MODULE VI: COMPANY LAW

CONTENT
 Companies Act, 1956/2013
 Meaning and types of companies,
 Formation of a company,
 Memorandum and Articles of Association,
 Share Capital and Shareholders,
 Prospectus and Issue of Shares,
 Buy Back of Shares, Debentures,
 Company Meetings and Proceedings,
 Powers, Duties, Liabilities of Directors and Winding up of
Company.
WHAT IS THE MEANING OF A COMPANY?
 The word company means an association
formed by a number of persons for some
common object.

 When such an association of persons is

registered under the companies act, it becomes
an artificial person with perpetual succession and
common seal.
HOW IS A COMPANY DEFINED?
 According to sec. 2(20)of the company act 2-
13, A company is defined as, ‘a company formed
and registered under this act or an existing
company.’

 An existing company means ‘a company formed

and registered under any of the previous
company laws.’
WHAT ARE THE CHARACTERISTICS OF THE COMPANY?

 1. Incorporated Association:
 Under the Companies Act, a company must be
registered or incorporated.
 The minimum numbers of persons required for
incorporation are seven in case of public co. and
two in case of private company.
2. ARTIFICIAL LEGAL PERSON
 2. Artificial person:
 It is an artificial legal person enjoying same
rights and owing same obligation as a nature
person.

 It acts through some human agency and they are

called director and the director and not the agent
of the members but company
3.SEPARATE LEGAL ENTITY
 3. Separate Legal Entity:
 A company is separate and distinct from the persons
who constitute it.
 Different From The People Making It
 Different Bank Account
 Buy Property Buy Dispose
 Raise Loan
 Enter Into Contract
 And the asset that the share holder give the
company ,company becomes the owner of the assets .
3.SEPARATE LEGAL ENTITY:
 Separate Legal Entity: share holders are not joint and private owner
of company property .

 Macaura v Northern Assurance Co Ltd [1925] AC 619. Members

have no interest in a company’s property.

 The owner of a timber estate sold all the timber to a company which
was owned almost solely by him.
 He was the company’s largest creditor. (loan to the company)
 He insured the timber against fire, but in his own name.
 After the timber was destroyed by fire the insurance company refused
the claim.
3.SEPARATE LEGAL ENTITY
 The House of Lords held that in order to have an
insurable interest in property a person must have
a legal or equitable interest in that property.

 The claim failed as “the corporator even if he

holds all the shares is not the corporation…
neither he nor any creditor of the company has
any property legal or equitable in the assets of the
corporation.” (per Lord Wrenbury, at pg 633).
4. LIMITED LIABILITY
 4. Limited Liability: the liability of its members
is limited to the unpaid value of the shares held
by them or guarantee given by them.

 Limited by shares =unpaid amount

 Limited by gurantee =on winding up
 Unlimited company =unlimited liablity
4.LIMITED LIABILITY
 Limited liability is a type of legal structure for an organization
where a corporate loss will not exceed the amount invested in
a partnership or limited liability company (LLC). In other words,
investors' and owners' private assets are not at risk if the
company fails.

 The limited liability feature is one of the biggest advantages of

investing in publicly listed companies. While a shareholder can
participate wholly in the growth of a company, their liability is
restricted to the amount of the investment in the company, even if
it subsequently goes bankrupt and has remaining debt obligation
CHARACTERISTICS OF THE COMPANY?
 5.Separate Property: Company is entitled to
own and hold property as distinct from its
members.

 6. Transferability of Shares: Shares of the

company are freely transferable which makes the
life of the company independent of the lives of its
members.
 CHARACTERISTICS OF THE COMPANY
 7. Perpetual Existence: A company being an artificial judicial
person, it is not affected by the death, insolvency or retirement
of the members. Members may come and members may go
out but the company can go on forever.
 8.Common seal: Common seal is the official signature of the
company because a company cannot sign like a natural
person. (amendment 2013-sign by 2 director and 11 director
and one CA )
 9. Company may sue and be sued in its own name: One of
the consequences of separate legal entity is that a company
may sue and be sued in its own name
corporate veil
CORPORATE VEIL?
 A company is a legal person and is distinct from its
members. Separate legal entity

 This principle is regarded as a curtain or a veil between

the company and its members protecting the later from
the liabilities of the former. If the liability of a company
is 1cr the liabilty of the shareholders /members is not one
cr.

