Company Law

U1-1- Introduction
By: Dr. Nishant Dublish
Asst. Prof. – Finance
IMS Unison University
 COMPANIES ACT, 2013
The old Act (Companies Act, 1956) was replaced by the
Companies Act, 2013 on 29th August, 2013 when it got the
President’s assent.

Contains 29 Chapters, 470 Sections and 7 Schedules.

COMPANY:
Section 2(20) of the Companies Act, 2013 defines a
company as “any company formed and registered under
the Companies Act or under any previous company law.”
 Definition of a Company
The Companies Act, 2013 defines a company as “a
company incorporated under this Act or under any
previous company law.”
Some Popular Definitions of a Company:
Lord Justice Lindley – “A company is an association of
many person who contribute money or monies worth to a
common stock and employed in some trade or business
and who share the profit and loss arising therefrom. The
common stock so contributed is denoted in money and is
the capital of the company. The person who contribute to it
or to whom it pertains are members. The proportion of
capital to which each member is entitled is his share. The
shares are always transferable although the right to transfer
is often more or less restricted.”
 Definition of a Company
Chief Justice Marshall- “A corporation is an artificial
being, invisible, intangible, existing only in
contemplation of the law. Being a mere creation of law,
it possesses only the properties which the Charter of
its creation confers upon it, either expressly or as
incidental to its very existence.”

Prof. L.H. Haney - “A company is an artificial

person created by law, having separate entity,
with a perpetual succession and common seal.”
 Features/Characteristics
of a COMPANY
1. Incorporated Association.
A company is created when it is registered under the
Companies Act. It comes into being from the date
mentioned in the certificate of incorporation.
For forming a public company at least seven persons and
for a private company at least two persons are required.
These persons will subscribe their names to the
Memorandum of association and also comply with other
legal requirements of the Act in respect of registration to
form and incorporate a company.
2. Artificial legal person.
 A company is an artificial person. It is not a natural person. It exists in
the eyes of the law and cannot act on its own. It has to act through a
board of directors elected by shareholders.
 But for many purposes, a company is a legal person like a natural
person. It has the right to acquire and dispose of the property, to enter
into contract with third parties in its own name, and can sue and be
sued in its own name.

3. Perpetual Succession.
 A company is a stable form of business organization. Its life does not
depend upon the death, insolvency or retirement of any or all
shareholder(s) or director(s). Law creates it and law alone can dissolve
it. Members may come and go but the company can go on forever.
4. Separate Legal Entity.
A company has a legal distinct entity and is independent
of its members. The creditors of the company can recover
their money only from the company and the property of
the company. They cannot sue individual members.
Similarly, the company is not in any way liable for the
individual debts of its members. The property of the
company is to be used for the benefit of the company and
not for the personal benefit of the shareholders. On the
same grounds, 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 principal of separate legal entity was explained and emphasized in
the famous case of Salomon v Salomon & Co. Ltd.
The facts of the case are as follows :
 Mr. Salomon, the owner of a very prosperous shoe business, sold his
business for the sum of $ 39,000 to Salomon and Co. Ltd. which
consisted of Salomon himself, his wife, his daughter and his four sons.
 The purchase consideration was paid by the company by allotment of
20,000 shares and $ 10,000 debentures and the balance in cash to Mr.
Salomon. The debentures carried a floating charge on the assets of the
company. One share of $ 1 each was subscribed by the remaining six
members of his family.
 Salomon and his two sons became the directors of this company.
Salomon was the managing Director. After a short duration, the
company went into liquidation.
 At that time the statement of affairs’ was like this: Assets: $6000,
Liabilities: Salomon as debenture holder: $10,000 and unsecured
creditors: $7,000. Thus its assets were running short of its liabilities by
$11,000.
 The unsecured creditors claimed a priority over the debenture holder on
the ground that company and Salomon were one and the same person.
 But the House of Lords held that the existence of a company is quite
independent and distinct from its members and that the assets of the
company must be utilized in payment of the debentures first in priority
to unsecured creditors.
 Salomon’s case established beyond doubt that in law a registered
company is an entity distinct from its members, even if the person hold
all the shares in the company. There is no difference in principle
between a company consisting of only two shareholders and a company
consisting of two hundred members. In each case the company is a
5. Common Seal.
As was pointed out earlier, a company being an artificial
person has no body similar to natural person and as such it
cannot sign documents for itself. It acts through natural person
who are called its directors.
Therefore, the law has provided for the use of common seal,
with the name of the company engraved on it, as a substitute
for its signature. Any document bearing the common seal of
the company will be legally binding on the company.
However, the Companies (Amendment) Act, 2015 has made
the common seal optional and in case a company does not
have a common seal, the authorisation shall be made by two
directors or by a director and the CS (wherever the company
has appointed a CS).
6. Limited Liability.
 A company may be company limited by shares or a company limited by
guarantee.
 In company limited by shares, the liability of members is limited to the
unpaid value of the shares.
 In a company limited by guarantee the liability of members is limited to
such amount as the member may undertake to contribute to the assets of
the company in the event of its being wound up.

