Company Law Notes
Company Law Notes
Company Law Notes
Act 2013
New Company Law has been framed on Skelton Approach
It consist of 29 chapters, 470 Sections, 7 schedules, 95 definitions.
Meaning of Company
• The word "Company" is the combination of two words "Com" and "Panies". The word
“Com” means with or together and the word “panies” means bread.
• The word Company can be referred as an association of person who took their meals together.
• It is an association of persons for some common objects.
• In simple terms Company may be described to means voluntary association of persons who
come together for carrying on some business and sharing of money there from.
• In the words of Lord Justice Lindley, "A Company is an association of many persons 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 there from. The common stock so contributed is the share
capital of the Company.
Definition
• Section 2(20) of the Companies Act, 2013, provides that a 'company' means a company incorporated
under this Act or under any previous company law.
The case of Salomon 'VS. Salomon & Co. ltd. has clearly established the-principle of separate legal
entity. Salomon had, for some years, carried on a prosperous business as a leather merchant and. boot
manufacturer. He formed a limited company consisting of himself-his wife and a daughter, and his four
sons as the - shareholders, all of whom subscribed for one share of 1 pound each. Salomon was the
managing director and two of his sons were other directors.
Salomon sold his business (which was perfectly solvent at that time) to the Company for the sum of
38,782 pounds. He got the following payments:
10,000 Secured Debentures of 1 pound each 10,000 pounds
20,000 F1.llly – paid Shares of 1 pound each 20,000 pounds
Cash 8,782 pounds
The company soon ran into difficulties and the debenture holders appointed a receiver and the company
went into liqui4ation. The total assets of the company amounted to 6,050 pounds its liabilities were
10,000 pounds, secured ‘debentures and 8,000 pounds owing to unsecured trade creditors,
The unsecured trade creditors claimed the whole of the company's assets, viz. 6,050 pounds on the
ground that as the company was a mere agent for Salomon and thus they were entitled to payment of
their debts in priority to Debentures. -
The House of Lords rejected these contentions and held that a company, on registration, has its own
existence or personality separate and distinct from its members and, as a result, a shareholder cannot be
equated with a company even if he holds virtually the entire share capital-of the company.
Case Law 2 Lee v Lee Air Farming Ltd. (1961)
• In this case, a company was formed for the purpose of aerial top-dressing.
• Lee, a qualified pilot, held all except one of the share the company.
• He voted himself the managing director and got himself appointed by the articles as chief pilot at
a salary.
• He was killed in an air crash while working for the company.
• His widow claimed compensation for the death of her husband in the course of his employment.
The company opposed the claim on the ground that Lee was not a worker as the same person could
not be the employer and the employee. -
• The Privy Council held that Lee and his company were distinct legal persons which had entered
into contractual relationships under which he became the chief pilot and a servant of the company.
• In his capacity of managing director he could, on behalf of the company, give himself orders in
his other capacity of pilot, and the relationship between himself as pilot and the company, was that
of servant and master, Lee was a separate person from the company he formed and his widow was
held entitled to get the compensation.
• In effect the magic of corporate personality enabled him (Lee) to be the master and servant
at the same time and enjoy the advantages of both.
Certain persons transferred a Tea Estate to a company and claimed exemptions from ad-valorem duty
on the ground that they themselves were also the shareholders in the company, it was nothing but a
transfer from them in one name to themselves under another name.
Calcutta High Court rejected this and observed: "The company was a separate person, a separate body
altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property,
as if the shareholders had been totally different persons.
Need to have common seal, has been abolished in any company (w.e.f 25th May 2015)
In Section 9, of the Principal Act, the words ‘and a common seal’ has been omitted. In Section 22(2) of
the Principal Act, the words “under its common seal” has been substituted by “under its common seal, if
any”. If the company has no common seal then, authorisation under this sub section shall be made by-
• 2 Directors or
• By a director and the Company Secretary where company has appointed one.
If a company has common seal, then the following documents are required to have upon it the common
seal of the company:
▪ Power of Attorney
▪ Share Certificate
▪ Share Warrant
Case Study
XYZ Ltd., Company is a Company having seven members only. All the members of the company
were attending meeting in New Delhi in relation to some business. A bomb blast took place and all
of them died. Answer with reasons, under the Companies Act, 2013 whether existence of the
company has also come to the end?
Answer:
• The existence of the company does not come to an end
• Since the existence of the company does not depend upon the life of any or all the
members of the company. Since the existence of the company can come to an end only in
accordance with the provisions of law, viz. dissolution of the company.
