Company Law

1956

Contents

FEATURES
TYPES
FORMATION
COMMENCEMENT
DOCTRINES
DIRECTORS
METHODS OF RAISING CAPITAL
MEETINGS
WINDING UP

FEATURES

Separate legal entity

Limited Liability
Transferability of shares
Perpetual Succession
Can own and sell property
Can sue and be sued

Types

Public
Private
Holding and Subsidiary
Companies limited by
shares/guarantee/unlimited
Corporations
Public Financial Institutions

FORMATION
PROMOTER and his role
Pre Incorporation Contracts
Documents for Incorporation
MOA
AOA
Agreement with MD/Director/manager
Qualification shares
Statutory Declaration.
Effects of Incorporation

Commencement
Not required in the case of Private
Companies
Link with prospectus
Minimum subscription
Directors shares

DOCTRINES

CORPORATE VEIL
ULTRA VIRES
CONSTRUCTIVE NOTICE
INDOOR MANAGEMENT
CORPORATE GOVERNANCE

DIRECTORS

ROLE
TYPES
APPOINTMENT
POWERS

Role of Directors
Section 291 which states that the
Board of Directors can do all those
acts which a company can do. This
leads to the principle of Agency i.e.
the Board of Directors are agents of
the company. However it may be
noted that this applies to the whole
Board and not individual Directors.

Role of Directors (continued)

The Directors have a fiduciary relationship with
the company i.e. a relationship of trust and
faith.( please note that it does not extend to the
shareholders).
Four duties of Director (Prof Gower)
- to act in interest of company
- to act within the parameters
- not to put himself in a position of conflict where
his personal interests clash with the companys
- his responsibility cannot be fettered( delegated)

TYPES

Managing Director
Whole Time Director
Part Time Director
Independent Director
Nominee Director
Additional Director
Alternate Director

APPOINTMENT
By the Articles of Association
By the Shareholders

DEFINITION AND NATURE

OF A COMPANY
Company Law, 1956

Companys Act of 1956

a group of persons associated together for
the purpose of carrying on a business, with
a view to earn profits.
The word Company is an amalgamation
of the Latin word Com meaning with or
together and Pains meaning bread.
a group of persons who have come
together or who have contributed money
for some common person and who have
incorporated themselves into a distinct
legal entity in the form of a company for
that purpose.

Characteristics of a
Company
Separate Legal Entity
Limited Liability
Perpetual Succession

Separate Legal Entity

On incorporation under law, a company
becomes a separate legal entity as
compared to its members.
The company is different and distinct from
its members in law. It has its own name and
its own seal, its assets and liabilities are
separate and distinct from those of its
members.
It is capable of owning property, incurring
debt, borrowing money, having a bank
account, employing people, entering into
contracts and suing and being sued
separately.

Salomon v. Salomon & co. Ltd.(1897) A.C. 22.

S sold his boots business to a newly formed company for
30,000.
His wife, one daughter and four sons took up one share of
1 each.
S took 23,000 shares of 1 each and 10,000 debentures
in the company.
The debentures gave S a charge over the assets of the
company as the consideration for the transfer of the
business.
Subsequently when the company was wound up, its assets
were found to the worth 6,000 and its liabilities amounted
to 17,000 of which 10,000 were due to S (secured by
debentures) and 7,000 due to unsecured creditors, the
unsecured creditors claimed that S and the company were
one and the same person and that the company was a mere
agent for S and was hence they should be paid in priority to
S.

 Held, the company was, in the eyes of

the law, a separate person
independent from S and was not his
agent.
S, though virtually the holder of all
the shares in the company, was also
a secured creditor and was entitled to
repayment in priority to the
unsecured creditors

 Held, the company was, in the eyes of

the law, a separate person
independent from S and was not his
agent.
S, though virtually the holder of all
the shares in the company, was also
a secured creditor and was entitled to
repayment in priority to the
unsecured creditors.

Limited Liability
The liability of the members of the company is
limited to contribution to the assets of the
company up to the face value of shares held by
him.
A member is liable to pay only the uncalled
money due on shares held by him when called
upon to pay and nothing more, even if liabilities
of the company far exceeds its assets.
On the other hand, partners of a partnership firm
have unlimited liability i.e. if the assets of the
firm are not adequate to pay the liabilities of the
firm, the creditors can force the partners to make
good the deficit from their personal assets.
This cannot be done in case of a company once
the members have paid all their dues towards the
shares held by them in the company.

