber in his own name. The timber was
filed the cdaim for the losses.
liable to compensate as
Decision: It was held that the insurance company was not
property of the company
Macaura had no insurable interest in the property. The
belonged to the company only.
perpetual succession. It has no allotted
5. Perpetual Existence: A company has a
dissolution of a company and the
span of life. The modè of incorporation and continuit÷of the existence
right of-the members.to transfer shares guarantee the of
the mémbers. The existence
of the company quite independent of the life of
Being ¡n artificial person, it c£nnot
acompany can be terminated only by law. even thefounders or subscribers
die irrespective of the fact that its members,
Moreover, in-spite of the changes
to the Memorandum, may die or go out of it.
its contracts and enter intö
in the mnembership of the cómpany, it can, perform
but the company cango
future agreements. Thus, members may come. and go
on forever.
Case Law Re Mea Suppiiers
Re Meat SuppliersGuildford Ltd. During the war, all the members of a private company
company survived.
while in the general meeting were killed by a bomb. Held, the
physical
6. Common Seai: Acompany is an artificial person, and it has no
existence, so it cannot sign any document personally. Therefore, it is necessary
signature.
for every company to have its own common seal which works as its
All the acts of the company are authorized by its "common seal" which is the
officiai signature of the çompany. A document not bearing the common seal of
the company willnot be binding on the company.
Howeyer, the use of common seal has been made optional under the Companies
(Amesdment) Act, 2015. ...

7. Separation of Ownership andManagement: A company is qwned (de facto)

by a number of sharehoBders which is too large a body to manage the affairs
of the company. Shareholders set the objectives of the compan'y and appoint
their representatives or agents.(known as directors) to manage the affairs of
the company on their behalf topursue. their objectives. The directors, in. turn,
hire professional managers (executives) to run the day-to-day operations of the
company under their supervision and control. The separation of ownership and
Management is the distinguishéd feature of company. The separation has raisa
zany issues also which give rise to evolution of
focal point of modern corporate governance as uie
corporation_.
 10
COMPANY :MEANING AND FEATURES
8. Limited Liability: The liabilityof shareholders of a company is diferent Iro
yof the company. Shareholders generally® have limited liability which
1s bmited to the extent of unpaid value of shares held up. Shareholders have no
ODhgation to the company once they have paid full amount on the shares neld
by them. In cases of losses, shareholders are not called upon to make good the
losses. Creditors cannot claim from the personal wealth of the shareholders.
In the case of a guarantced company, the members are liable to contribute a
Speciiied agreed sum to theassets of the companyin the event of the company
being wound up.
9. Transferability of ^hares: One can sell one's share of ownership rights to
an interested buyer as the shares of a company are transferable. While in case
of public companies shares are freely transferable, there are some restrictions
in the transferability of shares of private companies. In fact, transferability of
shares and imited iability are the enabling factors for the tremendous rise of
companies all 'over the world.

Advantages of Company
1. Continuity: The continuity and stability of the company is not affected by
the death, insoBvency, and insanity of its members. So, the perpetual succession
L
of the company alBows company to undertake the big projects which nced tong
time for their completion.
2. Large Capital: It is much easy to generate capital in case of companies as
funds may be raised from the public by issuing shares or debentures. Thus a
company has very large and unlimited resources available for undertaking Jarge
busines[es.
3. Limited Liability: Limited liability feature of company
encourages more
investment in the company as the shareholders are only liable to the extent of
their investmernts in the company.
4. Transferability of Shares: This feature of the company provides
the funds invested. The sharehoBders may any time sell their shares liquidity to
for Cash.
The trading in shares is facilitated by stock exchange.
5. Dem0cratic Set Up: Elected representatives of
shareholders manape and
control the working of the conpany. They are accountabBe to the shareholders
of. the company. The voting power of the shareholders indirctly controls the
policies of the company.
R Comoany law'of many çountries including fndi alsó provides for.a company with
Kit tchcompanies are very few and are in the nature of unlimited Jiability
non-trading companies (pursuing religious
or socially useful objects).
There are a few exceptions when théshareholders or officers of a company may be called wpon to
comnensate the company for the losses sulfered by the company:; or in cases of the officers includine
directors are found to be negligent in discharging their duties. This is known as 'piercing the cornort
veil:
 11
COMPANY : MEANING AND FEATURES

