Company An Introduction Corporate law notes

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Long Answer Questions

Define a Company and explain its characteristics.

“An association of persons, united for a common object is a company.” Discuss. Is the gathering of students at examination center, a company ?

“A company is a legal person and it has separate identity from members comprising it.” Bring out truth of this statement.

“A company is an artificial person created by law having a separate entity with a perpetual succession and a common seal.” Discuss this statement and explain the characteristics of a company.

Ans. Proprietary and partnership forms of business organisation were unable to cope with the increased needs of modern industry and commerce. Their main drawbacks were limited resources, unlimited liability and absence of continuity. Such limitations of traditional forms of business organisations led to the advent of company form of organisation. This form of organisation placed heavy sums at the disposal of entrepreneurs and at the same time reduced the business risk through the principle of limited liability. This form is very well suited for large undertakings requiring huge capital.

Meaning of A Company

The word ‘company’ is derived from the Latin word ‘Com’ which means ‘with or together’-and ‘pains’ which means ‘bread.’ Here the Word ‘company’ is referred-to-as-an-association of persons who took their meals together, A company, thus may be defined ac a-voluntary-association of persons formed for some common purpose, with capital divisible into transferable shares, limited liability with a distinctive name, having a corporate body, a legal personality of its own.. It is creation of Sometimes known as an artificial person with a perpetual succession and a common seal.

Definitions of A Company

For the sake of convenience, the definitions of a company can be divided into two parts :

(I) Definitions given by legal luminaries and scholars of law.

(II) Definition given in Companies Act 2013.

(I) Definitions given by Legal Luminaries and Scholars or Law : According to Chief Justice Marshall, “A corporation is an artificial being invisible, intangible, existing only in contemplation of the law. Being a mere creation of law it possesses only the properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence.

According to Prof. Haney, “A company is an artificial person created by law, having separate entity, with a perpetual succession and a common seal.

According to Justice James, ‘CA company is an association of persons united for a common object.

(II) Definition Given in Companies Act, 2013 : Section 2 (20) of the Companies AM, 2013 define a company as “a company incorporated under this Act or under any previous company law.” A company incorporated under any previous company law means an existing company. However, The above definition does not reveal the distinctive characteristics of a company.

Conclusion : After studying -the different definitions of a company, we can sav that A Company may be defined as an incorporated association, which is an artificial person, having an independent legal entity, with a perpetual succession, a common seal, a common capital comprised of transferable shares and carrying limited liability.

Lifting or Piercing The Corporate Veil

Exceptions of The Principle of Company/ Corporate Veil

As it can be seen from the case of Salomon Vs. Salomon Co Ltd. a company is given a distinct legal entity in comparison to the individuals who are managing the affairs of the company. This provides a ‘veil’ for the persons who run the incorporated company as its ‘arms’ and ‘heads.’ The courts generally consider themselves bound by the principle of separate legal entity and adopt a cautious approach while piercing a corporate veil.
However, there have been instances where the courts lift the corporate veil of an incorporated company either to expose the ingenuous persons behind the company or to find out the real purpose of incorporating it. The corporate veil is said to be lifted or pierced when the court ignores the company and concerns itself directly with the members or management.

The circumstances under which the courts may lift the corporate veil may be discussed under two broad headings, namely

(l) Statutory Provisions, (ii) Judicial Interpretations.

(2) Judicial Interpretations. Statutory Provisions : The Companies Act, and other statutes expressly provide for the following provisions pertaining to the lifting of the corporate veil .

l. Number of Members Below Statutory Provisions : If at any time the number of members of a company is reduced below two in the case of a private company or below seven in the case of a public company and itcarries on business for more than six months while the number is so reduced, every member, who knows of this fact, will become liable to an unlimited extent for the payment of the whole debts of the company contracted during that time. However, the members who left the company during the said 6 months period will not be liable. In this case, the privilege of limited liability of shareholders is lost and the law pierces the corporate veil making persons behind the company personally liable despite their limited liability.

2. Failure to Refund Application Money : If the application money of those applicants whom no share has been allotted is not repaid within 45 days of the issue of the prospectus, then the directors of the company shall be jointly and severally liable to repay that money with interest @ 15% p.a. from the expiry of 45th day. [Section 39 (3)]

3. Misdescription of Name of the Company: If a director or officer of the company or any other person who enters into a contract or does any Other act without fully or properly mentioning the name of the company and the address of its registered office, he shall be personally liable. The contract may be any contract, bills of exchange, hundi, promissory note, cheque or order for money.

4. Fraudulent Conduct of Business : If in the course of the winding up of a company it appears that any business of the company has been carried on with intend to defraud creditors, the tribunal may declare that any persons who were knowingly parties to the carrying on of such business are to be personally liable for all or any of the debts or other liabilities of the In case of company.

5. Misrepresentation in the Prospectus [Section 34]: misrepresentation in a prospectus, evety director, promoter and every other person, who authorizes the issue of such a prospectus incure liability towards those who subscribe for shares on the faith of the untrue statements contained therein. Further, they ‘nay be held criminally also.

6. Holding and Subsidiary Companies — It is a matter of fact that a holding company and its subsidiary companies are separate and distinct legal entities. But a holding company is required to prepare a consolidated financial statement of its own as well as the financial statement of is each and every subsidiary company. Moreover, all these statements are required to be laid before the annual general meeting of the holding company along with its own financial statement (Section 1291. Thus, this provision disregards the separate legal existence of subsidiary companies for this limited purpose.

7. Investigation of Ownership of a Company—The Central Government may appoint inspectors to investigate and report on membership of any company and other matters relating to the company for the following purposes:

(i) For determining the true persons who are or have been financially interested in the success or failure of the company.