Perpetual Succession
A company does not die or cease to exist
unless it is specifically wound up or the task
for which it was formed has been completed.
Membership of a company may keep on
changing from time to time but that does not
affect life of the company. Death or
insolvency of member does not affect the
existence of the company.
There is a very good saying. Even where
during war all the members of a private
company, while in general meeting was killed
by a bomb, the company survived; not even
a hydrogen bomb could have destroyed it.

Separate Property
A company is a distinct legal entity. The
companys property is its own. A member
cannot claim to be owner of the companys
property during the existence of the company
Transferability of Shares
Shares in a company are freely transferable,
subject to certain conditions, such that no
shareholder is permanently or necessarily
wedded to a company. When a member
transfers his shares to another person, the
transferee steps into the shoes of the
transferor and acquires all the rights of the
transferor in respect of those shares.

Common Seal
A company is a artificial person and does
not have a physical presence. Therefore, it
acts through its Board of Directors for
carrying out its activities and entering into
various agreements. Such contracts must
be under the seal of the company. The
common seal is the official signature of the
company. The name of the company must
be engraved on the common seal. Any
document not bearing the seal of the
company may not be accepted as authentic
and may not have any legal force.

Capacity to sue and Being Sued

A company can sue or be sued in its
own name as distinct from its members.
Separate Management
A company is administered and
managed by its managerial personnel
i.e. the Board of Directors. The
shareholders are simply the holders of
the shares in the company and need
not be necessarily the managers of the
company.

Company
A Company is association of
persons who have come
together for a specific purpose
Has a separate legal entity as
soon as it is incorporated under
law
Liability of shareholders of a
limited company is limited to
the extent of unpaid share
Property belongs to the
company and not to its
members
Shares may be transferred
without the permission of the
other members, in absence of
provision to contrary in AOA
Public co: 7-Unlimited members
Private co: 2-50 Members
Decision of the majority prevails

Partnership
Partnership firm is sum total of
persons who have come together
to share the profits of the
business carried on by them or
any of them
It does not have a separate legal
entity
Liability of the partners is
unlimited
Property of the firm belongs to
the partners and they are
collectively entitled to it
A partner cannot transfer his
shares in the partnership firm
without the consent of all other
partners
Banking biz: 2-20 members
Other business: 2-10 members
100 % consensus is required for
any decision
On the death of any partner, the
partnership is dissolved unless
there is provision to the contrary

Illegal Association

Not more than 10 (other business) or 20 persons

(banking business) can come together for carrying on
any business, unless the association is registered
under the Companies Act or any other Indian law. Any
association, which does not comply with the above
norms, is an illegal association.
However, you cannot apply this provision in the
following cases
A Joint Hindu Family business comprising of family
members only
But where two or more Joint Hindu families come together
for business through partnership, the total number of
members cannot exceed 10 or 20 as the case may be, but
in computing the number of persons, minor members of
such family will be excluded
Any association of charitable, religious, scientific trust or
organisation which is not formed with a profit motive
Foreign companies

Consequences of nonRegistration
Law does not recognize an illegal association.
An illegal association cannot enter into any
contract, cannot sue any members or any
outsider, and cannot be sued by any members
or outsiders for any of its debts. The members
of the illegal association are personally for the
obligations of the illegal association. A member
may be liable to a fine of Rs. 1000. Any
member of an illegal association cannot sue
another member in respect of any matter
connected with the association.

TYPES OF COMPANIES
Company Law, 1956

Public co

7Unlimited
members
Minimum
number of
directors
is 3

Private co

2-50 Members
Restricts the right of
members to transfer
its shares
Limits the number of
its members to fifty
Prohibits an invitation
to the public to
subscribe to any
shares in or the
debentures of the
company
Minimum number of
directors is 2

privileges and exemptions of a

private limited company
Minimum number of members is 2
Minimum number of directors is 2
Prohibition of allotment of the shares or
debentures in certain cases unless statement
in lieu of prospectus has been delivered to
the Registrar of Companies does not apply
A special resolution to issue shares to nonmembers is not required
does not need a separate certificate of
commencement of business
No person other than the member of the
company concerned shall be entitled to
inspect or obtain the copies of profit and loss
account of that company

Companies Deemed to be
Public limited Company
Where at least 25% of the paid up share
capital of a private company is held by one
or more bodies corporate
Where the annual average turnover of the
private company during the period of three
consecutive financial years is not less than
Rs. 25 crores
Where not less than 25% of the paid up
capital of a public company limited is held by
the private company
Where a private company accepts deposits
after the invitation is made by advertisement
or renews deposits from the public

Company limited by
guarantee

is a registered company
having the liability of its
members limited by its MOA
to such amount as the
members may respectively
thereby undertake to pay if
necessary on liquidation of
the company.
The liability of the members
to pay the guaranteed
amount arises only when
the company has gone into
liquidation and not when it
is a going concern.
A guarantee company may
be a company with share
capital or without share
capital.