7. Transferability of Shares.
 In a public company, the shares are freely transferable. The right to
transfer shares is a statutory right and it cannot be taken away by a
provision in the articles.
 However, in the case of a private company, the articles shall restrict the
right of member to transfer their shares in companies with its statutory
definition.
8. Separate Property
As a company is a legal person distinct from its members, it is
capable of owning, enjoying and disposing of property in its own
name. Although its capital and assets are contributed by its
shareholders, they are not the private and joint owners of its
property.

9. Delegated Management.
A joint stock company is an autonomous, self governing and self-
controlling organization. Since it has a large number of members,
all of them cannot take part in the management of the affairs of the
company.
Actual control and management is, therefore, delegated by the
shareholders to their elected representatives, known as directors.
They look after the day-to-day working of the company.
 LIFTING THE CORPORATE VEIL
The chief advantage of incorporation from which all others
follow is, of course, the separate legal entity of the company.
However, it may happen that the corporate personality of the
company is used to commit frauds or improper or illegal acts.
Since an artificial person is not capable of doing anything
illegal or fraudulent, the facade of corporate personality
might have to be removed to identify the persons who are
really guilty. This is known as ‘lifting the corporate veil’.
Although, in general, the courts do not interfere and
essentially go by the principle of separate legal entity as laid
down in Solomon’s case and endorsed in many others, it may
be interest of the members in general or in public interest to
identify and punish the persons who misuse the medium of
corporate personality.
Circumstances to lift the Corporate Veil
The corporate veil can be lifted either under the
a) Statutory Provisions
OR
b) Judicial Interpretations

The statutory provisions are provided under the Companies

Act, 2013.
The other circumstances are decided through Judicial
interpretations, which are based on facts of each case as per
the decisions of the court.
 Statutory provisions
1. Membership falling below Statutory Minimum:
 Section 3A of The Companies (Amendment) Act, 2017 prescribes that if at any
time the number of members of a company is reduced below the minimum
prescribed and the company carries on business for more than 6 months while
the number of members is so reduced, then every person who is a member of
the company shall be severally liable for the payment of the whole debts of the
company contracted during that time and may be severally sued.