(ii) For determining the true persons who are or have been able to control or materially influence the policy of the company. {Section 216}For the above purposes, the corporate veil may be lifted to determine the true persons.

8. Liability of Promoters for Pre-incorporation Contracts— Promoters will be personally liable for all those pre-incorporation contracts which are not adopted by the company after incorporation.

9. Ultra Vires Acts—The directors of the company’ will be personally liable for alf those acts which they have done on behalf of the company, if they are : (i) ultra-vires the company„ or (ii) ultra-vires the directors if the company does not adopt their acts.

10. Liability under other Statutes—There are many other provisions of the company law where director(s) of a company are personally liable for the default in complying with those provisions. Some of these are : non-maintenance of proper books of accounts; default in holding of annual general meetings; default in filing the annual returns; default in paying dividends after declaration; false declaration of solvency; non-cooperation with the company auditors or with the liquidators (in the event of winding up of the company); non-compliance with t e regulations of the Securities and Exchange Board of India (SEBI). Besides these, directors may be held liable under pollution laws, social security laws (eg. Minimum Wages Act, ESI, EPF, Gratuity), Competition Act, Foreign Exchange Management Act (FEMA). and taxation laws.

Judicial Interpretations : The decisions of the courts have always been intended to provide opportunities for an incorporated company to retain its identity. However, certain circumstances compel the courts to divert from the Saloman principle only to restrict any unjust result. Some of the cases where the veil has been lifted by court are discussed below :

l. Determination of Character of a Company : When the management of a company is in the hands of persons residing in an enemy country, the Court may lift the corporate veil as the company acquires an enemy character. In such cases to allow alien enemies to trade under the garb of corporate entity, will be against public policy.

2. For Preventing Fraud or Improper Conduct : Where the machinery of incorporation has been used for some fraudulent purpose like defrauding creditors or defeating or circumventing law, the courts have resorted to piercing the corporate veil and looking into the realities of the situation.

3. For Protecting Government Revenue : Sometimes, a company formed purely as a means of evading taxes or to circumvent tax obligation. In such a case, the court may disregard the corporate entity and lift the corporate veil in order to protect government revenue.

4. Avoidance of Welfare Legislation : There are a large number of Welfare legislations, e.g., the payment of Bonus Act, the payment of Gratuity Act, P.F. Act etc. In order to fix the liability for offences of defaults under Welfare legislations, the court or Tribunal can lift the corporate veil and determine the persons responsible for committing of fences of defaults.

5. Company Acting as Agents of the Shareholders : Where a company is formed for acting as agent for its shareholders, the shareholders will be held liable for the acts of the company. Sometimes, a company forms a subsidiary company and the subsidiary company acts merely as an agent of the parent company. In such a case, the court may draw aside the veil of the company.

Short Answer Questions

Q. l. Explain in brief the Principle of Corporate Veil.

Ans. See page No. 24

What do you mean by separate Legal Entity of Company ?

Ans. See Page No. 24 Q.2 Explain the case of Salomon Vs. Salomon & Co. Ltd.Ans. See page No. 24

Q.3. Distinguish Between Partnership and Company.

Ans. Difference between partnership and company can be explained as follows :

Basis of Distinction	Company	Partnership
1. Mode of Creation.	A company comes into existence only when it is registered under the Companies Act.	Partnership is created by mutual agreement between the individuals.
2. Regulating Act	A company is regulated by the Companies Act, 2013.	Partnership firm is governed by the Indian Partnership Act, 1932.
3. Entity	A company is an artificial person and has a distinct legal entity separate from its members.	A partnership firm does not have a distinct legal entity separate from the members composing it.
4. Minimum Number of Members	The minimum number of members ‘in a private company except OPC is two and in case of public company is seven.	A partnership can be created by two persons.
5. Maximum Number of members	A private company is limited to 200 members, excluding its present and past employees. There is no limit to the maximum number of members in case of a public company.	A partnership carrying on business, may consist of such number of partners as may be prescribed by the central government subject to a maximum of 100 members. At present, the maximum prescribed number is 50. Hence, members of a partnership firm cannot exceed 50.
6. Liability	The liability of the shareholders is limited.	The liability of partners is unlimited. Each partner is personally liable for all the debts of the firm.
7. Management	A company is managed by a Board of directors elected by the members of the company.	A partnership firm is managed by partners, every member can participate in management of the firm.
8. Transfer of Share/Interest	In case of a public company a shareholder can transfer his shares freely without restrictions.	The partner cannot transfer his share without the consent of other partners.
9. Audit	The audit of accounts of a company is compulsory.	The audit of accounts of a partnership firm is voluntary’ unless its turnover exceeds the prescribed limit as laid down by the Relevant Finance Act.
10. Documents	A company is governed by the Memorandum of Association and Articles of Association and can be altered according to the procedure laid down in the Act.	A partnership firm is governed by the partnership deed and may be altered at any time with the consent of all partners.
11. Mutual Agency	A member of company is not an agent of the company or of other members and therefore, does not bind the company or other members by his acts.	Each partner is an agent of the firm and of other partners and therefore, binds the firm and other partners of the firm.
12. Perpetual Succession	A company has a perpetual succession. It comes to an end in the event of winding up.	A partnership has no perpetual succession. A partnership comes to an end due to the death, insolvency or insanity of a partner.
13. Right on the Property	The property of the company is the property of the company only and not to the individual members.	The Property of the firm is the joint property of all the partners those comprising the firm.
14. Contracts by members	A shareholder/member can enter into a contract with the company.	A partner cannot enter into a contract with a firm. However, a partner can enter into contract with other partners of the firm.
15 .Winding up	In the case of a company, no one member can require it to be wound up at’ will and winding up involves legal formalities.	A partnership firm can be wound up at any time by any partner, if it is, ‘at will’ without legal formalities.