COMPANY LAW

CHAPTER 2

Meaning and Nature of a Company :

Corporate Personality
DEFINITION OF COMPANY
 Section 2(20) of the Companies Act, 2013 defines a “company” as “A company
incorporated under this Act or under any previous company law.”
 Lord Justice Lindley has given a comprehensive definition of a company. According
to him, "A company is an association of many persons
– who contribute money or money's worth,
– to a common stock and, employed for a common purpose.
– the common stock so contributed is denoted in money and is capital of the
company.
– the persons who contribute it or to whom it belongs are members.
– the proportion of capital to which each member is entitled is his share.
– shares are always transferable although the right to transfer is often more or less
restricted.''
CHARACTERISTICS OF A COMPANY

1. Incorporated association. A company comes into existence on incorporation or

registration under the Companies Act. A joint stock company may be incorporated
under the Act either as a private or a public company. Minimum number of persons
required for the purpose of incorporation is seven in the case of a public company
and two in the case of a private company. However, Section 3 of the Company Act,
2013 permits formation of “One Person Company” also.
2. Separate legal entity. Once a company gets incorporated in the eyes of law, it is
considered as a legal & separate entity independent of the individual persons who
are its members. The company has the right to own property and right to transfer the
property. No member can claim (individually or jointly) any ownership rights in the
assets of the company during its existence as well as at the time of its winding up.
The company can sue and be sued in its own name by its members as well as
outsiders. A member can both own its shares and be its creditor at the same time.
Continue…
The Leading case on this point is
Saloman V. Saloman and Co. Ltd. (1897)
3. Limited liability. “Limited Liability” means “you have to pay as much as you
have agreed to pay.” “ Unlimited Liability” means “you have to pay as much as
you owe.” It is the liability of a member to a company, which is limited. The
company’s liability is always unlimited.
4. Separate property. Another characteristic of the company is that it is capable of
owning, enjoying and disposing of property in its own name. It is a consequence of
the fact that the company is a legal person. The property of the company will not be
considered as the joint property of the members constituting the company, although
the capital and assets of the company are contributed by members.
Macaura V. Northern Assurance Co. Ltd. (1925)
5. Perpetual succession. Unlike a natural person a company never dies. Under
Section 9 of the Companies Act, 2013, it is an entity with a perpetual succession.
Continue…
This means that the company being an entity separate and distinct from its
shareholders, the life of a company is not measured by the life of any member; it is
independent of the lives of its members.
6. Transferability of shares. Under Section 56 of the Companies Act, 2013, the
shares of a company are freely transferable and can be sold or purchased in the
share market. This is one of the reasons why people prefer to form companies than
partnerships. A shareholder is therefore not permanently wedded to a company.
7. Common seal. Companies (Amendment) Act, 2015, has diluted the mandatory
adoption of common seal. The company may or may not adopt a common seal. The
company may contract under its common seal, if any and in case, the company
does not have a common seal then according to the requirements of that particular
section the contract shall be validated.
Note : According to Companies (Amendment) Act, 2015, the use of common
seal is now optional. All such documents which required affixing the common
Continue…
seal may now instead be signed by two directors or one director and a
company secretary of the company [w.e.f. 29-5-15].
8. Capacity to sue and be sued. On incorporation a company acquires a
separate and independent legal personality. As a legal person it can sue and be
sued in its own name. A company may be sued for infringement of copyrights,
negligence and contempt of court. A company may sue for an injury done to its
business reputation by defamation.
9. A company is not a citizen . A company is a legal person (though artificial) in
the eyes of law. It can hold property and can sue and be sued in its own
name. But unlike a natural person it cannot acquire citizenship. There is no
provision in the Companies Act or in constitution expressly conferring citizenship
on a company. A company does not enjoy the fundamental rights which are
enjoyed by a citizen. This has been very well explained in State Trading
Corporation of India Ltd. v. C.T.O. and others.
ADVANTAGES OF INCORPORATION

Artificial Legal Person

Limited Liability.

Perpetual Succession

Transferability of Shares

Infinite Membership.

Permanency of capital & protection to creditors.

Mobilization of huge resources

Separate property.

Ease in Control & Management.

Capacity to Sue.
DISADVANTAGES OF INCORPORATION

Formalities.

Corporate Disclosures.

Divorce of control from ownership.

Loss of privacy.

Detailed winding up procedure.

Control by few.

More tax burden in certain cases.

Possibility of frauds.
LIFTING THE CORPORATE VEIL
 The concept of corporate entity was evolved to encourage and promote trade and
commerce but not to commit illegalities or to defraud people. Circumstances may
occur which compel the courts to identify a company with its members. When the
notion of legal entity is used to defeat public convenience, justify wrong, protect
fraud or defend crime the law will not regard the company as a corporate entity
and pays regard to the economic realities behind the legal façade.
 In reality the business of the artificial person is always carried on for the benefit of
some individuals. Since an artificial person is not capable of doing anything illegal
or fraudulent, the notion of corporate personality might have to be abandoned to
identify the persons who are really guilty. This is known as ‘lifting the corporate
veil’.
 The concept of lifting the corporate veil is a changing concept. It can be lifted for
the benefit of the company too.
Continue….

