BUSINESS LAW

XAVIER INSTITUTE OF MANAGEMENT

Instructor: Dr. Manaswee K Samal

WHAT IS A COMPANY?
- no strict technical or legal meaning
- an Association of Persons Economic activity / Non- Economic Activity (sec. 25 companies)
- Used mainly in the context of economic activity.
Indian law to deal with AOPs 1. Partnership Act (based on law of agency),
2. Companies Act
DEFINITION:
A company means a company formed and registered under this act or an existing company
(registered under any previous law).
Prof. Haney an artificial person created by law, having separate entity, with perpetual succession and
common seal.
FEATURES:
1. Incorporated Association (with minimum 2 / 7 members):
An association of more than 10 persons in case of banking business and more than 20 persons in case of
other commercial activity, if not registered as a company or under any other law, then it is an illegal
association [sec. 11]
2. Separate Legal entity: distinct from its members
CASES:
1. Solomon vrs. Solomon & Co. ltd.
2. Lee vrs. Lee Air Farming ltd.
3. Artificial person: acts through natural persons
4. Limited liability: of members limited by shares, limited by guarantee, guarantee companies having
share capital
Unlimited liability of members:

If membership is reduced below statutory minimum and company carries on business for more than 6
months after such reduction

In course of winding-up, if the court (now, tribunal) is of the opinion that business was carried on to
defraud creditors, members knowingly party to the transaction would be personally liable.

[Can a company be a partner in a firm? > Unlimited liability of the company. DCA: Object clause of
MOA]
5. Transferability of shares: not prohibited, could be restricted

Sec. 82: shares, debentures or other interest of any member in a company is movable property, transferable
in the manner provided in AOA.
6. Perpetual succession:
King (the monarch) is dead, long live the king (office of the king)
8.Common seal: Official signature of the company.
Contents: name engraved in legible characters, date of incorporation, place
Form: engraven > metal; any shape
Statutory cases of affixing:
-

Power of attorney to execute deeds in / outside India

Share certificates (debenture certificate not provided)

Share warrant

Documents authorising any person outside India to common seal to a deed or other document
LIFTING THE CORPORATE VEIL:

a company is a separate legal entity, yet it is an association of persons who are the real beneficiaries.
LIC vrs. Escorts ltd. [SC] : need not enumerate the cases when it should be lifted (the object sought to be
achieved , the impugned conduct , public interest , parties affected , etc. unlimited frontiers)
CIRCUMSTANCES:
A. UNDER STATUTORY PROVISIONS:
1. Reduction of membership [sec. 45]:
-

business beyond 6 months , shareholders are severally and individually liable.

2. Misrepresentation in prospectus [sec 62 & 63]:

Every director, promoter and every other person who authorises such issue of prospectus are liable to
the subscriber.
3. Misdescription of name [sec. 147]:
-

in any instrument, signatory directors are personally liable.

4. Holding Subsidiary Company [Sec 212]:

Holding company has to attach subsidiarys audited statements and directors report to its members.
(even if sub. is another entity)
5. Fraudulent conduct [Sec. 542]:
Business carried on to defraud creditors
6. For ultra vires acts: Directors and other officers of the company
B. UNDER JUDICIAL INTERPRETATIONS:
- some illustrative cases only
7. Protection of revenue:
Shares in TISCO

Mr. Cheat

Company formed

lends the dividend received from Y

[Company is nothing more than the assessee]
8. Prevention of fraud / improper conduct:
To avoid no-competition clause, company is used as a medium.
9. Trading with enemy (war time)
CASE:
Daimler Company Ltd. v. Continental Tyre & Rubber Co. Ltd.
10. Where company is used to avoid welfare legislation
CASE:
Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. avoidance of bonus
payment
11. Determination of technical competence of the company
CASE:
New Horizons Ltd. v. Union of India -SC
ADVANTAGES OF INCORPORATION:
1. Independent legal entity [company is free from personal misfortunes of its members]
2.
3.
4.
5.
6.
7.

Limited Liability [helps in establishing business ventures without tying up all personal fortunes]
Perpetual succession: free from death, insolvency, insanity of members unlike a partnership firm
Transferability of shares
Infinite membership [public companies]
Mobilisation of huge resources [infinite membership]
Helps in control and management through professional directors
DISADVANTAGES OF INCORPORATION:

1.
2.
3.
4.
5.
6.

Formality and expenses

Loss of privacy [ROC office is a public office]
Divorce of control from ownership [Directors pursue their personal goals]
Long death process
Control by few [control of huge economic wealth with disproportionate low stake]
Possibility of fraud [Plantation Companies]
COMPANY vrs. BODY CORPORATE

Body Corporate or corporation includes a company registered outside India, nationalised banks, public
financial institutions u/s 4A; does not include:
i)

a corporation sole (single individual constituted as a corporation by way of his office [The Crown,
Bishop under English Law ]

ii)

co-operative society

iii)

any other body corporate notified by C.G.

Society under Societies registration act is not a body corporate [SC]

C.G. has power to declare any AOP as B.C. [ONGC in1965]
Every Company is a B.C., but the reverse is not true.
COMPANY vrs. PARTNERSHIP FIRM
1.Mode of creation

COMPANY
Incorporated under statute

PARTNERSHIP FIRM
Registration is not compulsory
(mutual agreement)

2.Membership

Minimum: 2 / 7

Maximum: 50 / unlimited

10 banking / 20 other business

3. Legal status

Distinct from its members

not separate from its members

4. Liability of members

Limited

Unlimited (jointly and severally

liable)

5. Transfer of shares
6. Agency of members
7. Management

Freely Public Co.; Restricted

Consent

of

all

partners

is

Private Co.

necessary

Shareholder is not an agent (his acts

Partner is an agent of the firm and

dont bind the company)

other partners

BOD elected by the members

If not otherwise provided in the

deed, every partner has a right to
participate in mgt. of firm

8. Perpetual secession

Yes

Unless otherwise agreed, death,

insolvency of partners dissolves
the firm

9.Powers

Object clause of MOA, change

through right procedure

Mutual consent