• Since one of the characteristics of the company is 'perpetual succession'.
Case Law 5 T.R.Pratt ( Bombay) Ltd. Vs. E.D. Sasson & Co. Ltd
It was held that "Under the law, an incorporated company is a distinct entity, and although all the
shares may be practically controlled by one person. In law a company is a distinct entity and it is not
permissible or relevant to enquire whether the directors belonged to the same family or whether it is
as compendiously described a one-man company".
The judgement of the Delhi High Court was reversed by the Supreme Court which observed asunder:
"Once it is held that NHL (New Horizons Ltd.) is a joint venture, as claimed by it in the tender, the
experience of its various constituents namely, TPI (Thomson Press India Ltd.), LMI (Living Media
India Ltd.] and WML (World Media Ltd.) as well as IIPL (Integrated Information Pvt. Ltd.) had to be
taken into consideration, if the Tender Evaluation Committee had adopted the approach of a prudent
business man."
"Seeing through the veil covering the face of NHL, it will be found that as a result of re-organisation
in 1992 .the company is functioning as a joint venture wherein the Indian group (TPI, LMI and WML)
and Mr. Aroon Purie holds 60% shares and the Singapore based company (NPL) holds 40% shares.
Both the groups have contributed towards the resources of the joint venture in the form of machines,
equipment and expertise in the field."
The company is in the nature of partnership between the Indian groups of companies and. Singapore
based company who have jointly undertaken this commercial enterprise wherein they will contribute
to the assets and share the risk. In respect of such a joint venture company, the experience of the
company
can only mean the experience of the constituents of the joint venture i.e. the Indian group of companies
(TPI, LMI and WML) and the Singapore based company (IIPL).
Advantages of Company
1. A company is a legal entity, distinct and independent of those persons who from time to time
are called its members.
2. The liability of the company's members are limited to the extent they have agreed to contribute
towards the capital of the company with reference to the number of shares and/or the amount of
guarantee respectively undertaken by them.
3. As the company is having an independent personality of its own, its members are not personally
liable for any act or omission on the part of the company, unless the law expressly provides
otherwise.
4. The company being a juristic person, distinct from the members constituting it, a company can
acquire, own, enjoy and alienate property in its own name. As such the property would be that of
the company and no member can make any claim upon it so long as the company is a going concern.
5. The company being a legal entity can sue and also be sued in its own name.
6. The continuity of the company and its functioning-is not effected by the death, disability or
retirement of any of its members. The company continues to exist, irrespective of change in its
membership. It is commonly referred to as "perpetual succession"
7. Transfer of member's interest in the company can be readily attained without in any way
adversely affecting its property, business, or existence.
8. Transferability of the company's shares provides an element of liquidity to the investors in
respect of their investment in the shares of the company and thus facilitates increased investment in
the company's funds without, in any way, adversely affecting its economic stability.
9. The members of the company equitably share the profit by way of dividend and the company's
assets in the event of its winding up distributed in proportion of its capital respectively contributed by
them.
10. Shares of small denomination afford an opportunity to the small investors to invest according
to their capacity.
11. Increased investment in the company's funds is further ensured by permitting large number of
persons to subscribe to the company's shares.
12. Incorporation of a company affords better opportunity for strengthening capital resources,
growth and development of the enterprise.
13. The corporate form of business organisation affords opportunity for professionalization of its
management and entrusting the administration of its affairs to persons of professional competence
and standing.
14. Incorporation of company provides better borrowing facilities as the company can raise large
amount, on comparatively easier terms, by issue of debentures, especially those secured by a floating
charge or by accepting deposits from the public. Even banking and financial institutions prefer to
render financial assistance to incorporated companies.
15. In certain cases, an incorporated company comparatively stands in a better position from the
point of view of taxation on its income.
16. Once the company is brought into existence on its incorporation, it can only be dissolved with
the provisions of the law.
Disadvantages of Company
1. Formalities and expenses: Incorporation of Company is coupled with many complexes and
legal formalities. Even after the Company is incorporated, it has to comply with the various legal
provisions. Various documents and returns have to be filed with various government agencies from
time to time, which lead to heavy expenditure.
2. Corporate disclosure: Various corporate information has to be disclosed from time to time to
the members of the Company, hence no secrecy.
3. Separation of control from ownership: Members of the Company do not have the control over
the Company. Although they have interested in money and are the owner of the Company but still
they do not have active control over the Company.
4. Greater social responsibility: The Companies have the great impact on the society, due to this
reason the Companies are called to show greater social responsibility in their working.