over many persons in case of a

6. Diffused Risk: The risk of loss is diffused not
public company. It becomes so little that individually each shareholder does
feel the burden of it.
maxirmum number of
7. Large Membership: There is no, restriction on the
þusiness in large
members a company can have. This permits organization of
scale and across national borders.
8. Economies of Large Scale: The large number of members and raising of
funds from the public make it possible for acompany to engage in large scate
business which in turn, provides the economies of large scale.
9.Creditability: The companies are under certain obligations e.g. to publish its
annual accounts, to file Memorandum of Assóciation and Artice of Association
etc. which are helpful inwinning the confidence of general public. This increases
the borrowing power of the company also.

Disadvantages
i. Difficult Incorporation: To form a company prescribed legal fornmalities are
required to be complied with.These inchude filing of Memorandumof Association
and Article of Association; obtining Corporate Identity Number and Director
Identity Number; and paymnt ofregistration fees with the registrar of companies.
"AXMANNO
2. Lack of Personal Interest:The wOrking of the company is
organized and
managed by the elected representatives of the shareholders called directors:
They' may not have any personal interest in the business, and this may cause
losses to the cOmpany.
3. Separation of Ownership from Management: The
company do not have any direct say in the working of the shareholders of the
scattered far and wide throughout the country. The voice company as theyare
of the shareholders
may remain unheard.
4. Lack of Secrecy: It is difficult to
maintain- secrecy- in{the company form.of
organization as the company is under obligations such as to publish its annual
accounts, to file Memorahdum and Article of Association, and other documents.
5. Too many Legal
Formalities: There are too many legal formalities to be
compiled with right from the incorporation to the winding up of
6. Siow the company.
Decision-Making Process:
final authority to make decisioDs. No one in the company is vested with the
There are some decisions which are taken in
different general meetings. That causes delay. in taking the decisions.
i .Possibility of Frauds: The
increase the possibility of frauds asseparation of ownership from m¡nagement
the company to cheat the unscrupulous persons may form or wind up
shareholders. shareholders or grab the investments of the innocent
 12 COMPANY:MEANING AND FEATURES

majority in the
8.. Domination of Majority: All the decisions are taken by interest of mninority
Company. There are very little provisions which safeguard the
shareholders.
certain
9. SocialDisadvantages: The rise of bigcompanies and multinationals has
social disadvantages such as monopolistic tendencies, wasteful expenditure,
wastage of resources, pollution etc.

Company Distinguished from Partnership Firm

Company.is an incorporated association having an independent legal entity with
a perpetual succession, acommon seal for its signatures, a common capital
comprised of transferable shares and limited liability. Partnership is the relation
between persons who have agreed to share the profits of a business carried on
by all or any of them acting for all. Persons in the partnership are individually
called partners and colectively firm.
The' following are the main distinctions between a company and'a partnership.
firm.
TAXMANN@
SLBasis of Company
No. Differenc
1. Mode of By Registration under the By agreement called Partner
Creation Companies Act, 2013. ship Deed which may be written
or oral. Registration under the
Partnership Act, 1932 is not
compulsorý.
2. Legal Status Legal entity distinct from mem Firm and partners are not sep
bers. Has a perpetual succession. arate, no perpetua! succession.
Has uncertain life

3. Liability of Limited liability of members. Unlimited joint and several}

Mernbers iabilities of partnèrs.
4. Authority Divorce 'between ownership. Ownership and management
and management. Managed by common. Partners have the right
Board of Directors who are the to take part in the management.
representatives of the members. Each partner has implièd
authority to bind the firm by
his/her dealing,
S. Transfer of Public Company-freely trans-Ordinarily no right of transfer
shares ferable. Private Company trans- by apartner.
ferable, with afewrestrictions.
Transferee gets allthe rights of
the transferor.
 COMPANY: MEANING AND FEATURES 13