2. Misrepresentation in the Prospectus (Section 34 & 35):

 Every promoter, director or any other person who authorises the issue of such
prospectus.
 Liable to the investors who bought the shares on the faith of the untrue
statement u/s. 35. Also, criminally liable u/s. 34 and punishable u/s. 447 for
fraud.
Penalty u/s. 447:
If any person is found guilty of fraud involving an amount of
at least Rs. 10 lakhs or 1% of the turnover of the
company, whichever is lower, then he shall be punishable
with an imprisonment ranging 6 months to 10 years and
liable to be fined not less than the amount of the fraud, but
which may extend to 3 times the amount involved in the
fraud. However, where the fraud involves public interest, the
term of imprisonment shall not be less than 3 years.
Where the fraud is less than Rs. 10 lakhs or 1% of the
turnover of the company, whichever is lower, and does not
involve public interest, the guilty person shall be punishable
with imprisonment of upto 5 years or with fine upto Rs. 50
lakhs, or with both.
3. Failure to return the Application Money (Section 39 and
SEBI Guidelines):
As per Rule 11 of the Companies (Prospectus and Allotment
Rules) 2017, if the amount of minimum subscription is not
received within the specified limit, the money should be
repaid within 15 days of the close of the issue and if the
amount is not repaid, the directors will be jointly and severally
liable to pay the money along with interest @ 15% p.a.

4. Fraudulent Conduct of Business (Section 339):

Those who were knowingly part to such conduct of business
may be made personally liable for all or any of the debts of
the company, as the Tribunal may direct.
5. Holding and Subsidiary Companies (Section 129):
A subsidiary company may lose its separate legal entity
under two cases:
a) When the legislature brushes aside the legal forms and
requires the companies in a group to present a joint picture
[Section 129(3)]
b) The Court may on the facts of a case refuse to grant a
subsidiary company an independent status.
Case: D.H.N. Food Distributors Ltd. Vs. Town, Hamlets,
London Borrough Council.
6. For facilitating the task of an Inspector appointed u/s. 210 or 213, to
investigate the affairs of a Company for Alleged Fraud, Oppression or
Mismanagement.
7. Investigation of Ownership of Company u/s. 216 to find out the
Identity of the People who are Financially Controlling the Company.
8. Directors with Unlimited Liability.
9. Liability of Promoters for Pre-incorporation Contracts: Promoters
remain liable on those contracts which are not adopted by the company
after its incorporation.
10. Directors are personally liable for all acts which are Ultra Vires the
Company, the Directors and those in the Nature of Torts.
11. Liability under other Statutes: Income Tax Act, Foreign Exchange
Regulation Act etc.
 Judicial interpretations
1) Protection of Revenue:
The Court will ignore the separate entity of the company,
if it is formed solely for the purpose of evading income
tax.
Case: Sir Dinshaw Maneckjee Petit, Re AIR 1927

2) Prevention of Fraud or Improper Conduct:

Where the medium of a company has been used for
committing fraud or improper conduct, courts have lifted
the veil and looked at the realities of the situation.
Case: Gilford Motor Co. Vs. Horne (1933).
3) Determination of the Enemy Character of the
Company:
It sometimes is necessary to find out whether these
individuals are friends or enemies, especially during war.
Case: Daimler Co. Ltd. Vs. Continental Tyre & Rubber Co.
(Great Britain).

4) Formation of Subsidiaries to act as Agents:

Case: Merchandise Transport Ltd. Vs. British Transport
Commission (1982).
5) Where a Company Acts as an Agent for its
Shareholders:
Case: Smith Stone and Knight vs. Birmingham Corpn.
(1939)

6) In case of Economic Offences:

Case: Santanu Ray Vs. Union of India (1989).

7) Where Company is Used to Avoid Welfare Legislation:

Case: Workmen of Associated Rubber Industry Ltd. vs.
Associated Rubber Industry Ltd. (1986)
8) Where Company is Used for some Illegal or Improper
Purpose:
Case: PNB Finance Ltd. Vs. Shital Prasad Jain.

9) To Punish for Contempt of Court:

Case: Jyoti Ltd. vs. Kanwaljit Kaur Bhasin (1987)

10) For determination of Technical Competence of the

Company:
Case: New Horizons Ltd. Vs. Union of India (1995).

11) Where the company is a Sham or Cloak:

Case: D.D.A. Vs. Skipper Construction (Pvt.) Ltd. (1996)