Chapter

1
Introduction

Chapters Overview

Contents
 Introduction
 Characteristics/Features/Advantages of Company
 Disadvantages of Company
 Important Case Studies
 Distinctions B/W Company & Partnership & HUF
 Concept of Corporate veil & Lifting of such veil
 Whether Company is a Citizen of India or Not
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[Introduction]

CONSTITUTIONAL BACKGROUND IN RELATION TO THE

COMPANY LAW
43. Incorporation, regulation and winding up of trading corporations, including banking,
insurance and financial corporations, but not including co-operative societies.

44. Incorporation, regulation and winding up of corporations, whether trading or not, with
objects not confined to one State, but not including universities.

HISTORY OF INDIAN COMPANY LAW

Joint stock companies act of 1850:
 Companies legislation in India owes its origin to the English Company law.
 The companies acts passed from time to time in India have been following the English
companies acts with certain modifications to suit Indian conditions.
 The first legislative enactment for "Registration of Joint stock companies" was passed in

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the year 1850.
 This Act was based on the English companies Act, 1844 (known as the Joint stock
companies Act 1844) which recognized company as a distinct legal entity, but did not
grant to it the privilege of limited liability.

Joint Stock Companies act of 1857:

 The Joint stock companies act of 1850 was replaced by the Joint stock companies
act of 1857. This act of 1857 conferred, for the first time in India the benefit of limited
liability on the members of companies.

 But this act did not extend the benefit of limited liability to the members of banking
companies and insurance companies.

Joint Stock Companies Act of 1860:

 The Joint stock companies act of 1857 was replaced by the Joint stock companies
act of 1860.
 The Joint stock companies Act of 1860 extended the benefit of limited liability to the
members of Banking companies and insurance companies.
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The companies Act of 1866:

 The Joint stock companies Act of 1860 was replaced by the companies Act of 1866. The
companies Act of 1866 was the first comprehensive companies Act passed in India.

 The companies Act of 1866 was based on the English companies Act of 1862.
 The companies Act of 1866 was intended to consolidate and amend the law relating to
the incorporation, regulation and winding up of trading companies and other
associations.

Companies Act of 1913:

 The Indian Companies Act, 1913 did not take into account the peculiar features of the
Indian trade and commerce and some peculiar institution such as "managing agency.”
 The Act was, therefore, found to be highly unsatisfactory in the course of its operation.
As such, this Act was subjected to a large number of amendments from time to time.

Companies Act of 1956:

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 After the end of World War II, the need for a further revision of the company law was
felt. Many changes had taken place in the organization and management of Joint stock
companies.
 The government of India, therefore, appointed on 25th October, 1950 A committee of
12 members representing various fields under the chairmanship of Shri. H. C. Bhabha
for a comprehensive review of the Indian companies Act 1913.
 The committee submitted its report on all aspects of company law in April 1952. Based
on the recommendation of the Bhabha Committee companies Act of 1956 was passed.
 The companies Act of 1956 was based on the English companies Act of 1948, with
some modifications to suit the Indian conditions.
 The companies Act of 1956 came into force from 1st April, 1956 divided into XIII parts
with 658 sections, 6 tales & 15 schedules. Companies Act, 1956 repealed all earlier
Companies Acts.

Companies Act of 2013:

 Based on the recommendations of J. J. Irani committee companies bill came into
existence in the year 2008 that went through critical evaluations & after due
considerations took the shape of Companies Act, 2013.
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[Introduction]

 The bill was passed on 18th of December, 2013 by Lok Sabha & Rajya Sabha passed
the same bill on 8th of august, 2013. The bill then got presidential assent on 29
August 2013 & was notified on 30th August, 2013 in official Gazette.
 The 2013 Act is divided into 29 chapters containing 470 sections as against 658 Sections
in the Companies Act, 1956 and has 7 schedules.

The Act came into force on 12 September 2013 with few changes like
earlier private companies maximum number of members were 50 and
now it will be 200. A new term of "one-person company" is included in
this act that will be a private company and with only 98 provisions of
the Act notified. A total of another 184 sections came into force from 1
April 2014.

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 Law & Ethics 5
[Introduction]

INTRODUCTION
 The word „company‟ generally means coming together to generate penny i.e. money, and it
originally referred to an association of persons who took their meals together. Company is a
joint stock enterprise in which the capital is contributed by several people.

 Thus, a company denotes an association of likeminded persons formed for the purpose of
carrying on some business or undertaking. A company [Incorporated] is a corporate body and
a legal person having status and personality distinct and separate from the members
constituting it.

 It is called a body corporate because the persons composing it are made into one body by
incorporating it according to the law and clothing it with legal personality. Accordingly,
„corporation’ is a legal person created by a process other than natural birth. It is, therefore,
sometimes called artificial legal person.