 This veil is the corporate veil and is impassable as an

iron curtain.
WHAT IS MEANT BY LIFTING OF THE CORPORATE VEIL?

 As per the judicial point of view, a company is a separate legal

entity different from its members (saloman Vs. Saloman & co.
Ltd.).

 When there are cases of dishonesty and fraudulence in

incorporation, the law lifts the veil.
 This veil is a fictional veil and not a wall between the company
and its members.
 Lifting the corporate veil may be defined as looking behind the
company as a legal person and identifying the persons who are
behind the scene and are responsible for the preparation of fraud
(SALOMAN VS. SALOMAN & CO. LTD.).
 Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897]
AC 22 is a landmark UK company law case.


 The effect of the House of Lords' unanimous ruling was to

uphold firmly the doctrine of corporate personality, as set
out in the Companies Act 1862,


 so that creditors of an insolvent company could not sue

the company's shareholders for payment of outstanding
debts.
(SALOMAN VS. SALOMAN & CO. LTD.).
 Mr Aron Salomon made leather boots or shoes as a sole proprietor.
 His sons wanted to become business partners, so he turned the business
into a limited liability company. 38782 pounds
 This company purchased Salomon's business at an excessive price for its
value.
 His wife and five elder children became subscribers and the two elder
sons became directors.
 Mr Salomon took 20,001 of the company's 20,007 shares which was
payment from A Salomon & Co Limited for his old business (each share
was valued at £1).
 Transfer of the business took place on 1 June 1892.
 The company also issued to Mr Salomon £10,000 in debentures.
 Mr Salomon received an advance of £7,000 from Edmund Broderip.
(SALOMAN VS. SALOMAN & CO. LTD.).
 Soon after Mr Salomon incorporated his business there was a decline in
boot sales.
 The company failed, defaulting on its interest payments on its
debentures (half held by Broderip). Broderip sued to enforce his security.

 The company was put into liquidation. Got 6000 pounds only
 Salomon claimed under the retained debentures he retained.
 If Salomon's claim was successful this would leave nothing for the
unsecured creditors.

 When the company failed, the company's liquidator contended that

Salomon should be made responsible for the company's debts. Salomon
sued.
(SALOMAN VS. SALOMAN & CO. LTD.).
 Salomon’s right of recovery (secured through floating charge)
against the debentures stood aprior to the claims of unsecured
creditors, who would, thus, have recovered nothing from the
liquidation proceeds.
 To avoid such alleged unjust exclusion, the liquidator, on behalf of
the unsecured creditors, alleged that the company was sham,
was essentially an agent of Salomon, and therefore, Salomon
being the principal, was personally liable for its debt.
 In other words, the liquidator sought to overlook the separate
personality of Salomon Ltd., distinct from its member Salomon, so
as to make Salomon personally liable for the company’s debt as if
he continued to conduct the business as a sole trader
RULING

 The Court of Appeal, declaring the company to be a myth, reasoned that

Salomon had incorporated the company contrary to the true intent of the then
Companies Act, 1862, and that the latter had conducted the business as an
agent of Salomon, who should, therefore, be responsible for the debt
incurred in the course of such agency.
 The House of Lords, however, upon appeal, reversed the above ruling, and
unanimously held that, as the company was duly incorporated, it is an
independent person with its rights and liabilities appropriate to itself, and
that “the motives of those who took part in the promotion of the company
are absolutely irrelevant in discussing what those rights and liabilities are”. 3