5. Greater tax burden: Tax burden in case of the Company is more than any other form of
business organisation. A Company is liable to pay tax without any minimum taxable limit and it has
to pay tax on its whole income in other words Basic exemption limit for Companies is Nil.
6. Detailed winding-up procedure: The Act provides for a very detailed and lengthy procedure to
wind up the Company, which is more expensive and time consuming.
Difference between Company and Partnership Firm
11. Regulating Act Companies Act, 2013 Indian Partnership Act, 1932
But is was held that neither the provisions of the Constitution of India nor The Citizenship Act, 1955,
either confer the right of citizenship on or recognize as citizen any person other than a natural person
In the words of Justice Hidayatullah: "If all of them (the members) are citizens of India, the company
does not become a citizen of India, any more than, if all are married, and the company would be a
married person:'
The Supreme Court further stated in this case that a company is however, a person in the eyes of law
and it can claim the protection of such fundamental rights as are guaranteed to all persons, whether
citizens or not.
For instance, "Right to Equality" under Article 14 of Constitution of India. A company cannot claim
the protection of such fundamental rights as are expressly granted to citizens only. For instance,
"Right to Freedom" under Article 19 of Constitution of India.
However, where shareholder rights are equally affected if the rights of the company are affected, it
can claim the protection of all such rights, which are guaranteed to citizens through shareholders or
directors of the company.
Note: A company is a body corporate but bodies corporate need not be a company
Explanation: The rules can prescribe a limit, but whatever limit is prescribed it must not be greater
than 100 (i.e. up to 100)
LIABILITY OF MEMBERS
Every member of an illegal association is:
a) Personally liable for all liabilities incurred in carrying on the business of, or by, the illegal
association; and
b) Punishable with fine up to Rs.1,00,000/-
When the Karta of HUF enters with outsiders in business, the other members of such family do not
ipso facto become partners.
A company is formed by the members and managed by the Board of Directors with the
assistance of officers and employees. On incorporation, law gives separate legal entity to the
company. Thus, a fiction is created by law by which the rights, powers, duties, functions,
liabilities and property of a company is differentiated from the rights, powers, duties,
functions, liabilities and property of the members, Directors, officers and employees of the
company. This fiction of law is called Veil of Incorporation or Corporate Veil.
Or
“Lifting of Corporate Veil” means ignoring the separate legal entity of the company and
looking behind the company to identify the real persons who controls the company.
When a Company has been formed and registered under the Act, all dealings with the
Company will be in the name of the Company and the persons behind the Company will be
disregarded, however important they may be. This principle is called “Veil of Incorporation”.
The advantages of incorporation are allowed to be enjoyed only by those who honestly use
the veil of Company for the collective benefit of the Company and its members. In case of
dishonest and fraudulent use of the facility of incorporation, the law can remove/lift the
“Corporate Veil”.
(8) Ultra Vires Act Directors and other officers of Company shall be personally liable for all those
acts which they have done on behalf of the Company and which are Ultra Vires the Company.
He formed 4 private companies and transferred whole of his investments to these 4 companies. The
dividend and interest received by these companies were within the exempted limits of tax. Except these
investments no other business was run by these companies and had no other assets. The income
received in the form of interest and dividend, was transferred to that person in the form of loan and was
never returned.
It was held that these companies were created only to evade taxes and therefore court ignored the
separate legal entity status of the company and whole of interest and dividend earned by the company
was treated as income of that person.
Case Law 15 Daimler Co. Ltd. Vs. Continental Tyre & Rubber Co. Ltd
A company was formed in England for the purpose of selling tyres made by a German Company.
This German company held almost all the shares of this new company formed in England. Moreover
all the directors of this company were German. During the First World War, The English Company
filed a suit against another English company for recovery of a debt. Court ignored the separate legal
entity of the company and held that the persons who had the ultimate control of the company were
enemies and therefore suit was set aside.
3. Prevention of fraud
Where a Company is used for committing frauds or improper conduct, Court may lift the corporate
veil and look at the realities of the situation.
Case Law 17 Workmen of Associated Rubber Industry Ltd. Vs. Associated Rubber
Industry Ltd.
A company was earning huge profits and thus had to pay huge bonus to its employees. It created a
subsidiary company and transferred some of its investments to it so as to reduce some of its profits.
This subsidiary company had no other business. It was held that this new company was formed just to
avoid the liability of bonus under the Payment of Bonus Act. Hence profits earned by subsidiary
company were held as profits of holding company and had to give bonus on that profits also.