S BasiS of OntpaV Partnership Fi

No. DifferenCe
6 Number of Public Company minimum 7; Minimum 2; maximum 50
Members maximum unlimited. Private
Company minimum 2; maximum
200.
7. Legal Statutory books must bèNolegal formalities. Registration
Formalities maintained. Audit of accounts is not compulsory. Audit is also
is conpulsory. Documents and not compuBsory.
required information is to be
filed. Publication of accounts
requiréd.
Resources Large and unlimited resources Limited resources. Dependent
especially. in case of public on partners personal resóurces.
companies as funds can. be
raised from the public.
9. Conduct of Affairs of a company are con- Partners mnay carry anybusiness
Affairs ducted as per the Companies as they decide, so long itris.not
Act. Acompany has to operate illegal. They are free to make
within the objects aid down by whatever arrangements they
the MemorandumofAssociation. wish to run the affaits ofTAXMANN
thë
firm.
10. Dissolution May be dissolved only according| Dissolution by agreement, by.
to the provisions of law usually notice, or by court. Death of
by an order of the court. Death a partner dissolves the part
of member(s)does not dissolve nership.
the company.

Lifting the CorporateVei!

Acompany is aperson created by law(legaB persona) andit has a distinct entity.
Yet in reality it is an association of persons who re in fact the beneicial owners
of the coporate property. The persons behind a company are disregarded once
they have formed a company and given to their association the status of alegal
entity. The general principle laid down in Salomon . Salomon &Co., is foilowed,
that a company duly formed and registered is a separate legal entity.and is an
independent person with its own rights and liabilities distinct from those of
its shareholders. There are, however,'certain çases when the
corporate veil of
company will be probed intoand the veil is lifted. Thecases in which the doctrine
of the lifting of.the veil has been applied can be put
undér two categories:
() Cases under judicdaB
interpretation.
(i) Cases under statutory. provisians.
 14
COMPANY:MEANING AND FEATURES

Doctineof
Gorpo il
the

Casesunderjudiccallnterpretation
DeterrHination of Character of
Cases
ArStat Provisions
Reduction in Menmbership
Company. Holding and Subsidiary Company
Company Acting as Agents of Relationship.
the Shareholders. Investigation in the Affairs of
Benefit of Revenues.. Compapy.
Evasin of, Personal and Investigation of Ownership in
Statutory Obiigation. Company.
Avoidance of Weifare Directors with Unlimited Liability.
Legislation. Fraudulent Conduct of Business.
Fraud and Fraudulent
TAXMANN® Schemes. e Failure to Return Apptication
Money.
Diversion of Business
Misrepresentation in Prospectus.
Opportunity
Mis-description of Name.
Determining Expertise of
Company. Pre-incorporation Contracts.
Ultra vires Acts.
Liability under Other Statutes.

Cases under Juicial Interpretation

"When the notion of legal entity is used to defeat public convenience, justify
Wrong, protect fraud, or defend crime, the law will regard the corporation as
an association of persons.10
Courts have in general disregarded the concept of independent corporate
personality in those cases wher corporate personality has been blatantly used
as acloak for fraud or improper conduct or doing things against public poicy
or for evading indivídual responsibility. Such cases are as follows:
1, Determination of Character of Company: In case it is suspected that the
compäny is owned by the enemies of the cóuntrý, the court may disregard
thecorporate veil and examine the character of persons in real control of the
corporate affairs. To. allow alien enemies to trade under the corporate façade.
is against public policy. The leading case is:

Refrigerator Transit Co.

