CORPORATE LAW

CHAPTER 1- MEANING AND NATURE OF THE COMPANY

DEFINITION:

Section 2(20) - "company" means a company incorporated under this Act or under any
previous company law;

Lord J. Lindley-
 Association of people
 Contribute money or any common stock
 Share profit or loss
 This common stock or money is the money or capital of the company
 The person who contribute it are members
 The proportion of capital of member is his share
 This share is transferable

CJ Marshall-
 It is an artificial being and a creation of law. Possess a property which the charter of its
creation confers upon it.

Prof Haney added to the definition and states it also have perpetual situation and common seal
The organization, when registered under company act exists as company.

CHARACTERISTICS OF COMPANY

1. Incorporated association- Must be incorporated under company’s act [2(20)].

2. Separate legal entity- capable of enjoying right and being subjected to duties because of
separate entity from those who constitute it. “Company is different from subscriber..,
 company is not the agent of the member, and nor the members are liable for the act of
company” [Solomon]. The transfer of share is just like conveyance as in transfer of property
as the shareholder is different personality from company.
If total shareholding exists only in one person then also the existence of company continues
and the change in the BoD and the share proportionality would not form a new legal entity in
itself.
The company right to sue arises only when there is a loss to company and not to any
particular director.

SOLOMON v. SOLOMON CO. LTD.

FACTS:
 Surplus of assets over liability.
 Solomon have $20000 shares in the company and I share each to other 6 members.
 Solomon and his son was BoD.
 He also gave 10000 debenture shows that company own S.
 During liquidation, company have 6000 and liability was of 17000 out of which 10000
was of S and 7000 of unsecured creditor.
 Creditor argues that they are the one who should get the debt repaid and not S as he was
not secured creditor of the company but equitable to that of company. And claim that the
company is sham.
OBSERVATION OF COURT:
 To determine the existence of association as company it is necessecery to see the statute
of the company. 7 member each with minimum one share is required.
 The share I one person does not delimit the purpose of the company.

LEE v. LEES AIRFARMING CO. LTD

Lee died in plan crach and his wife asked for insurance according to workman’s comp. act.
Insurance agent said that lee was employer and not employee; the company and lee are not
separate entity. Therefore, no insurance amount. (Principle of Solomon)
BACHA F. GUZDAR v. THE CIT, BOMBAY
Dividend in respect of share in Tea Company. There was relexation in tax for the income from
the agriculture. She clame it to be ag. Income but it is not so. It is possible only if the compney
clam this as they are the one who is the producer but here Guzdar is the one receiving income
from the company and hence liable for the same.

3. Artificial Person: Company is the jurist person and hence depends on the natural person for
its daily transaction and those are the Directors, shareholders, officers etc. The extent of their
act is defined and restricted.

4. Limited Liability: The members are liable for the repayment of the debt to the limited
extent. If a company is limited by share then the members who pay the share amount and
any premium if required to be paid then he have no other liability. If there is unlimited
liability, in such a case the liability is not limited to the unpaid share but extend till complete
liability is over.
If even after selling the assets of the company the debts are not paid then the shareholders are
called upon but is restricted to their unpaid share and premium.
[Concept of Owner Shielding and Estate Shielding]

5. Separate Property: Shareholder is not the owner of the owner of the company. They are
only provided with certain by law. A member of the company does not have an insurable
interest in property of the company. [Macaura v. Norther Assurance Co. Ltd.]

SUBHRA MUKHERJEE v. BCCL

……………………………………………..to do;

6. Transferability of Shares: The shares are transferable in compliance with the AoA. [Section
44] This article can put certain restriction on the transferability of share but not altogether
stop it. Eg. RoFO, RoFR etc.
7. Perpetual Succession: The death, insolvency and the retirement of the partner does not
affect the company. It continues even its all human members are died. The concept of “King
is dead, long live the king” applies.

