Company Law

Kapoor, N.D. Elements of Mercantile Law, Sultan Chand & Sons, New Delhi

 A company, in common parlance, means a group

of persons associated together for the attainment of a common end, social or economic.
In this we will be concerned with registered or

incorporated companies Act 1956 or some earlier companies Act.

CompanyDefinition
A company is a voluntary association of

individuals formed for some common purpose. It has capital divisible into parts, known as shares.
An artificial persons- has no body or soul.

 Lindleys Definition- an association of many

persons who contributes money or moneys worth to a common stock, and employ it in some common trade or business, and who shares the profit or loss arising thereform.

Characteristics of a company
Separate Legal entity It has an entity

separate from its members. Any of its members can enter into contracts with it in the same manner as any other individual can. The companys money & property belong to the company & not to the shareholders. Similarly the companys debt are the debts of the company.

Case : Salomon v. Salomon & Co. Ltd

S sold his boot business to a newly formed

company for pound 30,000. His wife, one daughter & four sons took up 1 share of 1 pound. S took 23,000 shares of 1 pound each and 10,000 pound debentures ( secured) in the company. Subsequently when the company wound up, its assets were found to be worth 6000 pound & its liabilities amounted to 17,000 pound of which 10,000 pound were due to S & 7000 pound due to unsecured creditors. The unsecured creditors claimed that S & the company were one & the same person & hence they should be paid in

 1.

2.

Limited Liability A company may be a company Limited by shares - the liability of the members is limited to the unpaid value of the share. Face value = Rs. 10, Paid = Rs. 7, Rs. 3 can be called upon. Limited by guarantee The liability of members is limited to such amount as the members may undertake to contribute to the assets of the company, in the event of its being wound up.

 Perpetual Succession a companys

existence persists irrespective of the change in the composition of its membership. A company never dies, nor does its life depend on the life of its members. It is created by the process of law & can be put to an end only by the process of law. Members may come & go, but company can go on for ever.

 Common Seal Company has no

physical existence, it must act through its agents & all the contracts entered into by its agents must be under the seal of the company. Transferability of shares The capital of a company is divided into parts known as shares. These shares are freely transferable.

 Separate Property Co. is a separate

legal entity so it is capable of owning, enjoying & disposing of property in its own name. Although its capital & assets are contributed by its shareholders. Capacity to sue A company can sue & be sued in its corporate name.

Lifting the corporate Veil

The justice from Saloman v Saloman & Co Ltd

referred as the Veil of incorporation. The effect to this principle is that there is a veil( And not a wall) between the company and its members. The human beings have started using the veil as a cloak for fraud or improper conduct. Thus it is necessary for the court to break through the veil or lift the corporate veil.
The various cases in which corporate veil has

been lifted are as follows:

1.Protection of Revenue: The court may ignore the corporate entity of a company where it is used for tax evasion. Tax planning is legitimate where it is within the framework of law. Eg- A person formed 4 private companies for the purpose of reducing his tax liability. 2. Prevention of fraud or improper conduct: Eg- L agreed to sell certain land to J & changed his mind later on, then sell his land to a company which is formed by him specifically for the purpose ( In which L is a member). J brought the action for the performance of the contract. The court looked into the matter & ordered L to convey the land to J. 3. Determination of character of a company whether it is enemy- Daimeler Co. Ltd vs

4.Company avoiding legal obligation: Where the use of an incorporated company is being made to avoid legal obligation 5.Company acting as agent or trustee of the shareholder Where the company is acting as the agent of the shareholders the shareholders will be liable for the acts of the company. 6. Avoidance of welfare legalization- It is the duty of the court in every case to discover the true affairs where ingenuity is expanded to avoid welfare legislation 7. Protecting public policy. 8. Where the Company is Sham (Cloak) ( i.e. something that is not what it is an imitation or

Statutory exception
Number of members below statutory minimum.

Sec 45 Pvt Co.- 2 & Public Co- 7 Every person who knows this fact is liable Failure of refund application money with in 130 days of the date of issue of the prospectus Sec 69 (5) Mis description of companys name: Where the officer or his agent without mentioning the Co. name and the address of the registered office, enters in to a contract he shall be personally liable. Sec 147(4) Fraudulent trading: Sec 542 Holding and subsidiary companies:

In the eyes of law , holding Companies & subsidiaries are the separate legal entities. But the subsidiary may loose the separate legal entity a. Where the Co. has its subsidiaries , it must show its members the consolidated books of accounts b. The court in such a case treat subsidiary as a branch of the Holding Co.