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COMPANY LAW

The word Company has no strictly technical or legal


meaning.
The word 'Company' is an amalgamation of the Latin
word 'Com' meaning "with or together" and 'Pains'
meaning "bread".
Originally, it referred to a group of persons who took
their meals together.
A company is a group of persons who have come
together or who have contributed money for some
common purpose and who have incorporated
themselves into a distinct legal entity in the form of a
company for that purpose.
In generalized term, Company is an artificial person
created by law and destroyed by law.
It is an association of person to start a business under a
legal guidance.

CORPORATE PERSONALITY
Corporate personality
Corporate personality refers to the fact that as far
as the law is concerned Personality of a company
really exists apart and different from its owners.
As a result of this, a company can sue and be sued
in its own name, hold its own property and be
liable for its own debts.
this concept enables limited liability for
shareholders as the debts belong to the legal entity
of the company and not to the shareholders in that
company.

The history of corporate personality


Corporate legal personality arose from the activities
of organizations such as religious orders and local
authorities which were granted rights by the
government to hold property and sue and be sued in
their own right and not to have to rely on the rights of
the members behind the organization.
Over time the concept began to be applied to
commercial ventures with a public interest element
such as rail building ventures and colonial trading
businesses.
However, modern company law only began in the
mid-nineteenth century when a series of Companies
Acts were passed which allowed ordinary individuals
to form registered companies with limited liability.

Salomon v Salomon & Co.

Mr Salomon carried on a sole trading business .


He formed the company Salomon & Co. Ltd. Mr Salomon, his wife and
five of his children held one share each in the company.
The members of the family held the shares for Mr Salomon because the
Companies Acts required at that time that there be seven shareholders.
Mr Salomon was also the Managing Director of the company.
The newly incorporated company purchased the sole trading business.
The business was valued by Mr Salomon at 39,000.
The price was paid in 10,000 worth of debentures (a debenture is a
written acknowledgement of debt like a mortgage ) giving a charge over
all the companys assets (this means the debt is secured over the
companys assets and Mr Salomon could, if he is not repaid his debt,
take the companys assets and sell them to get his money back), plus
20,000 in 1 shares and 9,000 cash.
Mr Salomon thus held 20,001 shares in the company, with his family
holding the six remaining shares.
He was also, because of the debenture, a secured creditor.

within a year Mr Salomon had to sell his debenture.


company was placed in liquidation and a liquidator was appointed.
The liquidator alleged that the company was but a sham and a mere
alias or agent for Mr Salomon and that Mr Salomon was therefore
personally liable for the debts of the company.
The Court of Appeal agreed that shareholders had to be a bona fide
association who intended to go into business and not just hold shares
to comply with the Companies Acts.
The House of Lords disagreed and found that:
the fact that some of the shareholders are only holding shares
as a technicality was irrelevant; the registration procedure
could be used by an individual to carry on what was in effect a
one-man business a company formed in compliance with the
regulations of the Companies Acts is a separate person and
not the agent or trustee of its controller. As a result, the debts
of the company were its own and not those of the members.
The members liability was limited to the amount prescribed
in the Companies Act i.e. the amount they invested.

Individuals are permitted to incorporate companies to


separate their business and personal affairs, thereby
avoiding further personal liability as mentioned inSalomon.
This advantageous limited liability is consequential of
members being separate persons from the company.
Members liability is limited to their fully paid share
amountor the fixed amount payable by guarantee.
The company cannot insist on further contribution nor can
the members be liable to cover debts which the company
incurred as a separate person.
Salomonalso distinguished that a companys business is
its own as a separate person.
A company is hereby entitled to sue third parties, and
even its own members (Metropolitan Saloon Omnibus Co
Ltd v Hawkins).
members cannot sue on behalf of the company since the
legal rights belong to the company as a separate person.

Farrar v Farrars Ltd- sale by a member to a


company is not a sale to himself, since
those assets now become company
property in which the member has no
legal interest.
A company can enter into contracts and
transactions, even with its members, as a
result of separate personality
companies have perpetual existence even
after the death of all members-ownership
change and share trading will not affect its
continuous existence, unlike partnerships.

Macaura v Northern Assurance Co.

Mr Macaura owned an estate and some timber. He agreed to sell


all the timber on the estate in return for the entire issued share
capital of Irish Canadian Saw Mills Ltd. The timber, which
amounted to almost the entire assets of the company, was then
stored on the estate. On 6 February 1922 Mr Macaura insured the
timber in his own name. Two weeks later a fire destroyed all the
timber on the estate. Mr Macaura tried to claim under the
insurance policy. The insurance company refused to pay out
arguing that he had no insurable interest in the timber as the
timber belonged to the company.
House of Lords :
The timber belonged to the company and not Mr Macaura, even
though he owned all the shares in the company, had no insurable
interest in the property of the company just as corporate
personality facilitates limited liability by having the debts belong
to the corporation and not the members, it also means that the
companys assets belong to it and not to the shareholders.

Lee v Lees Air Farming [1961]

Mr Lee incorporated a company, Lees Air Farming


Limited, in which he owned all the shares.
Mr Lee was also the sole Governing Director for life.
Thus, as with Mr Salomon, he was in essence a sole
trader who now operated through a corporation.
Mr Lee was also employed as chief pilot of the
company.
while Mr Lee was working, the company plane he was
flying stalled and crashed.
Mr Lee was killed in the crash leaving a widow and
four infant children.
The company as part of its statutory obligations had
been paying an insurance policy to cover claims
brought under the Workers Compensation Act.

The widow claimed she was entitled to compensation


under the Act as the widow of a worker.
The issue went first to the Court of Appeal who found
that he was not a worker within the meaning of the
Act and so no compensation was payable. The case
was appealed to the Privy Council in London.
They found that: the company and Mr Lee were
distinct legal entities and therefore capable of
entering into legal relations with one another as such
they had entered into a contractual relationship for
him to be employed as the chief pilot of the company
he could in his role of Governing Director give himself
order as chief pilot. It was therefore a master and
servant relationship and as such he fitted the
definition of worker under the Act. The widow was
therefore entitled to compensation.