 Thus, the legal fiction of “corporate veil” between the company and its
owners/controllers4 was firmly created by the Salomon case.
Lifting of corporate veil
 Lifting of corporate veil means disregarding the corporate personality and
looking behind the real person who are in the control of the company.
 In other words, where 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. In this regards the court will break
through the corporate veil.
 According to the definition of Black Law Dictionary," the piercing the
corporate veil is the judicial act of imposing liability on otherwise
immune corporate officers, Directors and shareholders for the corporation's
wrongful acts."Aristotle said, when one talks of lifting status of an entity
corporate veil, one has in mind of a process whereby the corporate is
disregarded and the incorporation conferred by statute is overridden other
than the corporate entity an act of the entity
 The circumstances under which the court may lift
the corporate veil may be broadly divided into
following two heads:-
 1.Judicial Interpretation
 2. Statutory Provision
TO DETERMINE THE CHARACTER OF THE COMPANY
DURING THE TIME OF WAR
 To find out that company is our friend or enemy during war
 All except one of Continental Tyre and Rubber Co Ltd's shares
were held by German residents and all directors were German
residents.
 The secretary was English. Continental Tyre and Rubber Co Ltd
supplied tyres to Daimler, but Daimler was concerned that making
payment might contravene a common law offence of trading with
the enemy as well as a proclamation issued under s 3
 (1) Trading with the Enemy Act 1914. Daimler brought the action
to determine if payment could be made, given that it was the
First World War.
B. PROTECTION OF REVENUE:
 Where the medium of the company has been used
for tax evasion or to circumvent tax obligation,
courts have lifted the veil and looked at the
realities of situation
 [In Sir Dinashaw Mancekjee Petit]
 a. Avoidance of welfare legislation: Where the
device of incorporation is used for reducing the
amount to be paid by way of bonus to the
workmen, the Supreme Court can upheld the
lifting of the veil to look at the real transactions:
[workmen of Associated Rubber Industry Vs.
Associated Rubber Co.]
JUDICIAL INTERPRETATION:
JUDICIAL INTERPRETATION
 c. Where company is a sham:
 When the court finds that company is a mere cloak or
sham and is used for some illegal or improper purpose,
it may lift veil.
 The leading case on this was P.N.B. Finance V. Shital
Prasad, where a person borrowed money from a
company and invested it into three different
companies, the lending company was advised to bring
together the assets of all the three companies, as they
were created to do fraud with the lending company.
JUDICIAL INTERPRETATION
 d.Where the company is acting as the agent of the
shareholders: Where a company is devised to act
as an agent of its shareholders or of another
company it will be responsible for its acts.
 However, it will be a question of fact every case
whether the company is acting as agent for its
shareholders.
 e. Determination of character: Test of control is
adopted in the cases when the trade is conducted
with enemy country.
 In such cases the court will lift the veil at the
times of war to see whether a company is
controlled by enemy aliens.
 Consequently a company registered in England
may be alien enemy if its agents or the persons in
default controls of its affair are alien
 f. Provision of fraud or improper conduct: The
court will disregard the separate existence of the
company, where it is shown the company is
formed for evading contractual and statutory
obligations [Gilford Motor Co. Ltd. V. Horne]
STATUTORY PROVISION : CASES ARE AS FOLLOWS:-

 Number of member below statutory minimum [sec. 45]

 When at any time the number of member of a company
is reduced below two in case of a private company or
below seven in case of a public company and then too it
continues it s business for more than six months, the
every member who knows the fact will become liable to
an unlimited extend for the payment of the whole debt
of the company done during that time.
 The reason behind this is to withdraw the advantage of
incorporation when the conditions are not fulfilled.
 Company not mentioned on the bills of exchange
[sec. 147]:
 When the bills of exchange, promissory note, cheque
or order for money or goods are signed by officer of
the company or any other person on behalf of the
company, and the name of company is not fully or
properly mentioned.
 Then the person who signed the instrument will be
personally liable. Unless the amount is paid by the
company
 Failure to refund application money [sec. 69]:
 In case of issue of shares by a company to the
public, if the company is unable to receive
minimum subscription within 120 days from the
first issue of the prospectus than all money
received from application shall have to be
returned. If the amount is not refunded within 10
days, the directors shall be liable to repay the
money with interest at the rate of 6% per annum
 Fraudulent trading [sec. 542]; On the winding
up procedure of the company, if it is found that
any business of the company has been carried on
to defraud creditors, the court shall declare those
persons personally liable for the debts and other
liabilities of the company.
 Group accounts [sec. 212]: Where the company
has subsidiaries and group accounts, than the
principle of separate legal entity may be
disregarded. Along with the own profit and loss
account and balance sheet, subsidiaries and group
accounts have also to be laid down. Thus, these
are the circumstances were the veil can be lifted.
WHAT ARE THE VARIOUS TYPES OF COMPANIES?