10.: United Statev. Milmaubee
 COMPANY.: MEANING AND FEATURES 15

6RiihberCOAI6
Case Law: Daimnler Co.Lta v Continental
Fact of the Case: Acompany was incorporated in England to sell tyres manufactured
by a German company. The German company held majority of the shares in the English
company and all its directors were Germans. Thus, the real control of the company
was in German hands. During the World War Ithe company brought a case to recover
a trade debt.
Decision: The company was barred from recovering the debt on the groundthat such
payment would amount to trading with the enemy. It was observed, "Compay is not,
a natural person with mind or conscience, it cannot be loyal or disloyal, it can be
neither friend nor enemy, but it may assume an enemy character when persons in de
facto control of its affairs are residents in an enermy country or, wherevér residents
are acting under the.control of enemies."
2.Company Acting as Agentsof the Shareholders: Shareholders cannot be the
principals for the company. Where it is so, shareholders could be made liable
for the acts of the company, thus ignoring the corporate veil.
Case Laiw Re FG FmS LLu. A953)
Facts of the Case: An American holding company set up a British subsidiary to produce
a film so that it might be classified as a British film.The Board ofTrade refused to register
itas such, and the matter came to the court.
ecision: It was held that the British subsidiary company had been TAXMANNO
brought into
existence for the sole purpose of enabling it to qualify as a British film. The court refused
to compelthe film censor board to register the film produced as an English film. Held, a
company canrot be allowed to act as agent of its shareholders.
3. Benefit of Revenues: Courts may break the
corporate shell of a company if
it appears that the company has been formed for the only
purpose of evasion of
taxes or to circumvent tax obligation. Courts may identify the
the company when it is against the interest of the shareholders with
revenues of the government.
aw Re SI Dinshaw Maneckjee Reit 1927)
Facts of the Case: Sir Dinshaw Maneckjee Petit was a
wealthy man enjoying huge
dividend and interest income. He formed four private companies
each to bold a block of ivestment as an agent for it. and agreed with
Income received was credited in
the accounts of the company but the company handed back the
amount to him as a
pretended loan. Thi_ way he divided his income into four parts in a bid to reduce his tax
liability.
Dectsion: Itwas held that the company was formed by the assessee purely
as a means of avoiding super-taX and the company was nothing more and simpBy
than the assessee
bimself.It did no business but was,created simply as a legal entity to ostensibly
the dividends ånd interests and t¡ hand them over to the receive
assessee as
pretended loans.
4. Evasion of Personal and Statutory Obligatipns: Courts may
disregard the
separate existeneè of a company where it appears that company. was formed
for evadingcontractual and statutory obligations.
 16 COMPANY: MEANING AND FEATURES

aw Motoi CO. V. IHorne (19

Facts of the Case: Horne was appointed as the managing director of Gilford Motor
Company on the condition that he would not solicit the customers of the company so
long as he was the managing directór of the company or afterwards. He
to evade this obligation by forming a company which attempted
undertook the soliciting.
Decision: lt was held that the company started by Horne was a mere cloak or
sham for the purpose of enabling him to commit a
solicitation, and, therefore, it was restrained frombreach
of his agreement against
enticing away Gilford Motor
Company's customers.
Where a company is incorporated as a device or
of the proprietor of fraud, the orporate veil shall stratagem to conceal the identity
be lifted. If an individual forms a
company to avod specific prformance of his contracts, court will
performance against the company. enforce specific
5. Avoidance of Welfare
of incorporation of a Legislation: Court will not permit resorting to devise
company.to.evade welfåre legislation.
ase
ndust L°. ssociated Rúbber
TAXMANN
Facts of the Case: In this case,' a company
some of its investnents incorporated
a subsidiary
and securities only for the company
and transferred
to it
of splitting the. profits into two hands and purpose
obligation topay bonus. thereby to' reduce the incidence of the
Decision: The Supreme Court held that the
would be disregarded for the purpose of separate existence of the new company
to workers. working out the amount of bonus payable
6. Fraudand Fraudulent
beused as a cover for
Schemes: The corporate façade cannot be allowed to
illegalities and frauds. The court may lift thecorporate veil
to find out and expose persoms who £re
behindthe
garb of company. in numerous cases, courts häve fraudulent activities in the
seizure, and confiscation of properties Irom the ordered police investigations,
are SEBI V. Libra Plan tation Ltd.; Ali Jawad individuals. Some of such cases
Amneerhasan Rizvi v. Indo French
Biotech Enterprises Ltd., Dindas S. Thange v. State of
India Real Estate. Maharáshtra; SEBI v. Sahara
7. Diversion of Business Opportunity: When a
the business opportunity of another company, court company is formed to divert
may lift the corporate veil
to prevent such diversion.
CaseLaw:GencorACP
LtdVDalby20023
Facts of the Ca'se: A director of a public company förmeda
usd the compay to sell the materials of. the public cOmpaný. private company. He
 17
COMPANY: MEANING AND FEATURES