Corporations are of two kinds :

1. Corporation Aggregate :
Is an association of human beings united for the purpose of
forwarding their certain interest.
A limited Company is one of the best example. Such a company is
formed by a number of persons who as shareholders of the company
contribute to the capital of the company for the furtherance of a
common object.
Their liability is limited to the extent of their share-holding in the
company.
A limited liability company is thus formed by the personification of
the shareholders.
The property is not that of the shareholders but its own property and
its assets and liabilities are different from that of its members.
The shareholders have a right to receive dividends from the profits of
the company but not the property of the company.
The principle of corporate personality of a company was recognized in
the case of Saloman v. Saloman & Co.

2. Corporation Sole :
Is an incorporated series of successive persons. It consists of a single
person who is personified and regarded by law as a legal person.
a single person, who is in exercise of some office or function, deals in legal
capacity and has legal rights and duties.
A corporation sole is perpetual.
Post Master- General, Public Trustee, Comptroller and auditor general of
India, the Crown in England etc are some examples of a corporation sole.
Generally, corporation sole are the holders of a public office which are
recognized by law as a corporation.
chief characteristic of a corporation sole is its continuous entity endowed
with a capacity for endless duration.
A corporation sole is an illustration of double capacity.
The object of a corporation sole is similar to that of a corporation aggregate.
In it a single person holding a public office holds the office in a series of
succession, meaning thereby that with his death , his property , right and
liabilities etc., do not extinguish but they are vested in the person who
succeeds him.
Thus on the death of a corporation sole, his natural personality is destroyed,
but legal personality continues to be represented by the successive person.

Advantages of Incorporation

1) Independent Corporate Existence:


A corporate person shall have an independent corporate existence.
It is in law a person .
It is s distinct legal persona existing independent of its members.
In case of a company, by incorporation it gains a corporate
personality which is separate or distinct from the members who
compose it.
The property of the company belongs to it and not its members ;
it may sue or be sued in its own name ;
it may enter into contracts with third parties independently and even
the members themselves can enter into contract with the company.
the company becomes a body corporate which is capable immediately
of functioning as an incorporated individual.
With the incorporation, the entity of the company becomes
institutionalized.
This principle of the independent corporate existence and the
principle of corporate personality of a company was recognized in the
case ofSaloman v. Saloman & Co

2) Limited Liability :
One of the principal advantages of an incorporated company is the
privilege of limited liability.
It is the main feature of registered companies which provides a
special attraction to investors.
The principle of limited liability implies that the liability of a member in
the event of the company's winding up, in respect of the shares held
by him is limited to the extent of the unpaid value on such shares.
Thus the liability does not fluctuate but remains limited to the amount
which, for the time being remains unpaid., whether from the original
shareholder or the transferee of such shares as the case may be.
limited liability of members extends only for company's debt in the
event of its winding up.
The company itself, being a legal persona, is always fully liable and
therefore its liability is unlimited.
In other words, it is liable to pay the debts so long as assets are
available.
No member is bound to contribute anything more than the value of
the shares held by them

3) Perpetual Succession :An


incorporated company has perpetual
succession, that is notwithstanding any
change in its members, the company
shall remain as the same entity with the
same privileges and immunities, estate
and possessions.
the death or insolvency of individual
member does not in any way, affect its
corporate existence and the company
shall continue its existence until it is
wound up

4) Transferability of shares :shares or other


interest of any member in a company shall be
movable property, transferable in the manner provided
by the articles of association of the company.
Thus the member of an incorporated company can
dispose of his share by selling them in the open
market and get back the amount so invested.
The transferability of shares has two main
advantages, namely it provides liquidity to investors
and at the same time ensures stability of the company.
The transfer of shares of a company does not affect
its existence or management and the shareholder can
conveniently get relieved of his liability by transferring
his shares to some other person.

5) Separate Property :Incorporation


helps the property of the company to be
clearly distinguished from that of its
members.
The property is vested in the company as
a body corporate , and no changes of
individual membership affect the title.
In case of a company, it being a legal
person is capable of owning , enjoying and
disposing of property in its own name.
The company becomes the owner of its
capital and assets.

6) Corporate Finances :The shares


of an incorporated company being
transferable, it can raise maximum
capital in minimum possible time.
an incorporated company has the
privilege of raising its capital by public
subscriptions either by way of shares
or debentures.
The public financial institutions
willingly lend loan to companies as it is
generally secured by floating charge.

7) Centralized Management :
The shareholders have no direct concern with the
management of the company.
They exercise, only a formative control.
management of the company is altogether different from its
ownership.
Independent functioning of managerial personnel attracts
talented professional persons to work for the

The management of the company generally vests in the


directors who decide the policy matters in the meetings of the
Board of Directors.
With skilled professional managers supported by financial
resources, companies are able to develop and carry on their
business efficiently.
professional form of management of business disassociates
the 'ownership' from control of business and thus helps to
promote efficiency.

8) Capacity to sue and to be sued :


A company being a body corporate can sue
and can be sued in its own name.
A criminal complaint can be filed by a company
, but it should be represented by a natural
person.
A company has the right to protect its fair
name.
It can sue for such defamatory remarks
against it as are likely to damage its business
or property etc.
A company has the right to seek damage
where a defamatory material published about
it affects its business.

Disadvantages of Incorporation

1) Lifting or Piercing the Corporate Veil :


A corporation has a distinct personality by fiction of law, yet in reality it
is an association of persons who are in fact beneficial owners of the
property of the body corporate.
A company being an artificial person, cannot act on its own, it can act
only through natural persons.
The whole theory of incorporation is based on the theory of corporate
entity but the separate personality of the company and its statutory
privileges should be used for legitimate purposes only.
Where the legal entity of the company is being used for fraudulent and
dishonest purpose, the individuals concerned will not be allowed to take
the shelter behind the corporate personality.
The court in such cases shall break through the corporate shell and
apply the principle of what is known as lifting or piercing the corporate
veil.
The corporate veil of a company may be lifted to ascertain the true
character and economic realities behind the legal personality of the
company.
separate personality of the company, being a statutory privilege, must
always be used for legitimate business purposes .

