Unit 1
Company Definition: Section 3 (1), Companies
Act. A company is a company formed or registered under the companies act or an
existing company. According to section 3(1)(i)(ii), an existing Company is a
Company formed and registered under any of the former Companies Act. According to Honey, a Company is an
incorporated person
I.
Which is an artificial person
II.
Created by law
III.
Having a separate entity
IV.
With a perpetual succession and
V.
A common seal.
The above definition is more
comprehensive.
Characteristics of Company
1) Incorporated
Association: Company must be
incorporated under company’s Act . Compulsory for all associations Or
partnership of more than 10 members . In case of banking business or Section
20, In case of other business to register under the companies Act.
2) Artificial Legal person:
·
Created by law and law alone can dissolve it.
·
Invisible and intangible.
·
Exist in eyes of law.
·
Purchase and sell property
·
Can sue and be sued by others.
·
Enter into contracts through natural persons however does not
possess physical attributes of natural person.
3) Separate
Legal Entity:
Company is separate legal entity in
the eyes of law as distinguished from its members. It does not lose
individuality by issuing bulk of its capital to one person only. It can sue and
be sued by outsiders as well as members.
Case Laws
:
·
Solomon Vs Solomon and company
·
Lee Vs Lee Air farming Ltd
·
Telco Vs State of Bihar SC
4) Perpetual
Existence: Life of company does not depend upon the death, insolvency or
retirement of any or all share holders or directors of company. The provision
of transfer and transmission of shares preserve the perpetual existence of
Company. Company’s perpetual existence
is recognized in Section 34 (1) and (2) of Companies Act.
(i) On registration of memorandum of Co. registrar shall
certify that Company is incorporated.
(ii) From the date of incorporation
subscribers of memorandum and other persons as members shall be a body corporate.
5) Common
Seal :
Company being as separate legal
entity bound by documents which bear, inter alia, its signature, that is common
seal. Any document bearing common seal of Company duly witnessed by at least
two directors is binding on the company.
6) Limited Liability : There may
be :
·
A company limited by guarantee.
·
A Company with unlimited liability.
·
A Company with limited liability.
Liability of members of Company with
limited liability is limited to the extent of amount unpaid or shares held by
them.
7) Transferability
: In case of public limited Company shares are freely transferrable without
permission from Company or other members. In case of private Ltd Company there
are some restrictions on transferability of shares.
Advantages
of Incorporation:
·
Independent Corporate Existence Solomon Vs Solomon.
·
Limited liability: share holder liability is not more than
the nominal value of shares held by them.
·
Separate Property: Company is capable of owning, enjoying and
disposing of property in its own name. The members have no direct proprietary
right to Companies property.
·
Perpetual Succession: continuous existence. Members of
Company may come and go but Company can go on forever.
·
Capable of suing and being sued. Company has a right to seek
damages where a defamatory material published about it affects its business.
·
Transferrable shares: Legally and practically freely
transferrable in case of limited Company .
·
Management separate from capital: Company law provides for
separation for risk investment via purchase of shares from the management.
·
Finances: Company is the only form of business organization
which raises capital from public. Public financial institutions willingly lend
their resources to the companies.
Disadvantages
of Incorporation:
1) Formality and expense: Number of
formalities to be completed:
·
To pay stamp duty, registration fee, filling fees etc.
·
To work as per provisions of Companies Act.
·
To maintain elaborate Account Books
·
To be audited annually
·
To send annual reports to share holders and registrars of
Companies
·
Winding up also expensive
2) Loss
of Privacy: Public Ltd Company required to publish its constitution,
capital structure, final Accounts etc. Thus loss of privacy.
3) Corporate
Governance : In many cases management has poor track record of corporate
governance. Moreover lack of personal interest and motivation results in
wastages and inefficiency of management.
4) Lifting
the Corporate Veil : A company has a separate legal personality distinct
from its members. The Solomon’s case well established the existence of veil of
corporate personality. But there are exceptions to this fundamental principle
of corporate personality where veil is lifted and identity of members is
revealed. Corporate veil is said to be
lifted when court ignores the Company and concerns directly with the members or
managers.
Thus, lifting of corporate veil means
disregarding the corporate entity and paying regard instead to the individual
members behind the legal façade.
It must be noted that there is no
general principle covering all exceptions.
The Circumstances under which corporate
veil lifted may be classified into the following:
1) Under Judicial interpretation
2) Under Statutory Provision
Under Judicial interpretation: Determination of enemy character of company.