 Generally there are two common types of

companies which are registered under this Act,
they are:-
 1. Private company
 2. Public company
WHAT ARE THE VARIOUS TYPES OF COMPANIES?

 However, there are other types of companies which are shown

as under:-
 1. Chartered Companies: The companies which are
incorporated by a charter granted by the “Crown” in exercise
of royal prerogative Eg. East India Company.
 2. Statutory Companies: The companies incorporated by
means of Statute of special Act of the parliament or any
State Legislative Eg. RBI, LIC etc.
 3. Registered Companies: The companies registered under
the companies Act, 1956 or the earlier Companies Act.
Registered Companies are of the following types:
 (i) Companies limited by Share: The companies in which
the liability of the members are limited by the memorandum
to the amount, if any, unpaid on the share respectively held
by them.
 (ii) Companies limited by Guarantee: The companies in
which the liability of the members are limited to such
amounts as they may respectively undertake by the
memorandum to contribute to the assets of the company in
the event of being its wound up.
 (iii) Unlimited Companies: The companies in which the
liability of the members is not limited at all.
7. WHAT IS MEANT BY A PRIVATE COMPANY?

 According to Section 3(1) (iii) as amended by the companies (amended)

Act, 2000, a private company means:-
 A company which has a minimum paid up capital of one lakh rupees, or
such higher paid up capital as may be prescribed by its articles provides
for the following restrictions.
 1. Restricts the rights of members to transfer the shares
 2. Limits the number of its members to fifty and
 3. Prohibits any invitation to the public to subscribe for any shares or
debentures of the company.
 4. Prohibits any invitation or acceptance of deposit from persons other
than its members, director’s or their relatives. However, u/s. 25,
companies not for profit have been exempted from the provision of
minimum paid up capital of Rs. 1 lakh.
HOW IS A PUBLIC COMPANY DEFINED?
 According to sec, 3(1) (iv) as amended by the
companies (amended) Act, 2000, a public company
means:
 A company which:-
 1. Is not a private company
 2. Has a minimum paid-up capital of Five lakh Rupees
or such higher paid-up capital as may be prescribed.
 3. Is a private company, which is a subsidiary of a
public company.
9. WHAT IS MEANT BY HOLDING AND SUBSIDIARY COMPANY?

 A company which controls another company is knows as the

holding company and the company so controlled is the
subsidiary company.
 Section 4, provides that:- A company is a holding company if
it
 1. Controls the composition of board of directors of another
company.
 2. Holds more than half of the nominal value of equity share
capital of another company.
 3. Is a subsidiary of any company which is in twin a
subsidiary of another company
MEMORANDUM AND ARTICLES OF ASSOCIATION

 1. What is Memorandum of association?

 As per section 2(28) of the Companies Act, 1956,
“Memorandum” means “Memorandum of
Association of a company as originally framed
and altered from time to time in pursuance of any
provisions of company laws or of this Act”.
 This definition does not give any idea as to what
memorandum really is.
 According to Palmar, “the Memorandum of Association is a
document of great importance in relation to the proposed
company.
 It contains the objects for which the company is formed and
therefore identifies the possible scope of its operations beyond
which its action cannot go.
 It defines as well as confines the power of company. If
anything is done beyond these power that will be ultra vires the
Company and so void.
 Thus, it is evident that the memorandum is the charter and
defines the limitation of the power of a company
 https://www.youtube.com/watch?
v=5DeLz5mX78M&t=6610s