InNew Horizons Ltd. v. Union of India


and others, Court can see through the corporate
veil to ascertain the true nature of a
company. The doctrine of lifting the
corporate veil is invoked when the
corporate personality is found to be
opposed to justice, convenience or
interest of revenue.

a) Determination of Real character of a company


At the time of war, it may become necessary to lift the corporate veil of a
company to determine whether the company has an enemy character. In
such a case the courts may in their discretion examine the character of
persons who are in real control of the corporate affairs of the company.
- a company was incorporated in England for the purpose of selling tyres
manufactured in Germany by a German company, all the shares except one
were held by the German subjects residing in Germany. The remaining one
share was held by a British subject who was the Secretary of the company.
Thus the real control of the English company was in German hands. During
World War I, the company commenced an action to recover trade debts. The
question therefore was whether company had become an enemy company
consequent to World War I. The House of Lords, inter alia observed :
But it can assume enemy character when persons in de facto control of its
affairs are residents in any enemy country or, wherever resident, are acting
under the control of enemies. therefore held that the company was an enemy
company for the purpose of trading and therefore it was barred from
maintaining the action.
(b) For the benefit of revenue :The court has the power to disregard
corporate entity if it is used for tax evasion or to circumvent the tax
obligation.

(c) Fraud or improper conduct :


The courts will refuse to uphold the separate existence of
the company where it is formed to defeat or circumvent
law, to defraud creditors or to avoid legal obligations.
Gilford Motor Co v. Horne Horne was appointed as a managing director of the
plaintiff company on the condition that he shall not
entice away the customers of the company at any point
of time. He was employed under an agreement. Shortly
he opened a business in the name of a company which
solicited the plaintiffs customers. It was held that the
company was mere cloak or sham for the purpose of
enabling the defendant to commit a breach of his
covenant against the solicitation.

(d) A company at times loose their individuality


and may be treated as an agent or trustee.
In Re F.G. (Films) Ltd. an American company
produced a film called 'MANSOON' in India
technically in the name of a British company.
This British company had a capital of 100 out
of which majority was held by the President of
the American company which financed the
production of the film. In these circumstances
the Board of Trade refused to register the film
as a British film on the ground that in the
instant case the British company acted merely
as the nominee or agent of the American
company. This view was upheld by the Court.

(e) To punish the real persons in QuasiCriminal cases against the Company
The courts have sometimes applied the
doctrine of lifting the corporate veil in
quasi-criminal cases relating to companies
in order to look behind the legal person
and punish the real persons who have
violated the law.

(f) To prevent abuse of Process of Law


The doctrine of lifting the corporate veil
can also be used to prevent abuse of
process of Court.

The Supreme Court in Delhi


Development Authority v. Skipper
Construction Co. (P.) Ltd has observed
that the lifting or piercing the corporate
veil can be undertaken by Court to see
the real men behind the veil who are
involved in defrauding others by corrupt
and illegal means in deliberate defiance
of Court's order. In the instant case, the
company was defrauding others in
deliberate disobedience of Supreme
Court's orders which amounted to
contempt of Court.

2. Personal Liability of Directors or Members


the company law imposes personal liability on the directors or members of
a company in certain cases notwithstanding the cardinal principles of
'separate personality' and 'limited liability'. There are certain statutory
provisions apart from the liability of the company as an independent legal
person.
reduction of membership (if at any time the number of members of a
company falls below the statutory minimum i.e.. seven in case of a public
company and two in the case of a private company, and the company
carries on business for more than six months while the number is so
reduced, every person who is a member of that company during the time
the company so carries on business after those six months and is aware of
that fact, shall be severally liable for the payment of company's debts
contracted during that time);
Misdescription of name (Where an officer of a company signs on behalf
of the company any contract, Bill of exchange, cheque etc such person
shall be personally liable to the holder if the name of the company is not
fully or properly mentioned in the instrument;
liability for fraudulent conduct of a companys business- a business
is found to be carried on with the intent to defraud the creditors of the
company or any other person , or for any fraudulent purpose, those who
were knowingly parties to this business shall be personally held liable for all
or any of the debts of the company

Subsidiary company- a subsidiary company may lose its


independent identity to a certain extent, namely, law may brush aside
the legal forms and require companies in a group to present a joint
picture in order to give better information of the financial position of the
group as a whole to the public, creditors and shareholders ;
Failure to Return Application Money- director of a public company
personally liable to pay the money with interest if the application
money is not repaid within thirty days in the event of minimum
subscription not having been received or company not having obtained
certificate of commencement of business by the company;
Misrepresentation in Prospectus- In case of misrepresentation in
the prospectus of a company, every director, promoter, and every other
person who authorizes issue of such prospectus, incurs liability towards
those who subscribe for shares on the faith of untrue statement;
Ultra vires (v-res) acts- directors of a company shall be personally
liable for all those acts done by them on behalf of the company if they
are ultra vires the company;
Non-payment oftax- In the event of winding up of a private
company, if any tax assessed on the company whether before or in
course of liquidation in respect of any income of any previous year
cannot be recovered, every person who was director of that company at
any time during the relevant previous year, shall be jointly and
severally liable for payment of such tax.

3. Expenses and
formalism :Incorporation of a
company is an expensive affair.
Besides, it involves completion of a
number of formalities. Moreover, the
administration of a company has to
be carried on strictly in accordance
with the provisions of the company
law

4. Company is not a citizen


Citizenship as defined in Part II of the
Constitution of India indicates only natural
persons and not juristic persons, like
corporations.
1. In State Trading Corporation of India v
Commercial Tax officer Supreme Court held that company or
corporation is not citizen of India and cannot,
therefore claim such of the fundamental rights
as have been conferred upon citizens. The
citizenship conferred on a citizen as per the
provisions of the Constitution is concerned only
with natural persons and not juristic persons.

2. In Tata Engineering & Locomotive Co. V


State of Bihar, petition was filed by the
company and some shareholders also joined it.
They argued that though the company was not
a citizen but its shareholders were citizens and
if it was shown that all its shareholders were
citizens the veil of corporate personality might
be lifted to protect their fundamental rights.
The court rejected this argument and held that
If this plea is upheld, it would really mean that
what the corporations and companies cannot
achieve directly can be achieved by them
indirectly by relying upon the doctrine of lifting
the corporate veil.