Company limited by shares

the liability of members

is limited to the
amount of uncalled
share capital.
No member of
company limited by the
shares can be called
upon to pay more than
the face value of
shares or so much of it
as is remaining unpaid.
Members have no
liability in case of fully
paid up shares.

Government Companies
Any company in which not less than 51% of the
paid up share capital is held by the Central
Government or any State Government or partly
by the Central Government and partly by the
one or more State Governments and includes a
company which is a subsidiary of a government
company.
Government Companies are also governed by
the provisions of the Companies Act.
However, the Central Government may direct
that certain provisions of the Companies Act
shall not apply or shall apply only with such
exceptions, modifications and adaptions as may
be specified to such government companies.

Holding and Subsidiary

companies
A company shall be deemed to be subsidiary
of another company if

That other company controls the composition of its

board of directors
That other company holds more than half in face
value of its equity share capital
Company B is subsidiary of the Company A and
Company C is subsidiary of Company B, therefore
Company C is subsidiary of Company A

The control of the composition of the Board of

Directors of the company means that the
holding company has the power at its
discretion to appoint or remove all or majority
of directors of the subsidiary company without
consent or concurrence of any other person

One man company

One man company is a company in which one
man holds practically the whole of the share
capital of the company, and in order to meet
the statutory requirement of minimum
number of members, some dummy members
who are mostly his friends or relations, hold
just 1or 2 shares each.
It is like any other company is a legal entity
distinct from its members.
The dummy members are usually nominees
of the principal shareholder who is the virtual
owner of the business and who carries it on
with limited liability.

PROMOTION AND
FORMATION OF A
COMPANY
Company Law, 1956

forming
The process of forming a company can
be divided into four distinct stages:
Promotion
Registration or incorporation
Capital Subscription
Commencement of Business

 Promotion
This is the first stage in the formation of a company. It refers to the
entire process by which a company is brought into existence.
It starts with the conceptualization of the birth a company and
determination of the purpose for which it is to be formed.

Promoters
The persons who conceive the company and invest the initial funds
are known as the promoters of the company.
The promoters enter into preliminary contracts with vendors and
make arrangements for the preparation, advertisement and the
circulation of prospectus and placement of capital.
However, a person who merely acts in his professional capacity on
behalf of the promoter (e.g. lawyer, CA, etc) for drawing up the
agreement or other documents or prepares the figures on behalf of
the promoter and whom the promoter pays is not a promoter.

Pre-Incorporation or Preliminary Contracts

The promoters of a company usually enter into contract to acquire
some property or right for the company, which is yet to be
incorporated.
Such contracts are called Pre-Incorporation or Preliminary Contracts.

 Company not bound by pre-incorporation

contract
English & colonial produce co. ltd Re (1906)
A solicitor prepared the memorandum and
Articles of association of a company and
paid the necessary registration fees and
other incidental expenses to obtain of the
company.
He did this on the instruction of certain
persons who later became directors of the
company.
Held, the company was not liable of his
work.

 Company can not enforce preincorporation contract

Natal land & colonization co. Ltd. V.
Pauline colliery & Development syndicate
ltd., (1904)
The N company agreed with an agent of
the P syndicate Ltd before its formation to
grant a mining lease to the syndicate.
The syndicate was registered and
discovered a seam of coal.
The company refused to grant the lease.
Held, there was no binding contract
between the company and the syndicate.

 Promoters are personally liable

Kelner v. Baxter, (1866)
A hotel company was about to be formed and
persons responsible for the new company signed
an agreement on 27th January, 1866, for the
purchase of stock on behalf of the proposed
company, payment to be made on 28th January,
1866.
The company was incorporated on 20th February
1866.
the goods were consumed in the business and the
company went into liquidation before the debt was
paid.
The persons signing the agreement were sued on
the contract.
Held, The persons signing were promoters and
personally liable on their signatures.