considered it appropriate tÍ lift the corporate veil of the private

Decision: Court merely a cloak to earn profits for
which.
company was held to be
company as that
the public company.
the director was responsible to of the
Determining Expertise of Company: The, expertise and experience would
8. expertise of the company. This
shareholders could be regarded as the
mean piercing the corporate veil.
Case Taw:New HoLZOnS
New Horizons Ltd. (NHL) was a joint venture company wherein
Factsof the Case: contributed
foreign group companies held shares. The groups had expertise.
Indian and form ofmachines, equipment, and
towards the resources of the NHL in the
respect of such a joint venturecompany,
Deci_ion: TheSupreme Court held that in constituents of the company. Thus,
could mean the experience of the
the experience
the corporate veil to determine the expertise ofthe
pierce
it was thought proper to
company.
Cases under Statutory Provisions
Companies Act and other statutes provide expressly the circumstances where
The cases:
veil of a company is disregarded. Following is some of those
Corporate
section 3A, when number of members in
1. Reductionin membership. As per
acompany falls below specified number (7 in case of public company and 2 in
TAXMANE@
more than
private company) and business of the company is carried out for
a company who are aware of the fact shall
6 months, then every mnember, of such company contracted after
be severally liable for payment of who debts of the
six months from such reduction.
sectiOn 2(46), a
2. Hoiding and Subsidiary Company Relationship. As per
"holding company" is defined as, in reiation to one or more other companies,
a company of which such companies are subsidiary companies. A company is
termed as a holding company when it has the power to control the composition
of the boardof directors of ahother company: or` holds a majority of its-share
The other compa1y called a subsidiary of the former company has a separate
legai entity. The pfinciple of lifting the corporate veil is applicabBe in holding
subsidiary company relationship in two cases:
() Section 129(3) of the Companies Act. requires a holding company to
attach to /ts Balance Sheet, copies of the Balance Sheet, Profit & Loss
Acçount, Director's Report and Auditors Report of each of its subsidiaries.
Further, listed companies are required, as per the Accounting Standards,
toprepare Consolidated Balance Sheet ta give. better -information of th:
financial position of the group as a whole to the creditors,
and public. shareholders
 18
COMPANY : MEANING ¢ND FEATURES

(9were in spite of subsidiary companes being separate legal entities, tne

ktts and cirumstances show that they are in reality parts of oneconcern
Owned by aparent company or agroup as a whole.
3. nvestigation in the affairs of acompany. If an inspector is
appoBnted
under section 210 or 212 or section 213 of the Companies Act to investigate
the aftairs of the company, he has the power to also
investigate the alta
any oner related company in the same management or group (section Z19).
1his is in complete disregard to the separate entities of the companies.
4. Envestigation of ownership of a company. Central Government can appoint
Inspectors to investigate and report matters relating to company and itS
membership for finding out the true persons behind a company (Section Z16)
it involves piercing the corporate veil.
5. Directors with unlimited liability. Ordinarily, the liability of a. director in a
Iimited company is the same as that of the members of the company. There. 1s
nothing in the Act, however, to prevent their liability being made unlimited by
memorandum of the company or if<imited by memorandum, being converted into
an unlimited liability in pursuance of authority given by the articles. The same
principle applies also in the case of a manager ofa limited company. (Sec. 286)
6.-Fraudulent conduct of business. If in the course of tlhe winding up of a
company, it appears that any business of the.company has been carried on
with the intention to defraud creditors of the company or any other persons,
the Tribunal may declare that any persons who were knowingly parties to
the carrying on of the business in the fraudulent manner, shall be personally
responsible without any limitation of liability for all or any of the debts or other
liabilities of the company. (Sec. 339)
7. Failure to return Application Money. If the application money of those
applicants whom no share has been allotted is not repaid within 30 days of the
issue of fhe prospectus (or such other periodspecified by the SEBI which is 15
days frotn the ciosure of the issue), then the directors.of the company shall be
jointly and severally liabie to repay that money with interest @15% p.a. from
the expiry of that period [Sec. 39(3))
8. Misrepresentation in the Pro_pectu_. Inthe case of misrepresentation in
a prospectus, every directo, promoter and every other person who authorises
the issue of.such a prospectus incurs liability towards those who subscribe or
shares on the faith of untrue statements contained therein. Further they mav
be held criminally also (Sec. 34).
9. Mis-description of Nàmne, Directors and other officers of the company wi!
bepersonally liable for all the contracts made by them on behalf of the company
-in their personal names, e.g., acçeptance of- a Bill of Exchange drawn upon a
company by a director in his personal name or omitting to use the name of the
company in the prescribed manner (tor example, not using the word 'I.td
-part-of the company's game).
 COMPANY:MEANING AND FEATURES 19