3. In Bank nationalization case, the court held that A measure


executive or legislative may impair the right of the company
alone, and not of its shareholders: it may impair the rights of the
shareholders and not of company, it may impair the right of the
shareholders as well as of the company. Jurisdiction of court to
grant relief cannot be denied when by state action, the rights of
the individual shareholders are impaired, if that action impairs
the rights of the company as well. The test in determining
whether the shareholders right is impaired is not formal; it is
essentially qualitative, if the state action impairs the right of the
shareholders as well as of the company the court will not, only
upon technical ground, deny itself jurisdiction to grant relief. A
shareholder is entitled to the protection of Article 19 of the
Constitution. The fundamental rights of the shareholders as
citizens are not lost when they associate to form a company.
When their fundamental rights as shareholders are impaired by
state action their rights as shareholders are protected. The
reason is that the shareholders rights are equally and
necessarily affected, if the rights of the company are affected.

Bennett Coleman & Co. V Union of India question was whether the shareholder, the editor,
the printer have right to freedom under Article 19 of
the Constitution. Relying on the Bank Nationalization
case the court held that the protection of Article was
available to a shareholder, editor, printer and
publisher of a newspaper. The court said the rights of
shareholders with regard to Article 19 (1) (a) were
protected and manifested by the newspapers owned
and controlled by the shareholders through the
medium of the corporation. The individual rights of
speech and expression of editors, directors and
shareholders are all exercised through their
newspapers through which they speak. The press
reaches the public through the newspapers. The
shareholders speak through their editor.

D.C. & G.M. V Union of India writ petition filed by a company complaining
denial of fundamental rights guaranteed
under Article 19 is maintainable.
In the matter of fundamental freedom
guaranteed by Article 19, right of a
shareholder and the company which the
shareholders have formed are co-extensive
and the denial to one of the fundamental
freedom would be denial to the other

Statutory Corporations or Companies


Companies and undertakings concerned with public utility such as
railways, roadways, docks, electricity etc. are usually incorporated by
special Acts of the Legislature.
They are mostly invested with extensive powers.
The examples of statutory corporations are the Reserve Bank of
India established by the Reserve Bank of India Act, 1934, the
Industrial Finance Corporation of India established by the Industrial
Finance Corporation Act, 1948, Air India incorporated under the Air
Corporation Act, 1953, the Life Insurance Corporation of India created
by the Life Insurance Corporation of India Act, 1956 and so on.
statutory corporation is a public enterprise which comes into
existence by a special Act of Parliament.
The Act would define its powers and functions, rules and regulations
governing its employees and its relationship with the government
department.
They are financially independent.

ADDITIONAL READINGS PURPOSES OF INCORPORATION


The most important purpose of incorporation is to enable traders to embark upon commercial
venture with limited liability. This is possible only by the incorporation of the limited liability company.
Company is so formed by a number of persons becoming shareholders and registering the company
under companies Act. By becoming a shareholder, the member contributes or promises to contribute
a stated amount of money for the furtherance of common objects of the company. His liability is
limited to his share that is the contribution made by him. If the venture of the company ends in
disaster, he will not be called upon to meet the claims of the creditors of the company from his other
assets. The assets of the company (including the share capital promised but still remaining unpaid),
would alone be answerable for the claims of the companys creditors. In this way the shareholders
are able to trade with limited liability. This is one of the most important purposes of incorporation
and it cannot perhaps be served by any other device known to the law. There are other purposes
also served by incorporation but those can be served by other means as well. The fiction of
corporate personality is introduced for the purpose of bestowing the character and features of
individuality on a collective and changing body of men. Incorporation assimilates the complex form
of collective ownership to the simpler form of ownership. In case there are number of persons who
are owners of the same property, difficulty arises as to its distribution as well as to its management.
To avoid this, law creates fictitious legal person viz., the corporation or company etc. to which it
attributes the rights and duties that would ordinarily attach to the beneficiaries. This fictitious person
is endowed by law with the capacity of dealing with the property as the representative of the coowners and of figuring in legal proceedings on behalf of its members. This purpose of incorporation
may be served also by means of trusteeship. The trustees can represent the body of co-owners for
the purpose of suing and being sued. However, it must be observed that incorporation secures the
object in view much better than trusteeship. Thus, a corporation becomes a continuous entity
endowed with a capacity for perpetual existence. It is provided that a company has a perpetual
succession and a common seal. Trustees, on the other hand, being mortal may have to be changed
from time to time. The element of permanence is absent in trusteeship. Incorporation, thus, secures
not only the element of unity but that of permanence as well. Incorporation can, therefore, be
regarded as an indispensable legal concept of abiding value.

C. KIND OF CORPORATIONS
Corporations are of two kinds:
I. Corporation aggregate
II. Corporation sole
I. CORPORATION AGGREGATE

A Corporation aggregate is a group of co-existing persons, a combination of persons who are united together with a view to promote their common interest which is generally the
business or commercial interest. It has been defined as a collection of individuals united into one body under a special denomination, having perpetual succession under an artificial
form vested by the policy of the law with the capacity of acting in several respects as an individual, particularly of taking and granting property, of contracting obligations and of suing
and being sued, of enjoying privileges and immunities, in common and of exercising a variety of political rights, more or less extensive, according to the design of its institution or the
powers conferred upon it, either at the time of its creation or at any subsequent period of its existence. Under Indian Law, corporation aggregate are all those bodies or associations
which are incorporated under a statute of Parliament or State legislature. In this category come all trading and non-trading associations which are incorporated under the relevant laws
like the state trading corporation, Municipal Corporation, Roadways Corporations, the public companies, State bank of India, Reserve bank of India, The life insurance corporation, the
Universities, Panchayats, Trade Unions, Co-operatives Societies. In fact these are some examples of corporate aggregate.
In Board of Trustees V State of Delhi, the Supreme Court discussed in detail the characteristics of corporate aggregate. In this case the court was examining the question, namely,
whether the Board of Trustees, Ayurvedic and Unani Tibia College is a corporation aggregate or not. The court held the Board is not a corporation. Their Lordships observed that the most
important point to be noticed in this connection is that in the various provisions of the Societies registration Act, 1860, there are no sufficient words to indicate an intention to
incorporate. On the contrary the provisions show that there was an absence of such intention. Hence the Board is not a corporation aggregate because the essential characteristic of a
corporation aggregate, namely, that of an intention to incorporate the society is absent. The court observed in this case that a corporation aggregate has one main capacity, namely, its
corporate capacity. The corporate aggregate may be a trading corporation or a non-trading corporation. The usual examples of a trading corporation are: 1. Chartered companies
2. Companies incorporated by special Acts of Parliaments
3. Companies registered under companies Act etc.