Promoter Duties
He must not make any secret profit out of
the promotion of the company. Secret
profit is made by entering into a
transaction on his own behalf and then
sell to concerned property to the company
at a profit without making disclosure of
the profit to the company or its members.
He must make full disclosure to the
company of all relevant facts including to
any profit made by him in transaction with
the company.

If promoter duties not fulfilled,

company may
Rescind or cancel the contract made and if
he has made profit on any related
transaction, that profit also may be
recovered
Retain the property paying no more for it
then what the promoter has paid for it
depriving him of the secret profit
the company can sue him to for breach of
trust. Damages up to the difference between
the market value of the property and the
contract price can be recovered from him

promoter may be rewarded by

the company in these ways
The company may to pay some remuneration for the
services rendered
The promoter may make profits on transactions
entered by him with the company after making full
disclosure to the company and its members
The promoter may sell his property for fully paid shares
in the company after making full disclosures
The promoter may be given an option to buy further
shares in the company
The promoter may be given commission on shares sold
The articles of the Company may provide for fixed sum
to be paid by the company to him. However, such
provision has no legal effect and the promoter cannot
sue to enforce it but if the company makes such
payment, it cannot recover it back

Incorporation of the
company

 Registration
The promoters must make a decision
regarding the type of company i.e. a
public company or a private company
or an unlimited company, etc and
accordingly prepare the documents for
incorporation of the company.
In this connection the Memorandum
and Articles of Association (MA & AA)
are crucial documents to be prepared.

 Mode of forming incorporated

company
Any 7 or more persons (2 or more in case of
a private company) associated for any
lawful purpose may form an incorporated
company, with or without limited liability.
They shall subscribe their names to a
Memorandum of Association and also
comply other formalities in respect of
registration.
A company so formed may be:
A company limited by shares, or
A company limited by guarantee, or
Unlimited company

 Registration of the Company

Once the documents have been prepared, vetted,
stamped and signed, they must be filed with the
Registrar of Companies for incorporating the Company.
The following documents must be filed in this connection:
The Memorandum of Association duly signed by subscribers and
the Articles of Association, if any signed by subscribers to the
Memorandum of Association
An agreement, if any, which the company proposes to enter into
with any individual for appointment as its managing director or
whole-time director or manager
A statutory declaration in Form 1 by an advocate, attorney or
pleader entitled to appear before the High Court or a company
secretary or Chartered Accountant in whole time practice in
India who is engaged in the formation of the company or by a
person who is named as a director or manager or secretary of the
company that the requirements of the Companies Act have been
complied with in respect of the registration of the company and
matters precedent and incidental thereto
>> continued on next slide

 In addition to the above, in case of a

public company, the following
documents must also be filed
Written consent of directors in Form 29
to agree to act as directors and their
written consent to act as directors and
take up qualification shares
The complete address of the registered
office of the company in Form 18.
Details of the directors, managing
director and manager of the company
in Form 32.

Certificate of
Incorporation
Once all the above documents have been
filed and they are found to be in order, the
Registrar of Companies will issue
Certificate of Incorporation of the Company.
This document is the birth certificate of the
company and is proof of the existence of
the company.
Once, this certificate is issued, the
company cannot cease its existence unless
it is dissolved by order of the Court.

Rule In Peels Case

The certificate of incorporation given
by registrar in respect of a company
is conclusive evidence that all the
requirements of the Companies Act
have been complied in respect of
registration

 Commencement of Business
A private company or a company having
no share capital can commence its
business immediately after it has been
incorporated. However, other companies
can commence their activities only after
they have obtained Certificate of
Commencement of Business. For this
purpose, the following additional
formalities have to be complied with:

If a company has share capital

and has issued a prospectus

Shares up to the amount of minimum

subscription must be allotted.
Every director has paid to the company on each
of the shares, which he has taken the same
amount as the public has paid on such shares.
No money is or may become payable to the
applicants of shares or debentures for failure to
apply for or to obtain permission to deal in those
shares or debentures in any recognized stock
exchange.
A statutory declaration in Form 19 signed by one
director or the employee - company secretary or
a Company secretary in whole time practice that
the above provisions have been complied with
must be filed.

If a company has share capital

but has not issued a
prospectus
It must file a statement
in lieu of

prospectus with the Registrar of Companies

Every director has paid to the company on
each of the shares, which he has taken the
same amount as the other members have
paid on such shares
A statutory declaration in Form 20 signed
by one director or the employee - company
secretary or a Company secretary in whole
time practice that the above provisions
have been complied with must be filed.