Form of company

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COMPANY may be in the form of:

Incorporated Unincorporated
Corporation
company company

Enacted by a special Mere collection/aggregation

A separate person distinct
Act of Parliament, of individuals,
from the individuals
e.g. LIC of India. e.g. Partnership firm.
constituting it,
e.g. Tata Iron & Steel Co. Ltd.

AS PER THE COMPANIES ACT, 2013:

A “company means a company formed and registered under the Companies Act,
2013 or under the previous company law" [Sec.2(20)].
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AS PER LORD JUSTICE LINDLEY:

 Company means a voluntary organization of persons who are contributing their

money in the common stock of the company and who agree to invest the same
for a common goal/purpose, and to share the profits and the losses arising
threfrom.

 Persons who are contributing their money are called as shareholders or

members; and the common stock in which contributed is called share capital of
the company.

WETHER ALL COMPANIES ARE INCORPORATED FOR EARNING THE PROFITS?

 Section 8 of the companies Act, 2013 deals with “associations not for profit”, i.e.

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the companies meant for promotion of arts, science, culture or commerce, and
which prohibit the payment of dividend to its members by AOA.

 Such company [including OPC] get itself registered under Companies Act
without the words “Ltd./Pvt. Ltd. at the end of its name after obtaining licence
from the CG (RD). For Example: CII, FICCI etc.
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[Introduction]

Characteristics/features [advantages] of company

Main characteristics or features

1. SEPARATE  The company being a separate legal entity bears its own name and acts
LEGAL under a corporate name. It has a seal of its own. Its assets are separate
ENTITY and distinct from those of its members.
 It is capable of owning property, incurring debts, borrowing money, having a
bank account, employing people, entering into contracts and suing or being
sued in the same manner as an individual.
 A shareholder cannot be held liable for the acts of the company even if he
holds the entire share capital. The shareholders are not the agents of the
company and so they cannot bind it by their acts.

2. LIMITED The company being a separate entity, leading its own business life, the members are
LIABILITY not liable for its debts.
The liability of the members:

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 In the case of a company limited by shares: to the extent of the nominal
value of the shares held by them.
 In the case of a company limited by guarantee: only to the extent of
the amount guaranteed by them and not beyond, and only when the
company goes into liquidation.

3. PERPETUAL  An incorporated company never dies, except when it is wound up as per law.
SUCCESSION A company, being a separate legal entity is unaffected by death/departure of
any member even in case of total change in the membership.
 Perpetual succession, therefore, means that the membership of a company
may keep changing from time to time, but that shall not affect its
continuity which means “Members may come and go, but the company can go
on forever”

 Even in case of war all the members of one private company, while in GM,
were killed by a bomb, but the company survived — not even a hydrogen
bomb could have destroyed it”

4. SEPARATE  A company being a legal person and entirely distinct from its members, is
PROPERTY capable of owning, enjoying and disposing of property in its own name.
 “No member can claim himself to be the owner of the company’s
property during its existence or in its winding-up”. A member does not even
have an insurable interest in the property of the company.
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5. TRANSFER-  The capital of a company is divided into parts, called shares. The shares are
ABILITY OF said to be movable property and, subject to certain conditions, freely
SHARES transferable and therefore provide liquidity to the members.
 The shares of public companies are freely transferable. In the case of a
private company, the Companies Act put certain restrictions on the
transferability of shares.

6. COMMON  Although company is a separate legal entity yet it has no physical existence,
SEAL therefore require to act through its agents and all such contracts entered
into by its agents must be under the seal of the company.
 The common seal, acts as the official signature of a company. The name of
the company must be engraved on its common seal.
 A document not bearing common seal is not authentic and has no legal
force behind the company.

Points to be Remembered:

Now the common seal is made at the option of the company.

Companies act 2013 required common seal to be affixed on certain
documents (such as bill of exchange, share certificates, etc.) Now,

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the use of common seal has been made optional. All such
documents which required affixing the common seal may now
instead be signed by two directors or one director and a company
secretary of the company.

7. CAPACITY  A company, being a separate entity, can sue and be sued in its own name.
TO SUE AND
BE SUED  All legal proceedings against the company are to be instituted in its own
name. Similarly, the company may bring an action against anyone in its own
name.
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CONCEPT OF CORPORATE VEIL

 Separate legal identity of the company acts as a “corporate veil” which segregates the
persons present inside the company (i.e. BOD and the Members) from the outside world.

 All the benefits accruing to the company are enjoyed by its members and directors, but if
the company commits any breach of contract then the suit is faced by the company in its own
name, and not by the shareholders and directors in their personal names.

LIFTING OF OR PIERCING THROUGH THE CORPORATE VEIL

Although company is a distinct personality but in fact it is an association of persons who are
the beneficial owners of the property of the body corporate. A company, being an artificial
person, cannot act on its own, it can act only through natural persons.
As the company is a separate personality under the eyes of law, it must be used for legitimate
business purposes only. If a fraudulent and dishonest use is made of the legal entity, the
individuals concerned will not be allowed to take shelter behind the corporate personality. The
Court will break through the corporate shell and apply the principle of “lifting of or piercing
through corporate veil”.