However non-trading corporations are illustrated by:1. Municipal corporation


2. District Boards
3. Benevolent institutions
4. Universities etc.

The court further observed that an essential element in the legal conception of a corporation is that its identity is continuous, that is, that the original member or members of which it is
composed are something wholly different from the incorporation itself; for a corporation is a legal person just as much as an individual. In fact the essential of a corporation consist in
the following:
1. Lawful authority of incorporation
2. The person to be incorporated
3. A name by which the persons are incorporated
4. A place and
5. Words sufficient in law to show incorporation.
No particular words are necessary for the creation of a particular corporation; any expression showing an intention in corporation will be sufficient.
II. CORPORATION SOLE
Corporation sole is an incorporated series of successive persons. It implies two persons to exist under the same name, the one a human being and the other, the corporation sole, which
is a creature of the law and continues to exist though the human beings changes. The live official comes and goes, said Salmond in a passage which has become the classic
description of the corporation sole, but this offspring of the law remains the same for ever. The most outstanding example of Corporation Sole is the Crown (in England). Two persons
are deemed to be occupying the throne of England- one the queen in flesh and blood and the other is the Corporation sole which is the creature of law. This Queen never dies though
the Queen in flesh and blood may die.

THEORIES OF CORPORATE
PERSONALITY
Law treats a corporation aggregate and a
corporation sole as persons.
About the nature of their personality
different theories have been advanced.
courts have not followed any particular
theory in dealing with various problems
relating to corporation and have, by and
large, being guided by practical
considerations.

A. THE FICTION THEORY


According to some jurists, a corporation has a fictitious
personality.
This fictitious personality is attributable to the necessity
for forming an individual organization existing by itself
and managing for its beneficiaries, that is to say, the
members of it and its affairs.
Savigny developed the concept of the persona ficta.
He called fictitious persons by the term -juridical persons.
Juridical persons are those who exist only for juridical
purposes.
While in the case of a natural person, he is born with a
personality which the law has merely to recognize, it is
otherwise in the case of an artificial or juridical person
whose personality is created by the law (there being no
personality apart from this fictitious creation by the law).

B. THE REALISTIC THEORY


corporation has a real and not a fictitious,
personality. The realistic theory maintains that a
corporation has a real personality recognized, and
not created, by the law.
C. THE CONCESSION THEORY
The concession theory of the personality of the
corporation, says that legal personality can follow
from law alone.
It is by grace or concession alone that the legal
personality is granted, created or recognized.
The grace of the state and its law prevails.

D. THE BRACKET THEORY


The bracket theory of the personality of the corporation
maintains that the members of a corporation have their
rights and liabilities referred to the corporation itself,
simply from the point of view of convenience.
To determine, however, the real nature of the
corporation and its state of affairs, the brackets have to
be removed, for the names of the members of the
corporation are kept in brackets.
If and when the brackets are removed, one would be
able to see what the corporation is, what its true nature
is, and how its members are revealed through the
removal of brackets.

F. THE OWNERSHIP THEORY


fictitious personality is not an addition to the class of
persons, but is only a matter of owning or possessing
property in common. It is only a form of ownership.
G. THE PURPOSE THEORY
According to this theory personality is only enjoyed by
human beings, they alone can be the subjects of rights
and duties. The so called juristic persons are not persona
at all. Since they are distinct from their human
substratum, if any, and since rights and duties can only
vest in human beings, they are simply subject less
properties designed for certain purposes.
The main implication of this theory is that law protects
certain purposes and the interest of individual beings

Classification of Companies
I. On the Basis of Mode of
Incorporation, Companies can be
classified into three categories

Chartered Company:
A Company is incorporated by a charter granted by
Monarch and is regulated by that charter.
The powers and nature of business of a chartered
company are defined by the charter which
incorporates it.
A chartered company has wide powers.
It can deal with its property and bind itself to any
contracts that any ordinary person can.
In case the company deviates from its business as
prescribed by the charted, the Sovereign can annul
the latter and close the company.
Ex.- East India Company came into being by the
grant of a Royal Charter. Such Companies do not
exist in India now.

Statutory Company:
A Company which is created by a Special Act of the
Legislature and is governed by the provisions of that Act.
Such companies do not have any memorandum or articles
of association.
They derive their powers from the Acts constituting them
Alternations in the powers of such companies can be
brought about by legislative amendments.
The provisions of the Companies Act shall apply to these
companies also, except in so far as provisions of the Act
are inconsistent with those of such Special Acts.
These companies are generally formed to meet social
needs and not for the purpose of earning profits.
Ex.- State Bank of India , Industrial Finance Corporation of
India are Statutory Companies.

Registered Company:
A Company brought into existence by
registration of certain documents under the
Companies Act.
Such companies come into existence only
when they are registered under the Act and
a certificate of incorporation has been
issued by the Registrar of Companies.
This is the most popular mode of
incorporating a company.