 Once the above provisions have been

complied with, the Registrar of
Companies grants Certificate of
Commencement of Business after
which the company can commence
its activities.

MEMORANDUM OF ASSOCIATION

Memorandum of Association of a
company is its charter & defines the
limitations of the powers of a company. It
contains the fundamental condition upon
which alone the company is allowed to be
incorporated
- Lord Cairns

MEMORANDUM OF ASSOCIATION

Definitions
Memorandum of Association of a company as
originally framed or as altered from time to time in
pursuance of any previous companies law or of this
Act
Sec.2 (28)

MEMORANDUM OF ASSOCIATION

The purpose of Memorandum of Association is to

enable the share holders, creditors and those who
deal with the company to know what its permitted
range of enterprise is.
- Lord Macmillan

FORM OF
MEMORANDUM OF ASSOCIATION

Form as given in table B, C, D, & E in Schedule I

Printed
Divided into paragraphs
Numbered consecutively
Signed by at least 7 persons for public & 2 for
private company. Signatures attested by one
witness. Subscribers shall at least take one share

CONTENTS OF MEMORANDUM OF
ASSOCIATION

Six Clauses
Name

Liability

Objects

Registered
office

Capital

Association
or subscription

DOCTRINE OF ULTRA VIRES

The words :
Ultra means beyond
Vires means the powers
Ultra Vires means beyond the powers
A company which owes its incorporation to statutory
authority cannot effectively do anything beyond the
powers expressly or impliedly conferred upon it by the
statute or Memorandum of Association.

ASHBURY RAILWAY CARRIAGE & IRON

COMPANY LTD. Y. RICHE

The company has been formed with the object :

To make and sell, or lend or hire railway carriage
and wagons and all kinds of railway plants, to
carry on the business of mechanical engineers and
general contractors etc.
The company contracted with Riche to finance the
construction of Railway line in Belgium. The
company repudiated the agreement and was sued
for breach of contract.

ASHBURV RAILWAY CARRIAGE & IRON

COMPANY LTD. Y. RICHE

Rich Contended :
Firstly, that the contract in question came well
within the meaning of the words general
contractors, and, was therefore, within the powers
of the company, secondly, that the contract was
ratified by the majority of the shareholders.

EFFECTS OF DOCTRINE OF ULTRA

VIRES

Void Ab Initio
Injunction
Personal Liability of Directors
Acquisition of Property that is Ultra Vires
Directors personally liable to third parties

ALTERATION OF NAME CLAUSE

Special Resolution.
Written Approval of Central Government.
No Approval of Central Government is
necessary if the change of name involves only
the addition or deletion of the word Private.
Change by ordinary resolution and approval of
Central Government when name is identical or
too closely resembles the name of an existing
company.

CHANGE OF REGISTERED OFFICE

From one premises to another premises in the

same city, town or village
By passing a resolution of Board of Directors

CHANGE OF REGISTERED OFFICE

From one town or city or village to another town

or city or village in the same state
1. Special Resolution.
2. Confirmation of Regional Director when
jurisdiction of Registrar of companies is
changed.
3. Copy of (i) & (ii) to be filed with ROC.
4. Notice of new location to ROC within 30
days.

CHANGE OF REGISTERED OFFICE

From one state to another state

1. Special Resolution
2. Confirmation of Central Govt.
3. For certain Purposes only
(As given in section 17)

ALTERATION OF OBJECTS CLAUSE

A. Special Resolution
B. Alteration is sought on any of these grounds:
To carry on its business more economically & more
efficiently
To attain its main purpose by new or improved means
To enlarge or change the local area of its operations
To carry on some business which under existing
circumstances may conveniently or advantageously be
combined with the business of the company
To restrict or abandon any of the objects specified in the
memorandum
To sell or dispose off the whole or any part of the
undertaking
To amalgamate with any other company
C. Copy of (A) is filed with ROC within 30 days

ALTERATION OF LIABILITY CLAUSE

The liability of a member of a company cannot

be increased unless the member agrees in
writing.
From unlimited liability, it can be made limited
by re-registration of the company.

ALTERATION OF CAPITAL CLAUSE

Increase of authorized share capital.

Consolidation and subdivision of shares.
Conversion of shares into stock & vice versa.
Diminution of share capital.