10. Liability of Promotersfor pre-incorporation contracts. Promoters will be

personally liable for allthose pre-incorporation contracts which are not adopted
by the company after incorporation.
11. Ultra vires acts.. The directors of the company will be personally liable
for all those acts which they have done on behalf of the company, if
they are:
() ultra vires the company, or
(ii) ultra vires the directors if the company does not adopt their acts.
12. Liability under other Statutes. There are many other
provisions of the
company lawwhere director(s) of a company are personally liable for the default
ìn complying with those provisions. Some of these are:
proper books of account; default in holding of annual generalnon-maintenance of
in filing the annual returns; default in paying dividends after
meetings; default
declaration; false
declaration of solvency; non-cooperation with the company auditors or with the
liquidators (in the event of winding up.of the company); non-compliance with
the regulations of the Securities and Exchange Board of .India (SEBI).
these, directors may be heid Jiable under pollution laws, social security Besides
lawS
(e.g. Minimum Wages Act, ESI, EPE, Gratuity), Competition Act, Foreign
Exchange
Management Act (FEMA), and taxation laws.
TAXMANND
MEORTA
Salomon vs. Salomon & Co. Ltd.
Independent Legal Entity
Lee vs. Lee's Air Farming Ltd. Independent Legal Entity
Re. Kondoli Tea Co. Ltd.
Independent LegaB Entity
Abdul Haq vs. Das Mal
Independent Legal Entity
Rajendra Nath Dutta vs. Shibendra Nath Independent Legal Entity
Mukherjee
Macaura vs. Northern Assurance Co. Ltd. Separate Property
Re. Meat Suppliers Guildford Ltd. Perpetual Existence
Daimler Co. Ltd. vs. Continental Tyre and Lifting the Corporate Veil
Rubber Co.
Merchandise Transport Limited vs British Lifting the Corporate Vei!.
Transport Commission
Ref. F.G. (Films) Ltd. Lifting the Corporate Veil
Apthrope vs. Peter Behoenhofer Brewing Co. Lifting the Corporate Veil
Re. Dinshaw Maneckjee Petit Lifting the Corporate Veil
Gilford Motor Co. vs. Horne. Lifting the Corporate Veil
 20 COMPANY : MEANING AND FEATURES

Workmen of Associated Rubber lndustry Lifing the Corporate Veil

Lid. vs. Associated Rubber ndustry Ltd.
Kersington lnternational Ltd. vs. Republic of Lifing the Corporate Veil
Congo
" New Horizons Ltd. us. Union of India Liftingthe Corporate Veil
" LJC vs. Escorts Ltd. Lifting the Corporate Veil

BEVIEW QUESTIONS NNtAVOayoAMMDew

1. "A company is an artificial person created by law with a perpeual suc

cession and comnmon seal." Comment.
2. "A company is a different person altogether from the members" Comment.
3. What is meant by corporate personality? Explain with reference to the
case law.

4. "The property of the Company is the property of its members" Comment.

TAXMANN0
5. What is a corporate veil? When is it pierced by the order of the Court?
6. "The Doctrine of lifting of the veil of corporate personality is an accepted
legal principle" Explain quoting the case law.
7. The fundamental attribute of corporate personality is that company is
a legal entity different from its members. Elucidate the statement citing
relevant case laws.

8. "The term body corporate connotes a wider meaning than the term com
pany." Comment.
9. A company having no natural existence cannot sue but be sued' Comment.
10. "The property of the Company is the property of its members". Comment.
11. Undér what circumstances the court may disregard the separate legaB
entity of a company.
12. What is reverse piercing? Illustrate with the case law.
13. "The doctrine of iifting the corporate veil ought to be applied in excep
tËonal circumstances and not as a routine matter. Comment.
14. During a war all the members of a private.company, while in general
meeting are killed by a bomb. Does the company cease to exist because
allthe members die? State reasons.
Ans. (A company has a perpetual succession. Its existence is in no way
affected by the death of all its members].