Registered companies may further


be divided into three categories on
the basis of liability.

i) Companies limited by Shares :


The main attribute of limited companies which attracts the
investors is limited liability of the share-holders.
The Liability does not fluctuate but limited to the extent of
the unpaid value of such shares.
These types of companies have a share capital and the
liability of each member or the company is limited by the
Memorandum to the extent of face value of share subscribed
by him.
The amount remaining unpaid on the share can be called up
at any time during the lifetime of the company or at the time
of winding up.
In other words, during the existence of the company or in
the event of winding up, a member can be called upon to pay
the amount remaining unpaid on the shares subscribed by
him.
Such a company is called company limited by shares.
These are the most popular types of companies.

ii) Companies Limited by Guarantee:


Each member promises to pay a fixed sum of money specified
in the Memorandum in the event of liquidation of the company
for payment of the debts and liabilities of the company.
This amount promised by him is called - Guarantee.
The Articles of Association of the company state the number
of member with which the company is to be registered.
The liability of the member is limited to the extent of the
guarantee and the face value of the shares subscribed by
them, if the company has a share capital.
The amount of guarantee of each member is in the nature of
reserve capital. This amount cannot be called upon except in
the event of winding up of a company.
Non-trading or non-profit companies formed to promote
culture, art, science, religion, commerce, charity, sports etc.
are generally formed as companies limited by guarantee.

iii) Unlimited Companies :


promoters can form a company with or
without limited liability.
A company not having any limit on the
liability of its members is called an unlimited
company.
The right of limited liability is desirable, but
not a necessary adjunct to incorporation.
The main disadvantage of an unlimited
company is that its members are liable like
the partners of a firm for all its trade debts
without any limit .But still, the creditors
cannot directly sue the members.

On the basis of number of members a company


can be classified as :
1.One person company: One Person
Company means a company which has only
one person as a member. Though new in India,
OPC's are in existence in quite a few countries
across the world. It is a one shareholder
corporate entity, where legal and financial
liability is limited to the company only. The One
Person Company will be formed as a private
limited company. The words One Person
Company shall be mentioned in brackets
below the name of such company, wherever its
name is printed, affixed or engraved.

A private company is that company which by its


articles of association limits the number of its
members to fifty, excluding employees who are
members or exemployees who were and continue to
be members; restricts the right of transfer of shares, if
any; prohibits any invitation to the public to subscribe
for any shares or debentures of the company.
minimum number of members to form a private
company is two.
A private company must use the word Pvt after its
name.
A Private Company has been described as an
incorporated partnership, combining the advantages
of the privacy of partnership and the permanence and
origin of the corporate constitution.

Characteristics or Features of a Private Company. The main


features of a private company are as follows :
i) A private company restricts the right of transfer of its shares. The
shares of a private company are not as freely transferable as those of
public companies. The articles generally state that whenever a
shareholder of a Private Company wants to transfer his shares, he must
first offer them to the existing members of the existing members of the
company. The price of the shares is determined by the directors. It is
done so as to preserve the family nature of the company's shareholders.
ii) It limits the number of its members to fifty excluding members who are
employees or ex-employees who were and continue to be the member.
Where two or more persons hold share jointly they are treated as a single
member.
The minimum number of members to form a private company is two.
iii) A private company cannot invite the public to subscribe for its capital
or shares of debentures. It has to make its own private arrangement.
Private Company can also be broadly classified as:
a) Purely Private Company ,and
b) Private Company which is a subsidiary of a company which is
not a private Company

3. Public companies: A company which is not a


private company or a private company which is a
subsidiary of a company which is not a private
company.
Public company may be said to be an association
consisting of not less than seven members, which
is registered under the Companies Act
shares and debentures of a public company may
be listed on a Stock Exchange and are offered to
public for sale.
There is no restriction on transfer of shares in case
of public company.
A Public company cannot commence its business
unless certificate to commence business is issued
by the Registrar of Companies.

The Government of India (GOI) had received several representations from


industry stakeholders for amending various provisions of Companies Act,
2013 (CA 2013) to ensure ease of doing business in India. Towards this, the
Companies (Amendment) Act, 2015 (CA Amendment 2015) received the
assent from the President of India on 25 May 2015 .
Some of the key amendments and clarifications in the CA Amendment 2015
are as follows:
No Minimum Paid-up Share Capital: The minimum paid-up share capital
requirement of INR 100,000 (in case of a private company) and INR 500,000
(in case of a public company) under CA 2013 has been done away with.
Consequently, the definitions of private and public companies stand
amended.
Accordingly, no minimum paid-up capital requirements will now apply for
incorporating private as well as public companies in India.

Common Seal Optional: CA 2013 required common seal to be affixed on


certain documents (such as bill of exchange, share certificates, etc.) Now, the
use of common seal has been made optional. All such documents which
required affixing the common seal may now instead be signed by two
directors or one director and a company secretary of the company.
No declarations for commencement of business, etc.: CA 2013
required all companies to file following additional declarations with the
Registrar of Companies prior to commencement of business or exercising any
borrowing power: (i) declaration by a director that minimum paid-up share

Violation of Acceptance of Deposits, etc.:


CA 2013 introduced stringent provisions in relation to
acceptance/ renewal / repayment of deposits. However, no
specific penalty was prescribed for non-compliance with the
relevant provisions i.e. Section 73 and Section 76. This lacuna
has been filled by the CA Amendment 2015.

A new Section 76 A has been introduced for the above noncompliances. The defaulting company will be liable for fine of a
minimum amount of INR 10,000,000 and a maximum of INR
100,000,000 in addition to the amount of deposit or part
thereof, along with interest.
Further, every officer of the company in default is punishable
with imprisonment which may extend upto 7 years or with a
fine amounting to a minimum of INR 2,500,000 and maximum
of INR 20,000,000 or both. Such officer may attract additional
penalty for fraud under CA 2013 if the non-compliance was
done knowingly or with the intention to deceive the company,
shareholders, depositors, creditors or tax authorities.

Dividend: Section 123 is an enabling provision for


companies to declare divided in a financial year, subject
to fulfilment of prescribed conditions. The CA
Amendment 2015 has introduced a new proviso which
states that a company cannot declare dividend for a
financial year, unless the losses and depreciation
carried over from past years have been set-off against
the profits of the company, in the year it proposes to
declare a dividend.
Special Courts: Section 435 read with Section 436
provides the Central Government the power to set up
special courts to try offences under CA 2013.
By way of the above amendment, special courts may
now only try offences punishable under CA 2013, with
imprisonment for 2 years or more. All other offences are
to be tried by a Metropolitan Magistrate or a Judicial
Magistrate of the First Class.