ARTICLES OF ASSOCIATION

Definition
Article means the articles of association of a
company as originally framed or as altered from
time to time in pursuance of any previous
companies laws or of this Act
Sec.2 (2)

ARTICLES OF ASSOCIATION

. The articles proceed to define the duties, the

right and the powers of the governing body as
between themselves and the company at large and
the mode and form in which the business of the
company is to be carried on and the mode and form
in which changes in the internal regulations of the
company may from time to time be made.
- Lord Cairns

CONTENTS OF ARTICLES

1. The extent to which Table A is applicable

2. Different classes of shares and their rights
3. Procedure of making an issue of share
capital and allotment thereof
4. Procedure of issuing share certificates and
share warrants
5. Forfeiture of shares and the procedure of
their re-issue
6. Procedure for transfer and transmission of
shares

CONTENTS OF ARTICLES

7. The time lag in between calls on shares conversion

of shares into stock
8. Directors, their appointment, remuneration,
qualifications, etc.
9. Account and audit
10. Lien of shares
11. Payment of commission on shares and debentures
to underwriters
12. Rules for adoption for preliminary contracts if
any

CONTENTS OF ARTICLES

13. Re-organization and consolidation of shares

capital
14. Alteration of share capital & Buyback of
shares
15. Borrowing power of directors
16. General meeting, proxies and polls
17. Voting rights of members
18. Winding up

ALTERATION OF ARTICLES (SEC 31)

Procedure :
Alteration by passing a special resolution.
Copy of resolution to be sent to registrar
within 30 days.
Copy of altered articles to be registered
within 3 months of passing of resolution.

LIMITATIONS REGARDING ALTERATION

OF ARTICLES
1. Alteration should not be inconsistent with
a. Provisions of Company Act or any other statute
b. Conditions contained in memorandum
2. Approval of govt. to be obtained in certain cases
3. Alteration must not deprive any person of his rights
under a contract
4. Alteration must not constitute a fraud on the
minority
5. Alteration must be bonafide for the benefit of the
company as a whole

BINDING FORCE OF MEMORANDUM AND

ARTICLES (SEC 36)

The following are the legal implications:

Company is bound to its members
Each member is bound to the company
Each member is bound to other members in
exceptional case only
Neither the company nor the members are bound
to outsiders

Memorandum of
Association

Articles of Association

Charter of Company

Regulations for interal management

Defines the scope of the activities

Rules for carrying out the objects of

company.

Supreme document

Subordinate to the memorandum.

Must for every company

Company limited by shares need

not have it (Table A applies)

Strict restrictions, alteration only

with sanction of central govt./
tribunal.

Can be altered by special

resolution.

Act, Ultra Vires is wholly void &

cannot be ratified.

Act Ultra Vires (but intra vires the

memorandum) can be ratified.

DOCTRINE OF CONSTRUCTIVE NOTICE

Documents are open & accessible to all.

Presumption that any outsider dealing with
company

has

read

&

understood

the

documents.
It is a negative doctrine, acting only against
the outsiders & not the company.

DOCTRINE OF INDOOR MANAGEMENT

Persons dealing with the company in good faith

have a right to assume that the internal
requirements prescribed in public documents
have been observed
Persons are not bound to enquire into regularity
of internal proceedings
Exceptions :
Knowledge of irregularity
Negligence on part of the outsider
Forgery
Acts outside scope of apparent authority

Lifting the Veil of

Incorporation
Although the general rule is that a
company has a separate legal identity
from its members, there are
exceptions to this rule when a court
will not treat a company as a separate
entity
This is often referred to as lifting the
veil of incorporation
Often, this is to prevent abuse of the
principle of separate identity

Lifting the Veil of Incorporation

(cont.)
For example, under the Companies Act
1985, if a company trades with fewer
than two members then the sole
member has unlimited liability for
company debts
Also under the Companies Act, officers of
the company will become personally
liable if they issue bills of exchange or
enter into contracts on behalf of the
company but do not use the companys
full name

Lifting the Veil of Incorporation

(cont.)
At common law, the general principle
is that the courts will not allow a
company to be used for a fraudulent
purpose or to avoid a legal duty
For example, in Gilford Motor Co v
Horne, a term in an employees
contract prevented him from
approaching former customers after
he left Gilford Motor Co

Lifting the Veil of Incorporation

(cont.)
Therefore, when he left he formed
his own company, and the
company approached his former
customers
The court held the company was a
sham being used to avoid the term
in his contract

Thank You