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Circumstances where corporate veil is lifted.
AS PER JUDICIAL PRONOUNCEMENT
Situations of Cases on the basis of situations where
lifting of corporate veil has lifted
corporate veil

In Jones v. Lipman,
Where the corporate
veil has been used for Fact in issue
commission of fraud or
 A agreed to sell certain land to B. Pending completion of formalities
improper conduct of the said deal, A sold and transferred the land to a company which
he had incorporated in which he and a clerk were the only shareholders
and directors.
 This was done in order to escape a decree for specific performance
in a suit brought by B.

Decision of court
 The Court held that the company was created by A only for avoidance
of his liability from specific performance. Thus, A must complete the
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contract, since he had the full control of the limited company in which the
property was vested.

Where the company is

incorporated only as In Re. R.G. Films Ltd.
an instrument.
Fact in Issue

 An American company produced a film in India technically in the

name of a British Company, 90% of whose capital was held by the
President of the American company which financed the production of the
film.
Decision
 Board of Trade refused to register the film as a British film which
stated that English company acted merely as the nominee of the
American corporation.

For determining the

In Daimler Co. Ltd. v. Continental Tyre & Rubber Co.,
true character or
status of the company. Decision of court

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 It was held that a company will be regarded as enemy character, if the
persons having de facto control of its affairs are resident in an
enemy country or, wherever they, are acting under instructions
from or on behalf of the enemy.

Where the veil has

Re. Sir Dinshaw Manakjee Petit
been used for evasion
of taxes and duties Fact in Issue
 In this case, the assessee was a wealthy man enjoying large dividend and
interest income. He formed four private companies and agreed with
each to hold a block of investment as an agent for it.
 Income received was credited in the accounts of the company but
the company handed back the amount to him as a pretended loan.
This way he divided his income in four parts in a bid to reduce his tax
liability.
 It was held “the company was formed by the assessee purely and
simply as a means of avoiding super tax and the company was nothing
more than the assessee himself.

 It did no business, except to receive the dividends and interests

and to hand them over to the assessee as pretended loans”.
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Decision of the court

 The Court had disregard the corporate entity as it was being used for
tax evasion.

Where the purpose of

The Workmen Employed in Associated Rubber Industries Limited,
company formation Bhavnagar v. The Associated Rubber Industries Ltd., Bhavnagar
was to avoid welfare and another
legislation.
Fact in issue
In this case a new company was created wholly by the principal company
with no assets of its own except those transferred by the principal company,
with no business or income of its own except receiving dividends from shares
transferred to it by the principal company i.e. only for the purpose of
splitting the profits into two hands and thereby reducing the
obligation to pay bonus.

Decision of the Court

The Supreme Court held that the new company was formed as a
device to reduce the gross profits of the principal company and thereby

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reduce the amount to be paid by way of bonus to workmen.
The amount of dividends received by the new company should,
therefore, be taken into account in assessing the gross profit of the
principal company.
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MULTIPLE CHOICE QUESTIONS

1. Companies Act, 2013 is applicable to _________

(a) Whole of India

(b)Whole of India except to the State of Jammu & Kashmir
(c) Whole of India except to the State of Goa & Pondicherry
(d)Whole of India and outside India

2. Provisions of Companies Act, 2013 are applicable to ______

(a) Private company only

(b)Public company only
(c) Government company only
(d)All companies

3. Which of the following is special features of company ?

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(a) Artificial person
(b)Separate legal entity
(c) Limited liability
(d)All of the above

4. Provisions of Companies Act, 2013 is applicable to ____

(a) Insurance Companies so far as it is not inconsistence with provisions of the Insurance
Act, 1938 and IRDA, 1999
(b)Banking Companies so far as it is not inconsistence with the provisions of the Banking
Regulation Act, 1949
(c) Electricity Companies so far as it is not inconsistence with the provisions of the
Electricity Act, 2003
(d)All of the above

5. In the famous case of Salomon vs. salomon & Co. Ltd., it was held that ______

(a) Company is at law a different person from its members

(b)Company is at law a different person from its directors
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(c) Company is at law a different person from its members

(d)All of the above

6. The share of a company are transferable in the manner provided in ______ of the company

(a) Share certificate

(b)Article of association
(c) Memorandum of association
(d)Prospectus

7. Which of the following documents required to be affixed by common seal, if company has
common seal?

(a) Power of attorney

(b)Share certificate
(c) Share warrant
(d)All of the above

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8. Which of the following statement(s) is/are correct?

(a) Partnership is a legal person

(b)Partnership firm does not have perpetual succession
(c) Registration of firm is optional
(d)Both (a) and (c)

9. Company is not citizen but it has _____

(a) Nationality
(b)Domicile
(c) Residential status
(d)All of the above