III. On the basis of membership


pattern and manner of access to
capital ,
Public Companies can further classified
as:
Listed Company: Company whose
shares are traded on an on an official
stock exchange. It means a public
company which has its securities listed
on any recognized stock exchange. A
company is said to be listed ,quoted
or have a listing if its shares can be
traded on a stock exchange.

Unlisted Company: A Public


company whose shares are not on the
official list of shares traded on a
particular stock market.
Unlisted companies are usually too
small to qualify for a stock exchange
listing, and do not usually advertise for
investors The Government of India have
passed the Unlisted Public Companies
Amendment Rules, 2011 for regulating
it.

On the basis of Control over the management, Companies may be


classified into:
1. Holding companies, and
2. Subsidiary Company
A company is known as the holding company of another company if it has control
over the other company. A company qualifies as a holding company when it has
the power to control the composition of the board of directors of another
company or holds a majority of its shares.
A company may become a holding company of another company in either of the
following three
ways: a) By holding more than fifty per cent of the normal value of issued equity capital
of the company; or
b) By holding more than fifty per cent of its voting rights; or
c) By securing to itself the right to appoint, the majority of the directors of the
other company, directly or indirectly.
The other company in such a case is known as a Subsidiary company. Though
the two companies remain separate legal entities, yet the affairs of both the
companies are managed and controlled by the holding company. A holding
company may have any number of subsidiaries. The annual accounts of the
holding company are required to disclose full information about the subsidiaries

On the basis of Ownership of companies


a) Government Companies. A Company of which not
less than 51% of the paid up capital is held by the
Central Government or by State Government or
Government singly or jointly is known as a Government
Company.
It includes a company subsidiary to a government
company.
auditors of the government company are appointed by
the government on the advice of the Comptroller and
Auditor General of India.
Some of the examples of Government companies are Mahanagar Telephone Corporation Ltd., National
Thermal Power Corporation Ltd., State Trading
Corporation Ltd. Hydroelectric Power Corporation Ltd.
Bharat Heavy Electricals Ltd. Hindustan Machine Tools
Ltd. etc.

b) Non-Government Companies.
All other companies, except the
Government Companies, are called
non-government companies. They do
not satisfy the characteristics of a
government company. Some of the
example of Non-Government
Companies are- Reliance Industries
Limited, WIPRO Limited etc.

On the basis of Nationality of the Company


a) Indian Companies: These companies are
registered in India under the Companies Act.
have their registered office in India.
Nationality of the members in their case is
immaterial.
b) Foreign Companies: It means any
company incorporated outside India which has
an established place of business in India.
A company has an established place of business
in India if it has a specified place at which it
carries on business such as an office, store
house or other premises with some visible
indication premises.

MODULE 2

PROMOTERS OF A COMPANY

Promotion- preliminary steps taken for the


purpose of registration and flotation of the
company.
persons who assume the task of promotion
are calledPromoters.
It is the Promoter who undertakes does and
goes through all the necessary
requirements keeping in view the object of
proposed company in order to bring to
existence a incorporated company.
it means A person who involves in the
promotion the company.

The expression promoter has not been defined under


the companies Act.
Even in English law, no general statutory definition of
Promoter is available.
As per section 2(69) of the Act, 2013 Promoter, means
a person (a) who has been named as such in a prospectus or is
identified by the company in the annual return to in
section 92; or
(b)who has control over the affairs of the company,
directly or indirectly whether as a shareholder, director
or otherwise; or
(c) in accordance with whose advice, directions or
instructions the Board of Directors of the company is
accustomed to act:

So, in other words promoter is a party to the


preparation of prospectus but does not include
any person by reason of his acting in a
professional capacity in procuring the formation
of the company.
Twycross v. Grant,described a Promoter as one
who undertakes to form a company with
reference to a given project, and to set it going,
and who takes the necessary steps to accomplish
that purpose.
In USA, securities Exchange Commission Rule
405(a) defines a promoter as a person who,
acting alone or in conjunction with other persons
directly or indirectly takes the initiative in
founding or organizing the business enterprise.

1.3. Types of Promoter:


A promoter is the one who envisages an idea for setting
up a particular business at a given place and carries out a
variety of formalities required for starting a business.
A promoter may be an individual, a firm, an association of
persons or a company.
The promoters may be professional, occasional or
managing promoters.
Professional promotershandover the company to the
shareholders when the company starts. Unfortunately,
such promoters are very scarce in the developing
countries.
Occasional promotersare those whose main interest is
the floating of companies. They are not in promotion work
on regular basis but take up promotion of some companies
and then go to their earlier profession. For example,
engineers, lawyers etc. may float some companies.

Managingpromoters played a
significant role in promoting new
companies and then get their
managing rights.
A promoter is neither an agent nor a
trustee of the company as it is a nonentity before incorporation.

FUNCTIONS OF PROMOTER
A promoter plays a very important role in the formation of a
company. A promoter may be an individual, an association or a
company. In their capacity as promoters, they perform the following
functions in order to incorporate a company and to set it going. To
originate the scheme for formation of the company:
Promoters are generally the first persons who conceive the idea of
business.
They carry out the necessary investigation to find out whether the
formation of a company is possible and profitable.
Thereafter they organize the resources to convert the idea into a
reality by forming a company. promoter
settles the name of the company
settles the content or details as to the Articles of the companies;
(articles implies Articles of association & Memorandum of association),
nominates the directors, bankers, auditors and etc.;
decides the place where registered office (head office) have to be
situated;
prepare the Memorandum of Association, Prospectus and other
necessary documents and file them for incorporation.

promoters are the originators of the plan for the formation


of a company.
promoters, in accordance with whether they want to
incorporate a private or public company, try to secure the
co-operation of persons needed to from the company.
Minimum number of members required to from a public
company is seven and that for a private company the
minimum number is two. Depending upon the form
chosen, the promoters may decide upon the number of
primary members.
The first directors of the company are generally appointed
by the promoters. The promoters seek the consent of
some individual whom they seem appropriate so that they
agree to be the first directors of the proposed company.
To settle about the name of the company: The promoters
have to seek the permission of the Registrar of companies
for selecting the name of the company.