Case Law: Diamler Company Vs Continental tyre and Rubber Company (AC Decision) (Corporate
Veil can be lifted for determination of character)
A Private Company incorporated in
England for selling tyres manufactured in Germany by German Company. Share
capital of 25,000 Shares of S1 each. Members
of Company –
German Co. 23,398 shares German
National 1601 shares British
National 1 share
During First World War , English
Company brought an action to recover trade debt. The house of lords held-
Company though incorporated in UK was an
English Company ; but its real character was German. Its directors , share
holder except one , its actual beneficiaries were Germans who had become
enemies of England in war. The Company was not allowed to proceed with the
action to recover trade debts.
The court laid down that a Company may
assume enemy character when person “in de facto control” of its affairs are : A)
residents in enemy country or B) residents acting under control of enemies.
Tax
Evasion: If a company is used for tax evasion or circumvent tax obligation the
courts have power to disregard the corporate veil of Company .
CASE LAW: In re Sir Dinshaw Manekjee The assessee Sir Manekjee, formed four private ltd
companies and transferred his investments in parts to each of them in exchange
of their shares. Companies were doing no business apart from receiving
dividends handing them back to assessee loans. Thus assessee divided his income
in four parts to reduce his tax liability. He was assessed for ‘ Super tax’
deeming that profits of Company were his profits and alleged loans were not
genuine loans. The courts disregarded the veil of incorporation and found out
that the Companies was formed as the means of avoiding super tax and it was
nothing more than the assessee himself.
The Co. was formed by assessee purely
and simply as a means of avoiding tax. It did no business but to ostensibly to
receive dividends and interests and to hand them over to the assessee as
pretended loans.
Fraud or
Improper Conduct: The courts will refuse to hold the veil of incorporation
where it seems Company is a cloak or sham to defraud creditors or to avoid any
legal obligation.
CASE LAW: Gillford Motor Company Vs Horme ( Court of appeal decision)
Defendant, a former employee of plaintiff
Company , was covenanted not to solicit
its customers. He formed a Company which solicited its customers. Held: a
Company formed as a device and as a mere cloak or sham for enabling the
defendant to commit a breach of its covenant with plaintiff.
Agency or
trust: A
Company sometimes be regarded as an agent or trustee of its members or another
Company and therefore deemed to have lost its individuality in favor of
principal.
Case law : LIC vs Escorts (SC)
A group of 13 Companies incorporated abroad
separately applied for permission (as provided) with FERA for investment in
Indian Companies. All these Companies purchased shares of Escorts Ltd. . More
than 60 % shares of these 13 Companies held by a trust of which Mr. Swaraj Paul
and his family member were trustees.
SC Held= FERA itself permits the veil
to be lifted fro knowing whether 60% holding makes the company belong to non
resident Indians.
Avoidance of
Welfare Legislation :
Case Law: Workmen Vs. Associated Rubber Industries. (SC)
A Company created a subsidiary and transferred
its investment holdings in it to reduce liability to pay bonus to workers.
Subsidiary Company had no assets of its own except those transferred to it by
the principal Company and assets except receiving dividend from shares transferred
to it. The purpose was to reduce the gross profit of the principal Company.
The court brushed aside the separate
existence of subsidiary Company and observed that it is the duty of the court
to go behind the smoke screen of expansion to avoid taxing and welfare
legislation and discover the state of affairs.
Under Statutory Provisions :
1.
Reduction in Membership S. 45
In case membership in a
public Company falls below 7 and in a private Company below 2; and the Co.
carries on business as such for more than 6 months, every member shall be
severally liable for the debts of the Co.
2.
Fraudulent Trading S. 542
In the course of winding
up of a Co., business carries on with the intent to defraud creditors or for
any fraudulent purpose; the persons who r parties to fraud r personally liable
without limitation of liability of Co.
3.
Mis-description of Company S. 147
In any contract or act
where name of Company is not fully or properly indicated, those responsible for
it shall be personally liable. Similarly, address of its registered office be
mentioned in legible characters in all busi8nesz letters, bill heads, notices
etc.
4.
Holding and Subsidiary Company
Section 212 to 214 of the
Companies Act provide form obtaining information of accounts and financial
position of a group of Companies as a whole.
Lifting of
Corporate Veil : Case Laws
K. HINGORANI V/s STATE OF
BIHAR
Lifting the veil of govt. Companies
is permissible when corporate personality is found to be opposed to justice,
convenience of interest of revenue or convenience of interest of workmen or
public policy.