The circumstances under which the courts may lift the corporate veil may be
discussed under the following two heads :—
One of the fundamental principles of company law is that a company has
personality that is distinct from that of its shareholders. Once a company is
formed and registered under the Act, it is a separate legal entity distinct from
its members. It can sue and be sued in its own name. This rule was laid down
by the House of Lords in Salomon v. Salomon & Co1, in 1897 in which it was
held that even if one individual held almost all the shares and debentures in a
company, and if the remaining shares were held on trust for him, the company
is not to be regarded as a mere shadow of that individual.
(A) COMMON LAW EXCEPTIONS
1. Determination of character. A company is not a natural person with mind or
conscience. But it may assume an enemy character when persons in effective
control of its affairs are residents in any enemy country or wherever residents are
acting under the direction and control of enemies. In times of war the court will lift
the veil to see whether a company is controlled by enemy aliens.
2. Where company is a sham. The court will lift the veil where the company is a
mere cloak or sham i.e. where the device of incorporation is used for some illegal
or improper purpose. Where a person borrowed money from a company and
invested it in three different companies in all of which he and his son were the only
members, the lending company was permitted to attach the assets of all the three
companies as they were created to hood wink the lending company.
3. Prevention of fraud or improper conduct. Where it appears that the company
was incorporated for evading contractual and statutory obligations, the court may
disregard the separate existence of the company.
Continue….
4. Where the company is acting as an agent of the share-holders. Where a
company is acting as an agent of its shareholders or of another company, it will
be liable for its acts.
5. Protection of revenue. The courts may disregard the corporate entity of a
company where it is used for tax evasion or to circumvent tax obligation.
6. Avoidance of welfare legislation. Avoidance of welfare legislation is as
common as the avoidance of taxation. It is the duty of the court in such cases
to get behind the smoke screen and discover the true state of affairs.
7. Punishment of contempt of court. Persons responsible for contempt of court
can be punished, if contempt of court is done by a company. Courts can find
real offender by lifting the corporate veil.
8. Ascertaining true nature of transaction if alleged as sham. Court will be
justified in lifting the corporate veil to ascertain the true nature of transaction as
to who are the real parties to sale and whether it is genuine and bonafide.
Continue….

9. Determination of technical competence of company. The Supreme

Court in a recent decision has delivered an interesting and very
significant judgement with regard to lifting of corporate veil.
10. Formation of subsidiary Company to act as an agent. The Concept of
lifting the corporate veil is a changing concept. It can be lifted for the
benefit of the company too. The supreme Court in one of its recent
decisions held that where the holding company hold 100% shares in a
subsidiary company and the latter is created only for the purpose of the
holding company, corporate veil can be lifted.
(B) STATUTORY EXCEPTIONS
1. Mis-statements in Prospectus (Sections 34 and 35). A person, who has
sustained any loss or damage as a consequence of mis-statement in
prospectus, the company and every person who–
2. Mis-description of Company’s name (Section 12). According to Section 12
of the Companies Act, 2013, every company shall have its name printed on
hundies, promissory notes, bills of exchange and such other documents as may
be prescribed. If any default is made in complying with the requirements of this
section, the company and every officer who is in default shall be liable to a
penalty of one thousand rupees for every day during which the default continues
but not exceeding one lakh rupees.
3. Failure to Refund Application Money (Section 39). Where a company
issues shares to the public and the minimum subscription as stated in the
prospectus has not been received within 30 days of the issue of prospectus or
Continue….
such other period as may be prescribed by the SEBI, the application money shall
be refunded within a period of 15 days from the closure of issue.
4. Investigation of Ownership of Company (Section 216). Section 216
empowers the Central Government to appoint one or more inspectors to
investigate and report on matters relating to the company, and its membership for
the purpose of determining the true persons –
(a) Who are or have been financially interested in the success or failure,
whether real or apparent, of the company ; or
(b) Who are or have been able to control or to materially influence the policy of
the company.
5. Fraudulent Conduct (Section 339). Where in the course of the 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 persons or for any
Continue….

fraudulent purpose, the Tribunal, on the application of the Official

Liquidator, or the Company Liquidator or any creditor or contributory of the
company, may, if it thinks it proper so to do, declare that any person, who
is or has been a director, manager, or officer of the company or any
persons who were knowingly parties to the carrying on of the business in
the manner foresaid shall be personally responsible, without any limitation
of liability, for all or any of the debts or other liabilities of the company as
the Tribunal may direct.
6. Liability for ultra vires Acts. Every director and officer of the company
will be personally liable for all those for all those acts which they have
done on behalf of the company if the same are ultra vires the company.
Continue….
Distinction Between Companies, and Partnership Firm

Sr.
Particular Company Partnership Firm
No.
1. Governing Law Companies Act, 2013 and The Indian Partnership Act,
various Rules made thereunder 1932 and various Rules
made thereunder
2. Registration/ Compulsory Optional
Incorporation
3. Minimum Minimum two for private Minimum two partners.
Number of Company and minimum seven
Members for public company and minimum
one for one person company as
per the Companies Act, 2013.
Continue….

4. Maximum Maximum 200 in case of Private Maximum 10 for banking

number of Company and no cap of business and 20 for other
Members maximum number of Member in business.
Public Company as per the
Companies Act, 2013.
5. Digital Signature Atleast one director of the Not Applicable. Documents
company should have their are filed manually.
Digital signature. Digital signature
is a pre-requisite for e-filing.
6. Drawing Drawings are not permitted. Drawings are permitted.
7. Creation Created by law Created by contract
………… End of Chapter