PRE-CONTRACTUAL AND POST CONTRACTUAL


OBLIGATIONS WITH RESPECT TO: STATUS,
DUTIES & LIABILITIES.
Legal status of promoter is undefined.
He cannot considered as an agent, an employee and
trustee of the companies.
The status of the promoter is generally terminated
when the board of directors has been formed and the
board starts governing the company.
They are the first persons who control or influence
the company, and it they who take the necessary
steps to incorporate it, to provide it with share and
loan capital and acquire the business or property with
it, When these things are done, they handover the
control of the company to its directors, who are often
themselves under a different name

Duties:
The early companies Acts contained no provisions
regarding the liabilities or duties of promoters, and even
today legislation is largely silent on the subject, merely
imposing liability for untrue statement in listing particulars
or prospectuses to which they are parties.
promoters have certain basic duties towards the company
formed : Promoters have been described to be in a fiduciary
relationship (i.e., relationship of trust and confidence) with
the company. This relationship of trust and confidence
requires the promoter to make a full disclosure of all
material facts relating to the formation of the company.
promoter can make profits in his dealings with the company
provided he discloses these profits to the company and its
members. What is not permitted is making secret profits
i.e. making profits without disclosing them to the company
and its members.

Liabilities of promoter:
A promoter can be compelled by the company to hand over any secret profit
which he has made without full disclosure to the company. The company can
also sue for the rescission of the contract of sale by the promoter where the
promoter has not disclosed his interest therein.
A promoter is subject to the following liabilities under the various provisions of
the companies Act:
Section 56 lays down matters to be stated and reports to be set out in the
prospectus. He may be held liable for the non-compliance of the provisions of
this section.
promoter is liable for any untrue statement in the prospectus to a person who
has subscribed for any shares or debentures on the faith of the prospectus. Such
a person may sue the promoter for compensation for any loss or damage
sustained by him.
promoters are criminally liable for the issue of prospectus containing untrue
statements. Act imposes severe penalty on promoters who make untrue and
deceptive statements in a prospectus with a view to obtaining capital.
A promoter may be liable to public examination like any other director or officer
of the company if the court so directs on a liquidators report alleging fraud in
the promotion or formation of the company.
A company may proceed against a promoter on action for deceit or breach of
duty , where the promoter has misapplied or retained any property of the
company or breach of trust in relation to the company.

POSITION OF PROMOTER IN INDIA IN RELATION


TO COMPANY.
A promoter is neither a trustee nor an agent of the
company which he promotes because there is no trust
or principal in existence at the time of his efforts.
But certain fiduciary duties, like an agent, have been
imposed on him under the Companies Act. As such he
is said to be in a fiduciary position (a position full of
trust and confidence) towards the company and the
original allottee of shares.
Consequently, a promoter must make full disclosure of
the relevant facts, including any profit made.

He must not make any secret profits out


of the transactions he makes on behalf of
the company.
it is not the profit made by the promoter
which the law forbids, but the nondisclosure of it. If full disclosure is made
to an independent Board of Directors or
to the shareholders as a body (and not to
a selected few), the profit is permissible.
disclosure ought to be to an independent
Board or to all shareholders by means of
a prospectus

4.1. Prior to incorporation of the company:


Sometimes, contracts are made on behalf of a company even
before it is duly incorporated. But no contract can bind a
company even before it becomes capable of contracting by
incorporations.So, a pre-incorporation contract is a contract
entered into by a company before it is incorporated, which is
obviously not possible. Ratification of a pre-incorporation
contract is not possible since ratification acts retrospectively. A
person cannot entered into a contract on behalf of a company
before the company incorporated or born or came into
existence.
However, it may be necessary to bind an outsider with a
contract before the company is incorporated. Hence, the need
for pre-incorporation contract.
The true legal position in respect of pre-incorporation contracts
may be discussed under the following two heads: Position before 1963(i.e., before passing of Specific Relief act,
1963), and
Position since 1963.

Position before 1963:


A pre-incorporation contract never binds a
company since a person (legal or juristic cannot
contract before his or its existence and a
company before incorporation has no legal
existence.
Inre English and colonial Produce Company
case, a solicitor was engaged to prepare the
necessary documents and obtain the
registration of a company. He paid the
registration fee and incurred certain expenses
incidental to registration. It was held in this case
that the company was not liable or bound to
pay for his services and expenses.
The company is also not entitled to sue on a
pre-incorporation contract.

Position since 1963 (i.e., after passing of the specific relief Act, 1963):
Until the passing of the specific relief Act, 1963, in India the promoters found it
very difficult to carry out the work of incorporation. Since contracts prior to
incorporation were void and also could not be ratified, people hesitated to either
supply any goods or services for the cause of incorporation. Promoter also felt shy
of accepting personal responsibility. The specific relief Act, 1963 came as a relief to
the promoters.
The specific relief Act provides under the following sections:
Section 15(h) and 19(e) of the Specific Relief Act provides as follows:
The contract should have been entered into by the promoter for the purpose of the
company.
The terms of incorporation should warrant such contract.
The company should accept the contract after incorporation.
Such acceptance should be communicated to the other party to the contract.
So, preliminary contract enforced by the promoter prior to incorporation of the
company will be treated as contract between two individuals who are in existence.
if the company does not execute a fresh contract post incorporation and the
contract is not one warranted for the purposes of incorporation of the company,
what will be the legal position of the promoter who brings about such a contract?
Phonogram Limited v. Lane,- Promoters shall be liable to pay damages for failure to
perform the promises made in the name of company and this shall be so, even
where the contract expressly provides that only the companys paid up capital shall
be answerable for performance

After incorporation of the company:


After company came into existence, a
company can ratify or adopt the contract,
and this would bound the company and
not the promoter. under theSpecific
Relief Act 1963,section 15(h) and
19(e)promoter can shift his right and
responsibility to the company, if it is
warranted by the terms of incorporation.
remuneration for promoter- generally the
promoter is not entitled for any kind of
remuneration, salary. once the company
is incorporated he may be compensated.

word Promoter is used in common


parlance to denote any individual,
syndicate, association, partnership or
a company which takes all the
necessary steps to create a company.

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