Separate Legal
Entity : Case Laws
SOLOMON V/s SOLOMON AND Company.
Solomon sold his business to Solomon
and Company. Which consisted of Solomon himself, his wife, daughter and 4 sons.
One share of (insert symbol) 1 each was subscribed by his wife, daughter
and four sons and rest held by Solomon himself. He was the MD of the Company.
After one year, Co. became insolvent
and winding up commenced. On winding up, assets were worthy 6000 and liability
17000 of which 10,000 were due to himself (Solomon) having a floating charge
and 7000 to unsecured creditors.
The house of lords held that a Co. is
distinct from its members and its assets must be applied in payment of
debentures first in priority to unsecured creditors. The Company being duly
incorporated became a separate legal entity independent from Solomon and was
his agent. Therefore, he was not liable to indemnify the Company for its debts.
The Company does not lose its
identity if bulk of its capital is held by one person. The Company, in law, is
altogether different from its subscriber.
LEE V/s LEE’S AIR FARMING Company. LTD
Lee formed a Company (Lee’s Air
Farming). Out of 3000 shares, Lee himself held 2999 shares and was the sole
governing director of Company. He was also appointed by the Company as ‘Chief
Pilot’. The Company was insured against liability to pay compensation under
Workmen’s Compensation Act.
Lee died during the course of his
employment in an air crash. His widow claimed compensation.
The court held that Lee and Co. were
two distinct legal entities having contractual relationship under which Lee
became an employee of the Company. The
relationship between Lee as Pilot and the Company was that of servant and
master.
The compensation was held to be
payable to the widow. Thus, Company and its sole governing director were held
to be separate legal entities.
Corporation and Fundamental Right:
Case Laws:
STC Vs CTO (SC decision, 1963)
Issue
: whether STC is a citizen within the meaning of Article 11 can ask for
enforcement of FR
The
Supreme Court enshrined that certain FRs ( Article 14, 20, 21, 27, 28) subject to
reasonable restrictions and limitations are available to ‘any person’
irrespective of whether he is a citizen of India or an alien, whether a natural
or artificial person. On the other hand, certain FRs have been guaranteed only
to citizens and certain disabilities imposed upon the state with respect to
citizens only.
From
the above it may be concluded that all citizens are persona but all persons are
not citizens.
The
term ‘citizens’ had not been defined in the constitution. Constitution deals
with citizenship which shall be by birth, by descent by migration and by
registration. The definition of ‘person’
in section 2(1)(f) of Citizenship Act provides that person does not include any
Company or body of individuals, whether incorporated or not. Thus, relevant
provision of the constitution and Citizenship Act does not contemplate a
corporation as a citizen.
Held : corporation may be
nationals of the country of their incorporation for the purposes of
international law but this fact will not make them citizens of the country.
v STATE OF GUJARAT V/s SHRI AMBICA MILLS (SC decision, 1974)
Held : a citizen shareholder may ____
TELCO V/s STATE OF BIHAR (SC decision, 1964)
(Company cannot lay claim
to FR under Article 19 (1)(g) on the basis of aggregation of citizens.)
The
STO levied the sales tax on the ground that transactions were inter-State sales
& not protected by Article 286 (1)(a). The petitioner including 2
shareholders challenged the levy of tax on the ground that sales were affected
in the course of inter-State trade, thus, protected by Article 286 (1)(a). It
was the alleged infringement of their FR.
The
court observed that if legislature intends that the benefit of Article 19 be made
available to corporation, it may enlarge the definition of citizens under the
citizenship Act. On the other hand, the parliament has not chosen to make any
such provision indicates that it was not the intention of the parliament to
tr5eat corporation as citizens.
The
court further observed that in view of decision in STC, the petitioner cannot
be heard to say that shareholder should be allowed to file petition non the
ground that in substance, the corporation and companies are nothing more than association
of shareholders and members thereof.
Held : Argument for lifting
the corporate veil cannot be sustained.
CHARITABLE CONTRIBUTIONS
Political Contributions :
DIVIDEND
BORROWING POWER OF COMPANY DEBENTURE AND CHARGE
Allotment of shares
LAW OF PROSPECTUS IN COMPANY LAW
Relationship between MOA and AOA.
DOCTRINE OF ULTRA VIRES
CONVERSION OF PRIVATE Company TO PUBLIC Company
KINDS OR TYPES OF COMPANIES
COMPANY LAW:-Characteristics of Company