8. Common Seal: the seal of the company in the all cases is not relevant. But if used it should
be common. It implies the symbol of its incorporation. U/S 22 authorization can be made by
seal and if not there by 2 directors or a director and CS. If any doc require authentication by
the company then can be signed by KMP (key managerial personnel) or official employed.

LIFTING OF CORPORATE VEIL DOCTRINE:

For while, company is the distinct legal entity yet in reality, is an association of persons who are
in fact the beneficiary of the corporate property. This may be possible that these people can
commit fraud or any illegal act. As the artificial person can not commit fraud so it is required to
remove corporate personality to identify the guilty one. Generally court prefer separate legal
entity concept but for public benefit the lifting the corporate veil can be used.
The corporate veil can be lifted only in two conditions:
 Under Statutory Provisions
 Under Judicial Interference

A. Under Statutory Provisions: The companies Act provides certain conditions where this
doctrine can be applied and where the separate entity and limited liability concept can be
removed:
 Misstatement in Prospectus (Section 34 & 35) - always r/w S 447
 Failure to return application money (Section 39) + Rule 11 Compnies (Prospectus and
allotment of Securities) Rule 2014.
 Misdiscription of Name (Section 12)
 Facilitation the task of Investigator u/s 210, 212, 213 (Section 219)
 Fraudulent Conduct
 Liability for Ultra Virus Act.
B. Under Judicial Interference: Some of the ways where judiciary by way of interpretation
lifted the corporate vial are as follows but this is not exhaustive list.
 Determination of Character: Company being artificial person can’t be a friend or enemy
of anyone. During war, it is required to lift corporate viel to see whether the person acting
is enemy or friend. Daimles Co. Ltd v. Continental Tyre and Rubber Co.

 For benefit of revenue: Re, Sir Dinshaw Maneckjee Patit, in this case, the assesses earn
huge income through dividend and interest. He formed 4 companies and transferred
investment in exchange of shares. This money received by company given back to him as
a pretended loan. The company was created to evade loan.

 Prevention of fraud: If the purpose of the company is for fraud or improper conduct then
the corporate viel is lifted. Gilford Motor Co. v. Horne restriction on same business and
non solicitor clause in employ. agreement of the company. He was removed from
employment and then forms a company doing same business and made his wife MD.
This was against the agreement and merely making her MD won’t deny the fact of his
business and this was just for fraud.

 Avoiding the welfare schemes: Where a new company is formed to give effect to the
welfare scheme to provide low bonus to workers then this doctrine is used. Workman of
Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. A take share of B by
investing 4,50,000/- it was getting dividend on the same and shown in the profit and loss
account of the company. Sometime the company transfers the share of B to C, subsidiary
company wholly owned by it. This C Company does not have other capital and the same
was reduced from the P/L acc of the company A. Due to which the bonus of workman
reduced and this was against welfare scheme and was hence liable as the purpose of new
comp was to reduce the p/l acc value and not for business purpose.

 Forming the subsidiary to act as an agent: If the subsidiary company is the agent of the
holding company then the Doctrine of LCV can be used to make liable the person acting
on behalf of the company. Som Prakesh Rekhi v. Union of India; New Tiruper Area
 Development Co. Ltd. v. State of Tamil Nadu; Smith, Stone & Kmitsts Ltd. v.
Birmingham. From notes

CHAPTER II – KINDS OF COMPANY

Two type of Company mainly registered under this act are – Private Company; one person or
small company and Public Company. They might be LLC or Unlimited liability Company.
LLC can be – Company limited by…..share; guarantee or share as well as guarantee.

PRIVATE COMPANY:
Have minimum Paid up Share capital, and by its articles-
i) Restrict right to transfer its share
ii) Limit member to 200 excluding…person in employment, formally in employment and was
member during same and remain the member thereafter. If a person or persons in joint share
have two or more share commonly count as a single share.
iii) prohibit invitation to the public to subscribe for any securities of company.

CHAPTER VII – PROSPECTUS