CS-EXECUTIVE PROGRAMME
PAPER:1. COMPANY LAW
CHAPTER-1: INTRODUCTION

1. MEANING & DEFINITION OF COMPANY:

In terms of the Companies Act, 2013 (Act No. 18 of 2013) a “company” means a company incorporated under this Act or under any previous company law [Section 2(20)].

2. NATURE & CHARACTERISTICS OF COMPANY:

The most striking characteristics of a company are discussed below:

(i) Corporate personality: A company incorporated under the Act is vested with a corporate personality so it bears its own name, acts under name, has a seal of its own and its assets are separate and distinct from its members. Its members are its owners however they can be its creditors simultaneously. A shareholder cannot be held liable for the acts of the company & these are not the Agents of the company.

Reference of Case Laws:

The case of Salomon v. Salomon and Co. Ltd.: In this case it has been decided that the company is a different person altogether from the subscribers of the memorandum. The company is not the agent or trustee of its members.

The case of Lee v. Lee’s Air Farming Ltd.: In this case it is decided that the company & its members are distinct legal persons & the magic of corporate personality enabled a member to be the master & servant at the same time & enjoys the advantages of both.

(ii) Company as an artificial person: A Company is an artificial person created by It is called an artificial person since it is invisible, intangible, existing only in the contemplation of law. It is capable of enjoying rights and being subject to duties.

(iii) Company is not a citizen: The company, though a legal person, is not a citizen under the Citizenship Act, 1955 or the Constitution of India. In a case it is decided by Apex Court that company is a legal person, not a citizen and can act only through natural persons.

(iv) Company has Nationality and Residence: The company is not a citizen, yet it has nationality, domicile & residence as established by many judicial decisions. It is quite true that a body corporate cannot have a domicile in the same sense as an

(v) Limited Liability: The liability of a member as shareholder, limited upto the nominal value of the shares held and not paid by him. Members, even as a whole, are neither the owners of the company nor liable for its doubts.

“The privilege of Limited liability is one of the principal advantages of doing business under the corporate form of organization”.

EXCEPTIONS TO THE PRINCIPLE OF LIMITED LIABILITY:

1. Members are severally liable in certain cases where no. of members is reduced below 7 in case of public company & 2 in case of private company & the company carries the business for more than 6 months with this reduced criterion.[Sec. 3A]

2. Where a company got incorporated by means of any false or incorrect information or representation & suppression of any material facts regarding its incorporation.

3. At the time of winding up it appears that business of company is carried on with the intention of defraud the creditors of the company.

4. When the company is incorporated as an Unlimited Company.

5. Where it is proved that a prospectus has been issued with intention to defraud the applicants for the securities of a company or for any other fraudulent purpose.

6. Where a company fails to repay the deposit or part thereof or any interest thereon under section 74 within the time specified or such further time as may be allowed by the NCLT.

7. There is a fraud reported by Inspector & it is found that undue advantages of this fraud has been taken by Director, KMP or Any other officer of the company.

(vi) Perpetual Succession: An incorporated company never dies, except when it is wound up as per law. Professor L.C.B. Gower rightly mentions, “Members may come & go, but the company can go on forever”. The perpetual Succession means that the membership of company may change but it does not effects its continuity.

(vii) Separate Property: A company being a legal person is capable of owning, enjoying and disposing of property in its own name. A company is distinct from its members & that’s why a member does not even have an insurable interest in the property of company.

(viii) Transferability of Shares: The capital of a company is divided into parts, called shares. The shares are said to be movable property and, subject to certain conditions, freely transferable. A member may sell his shares in the open market and realise the money invested by him. The Stock Exchanges provide adequate facilities for the sale and purchase of shares.

(ix) Capacity to Sue and Be Sued: A company being a body corporate, can sue and be sued in its own name. All legal proceedings against the company are to be instituted in its name. Similarly, the company may bring an action against anyone in its own name.

(x) Contractual Rights: A company, being a legal entity different from its members, can enter into contracts for the conduct of the business in its own name. A shareholder cannot enforce a contract made by his company as a company is not a trustee for its shareholders.

(xi) Limitation of Action: A company cannot go beyond the power stated in its Memorandum of Association. The Memorandum of Association of the company regulates the powers and fixes the objects of the company. it cannot go beyond such powers unless the Memorandum of Association, itself altered prior to doing so.

(xii) Separate Management: The members do not have any effective & intimate control over its working. They can elect their representatives as a directors to the Board of the company to operate the functions of company.

(xiii) Voluntary Association for Profit: A company is a voluntary association for Only a Section 8 company can be formed with no profit motive.

(xiv) Termination of Existence: A company, being an artificial juridical person, does not die a natural death. It is created by law & the existence of it terminated by means of winding up.

*AT A GLANCE, “A COMPANY IS A VOLUNTARY ASSOCIATION FOR

PROFIT WITH CAPITAL DIVISABLE INTO TRANSFERABLE SHARES WITH  LIMITED LIABILITY, HAVING A DISTINCT CORPORATE ENTITY & A  COMMON SEAL WITH PERPETUAL SUCCESSION”.

3. COMPANY VIS-A-VIS OTHER FORMS OF BUSINESS: There are so many similarities b/w. a company & other forms of business as well as so many dissimilarities also exists between them which are as follows:

(A) DISTINCTION BETWEEN PARTNERSHIP FIRM AND COMPANY:

SR. NO. BASIS OF DIFFERENCE PARTNERSHIP FIRM COMPANY
1 Distinction A partnership firm is not distinct with its partners. A company is distinct with its members.
2 Separate Property The property of partnership firm is the property of its partners. In a company, its assets is not belongs to its members.
3 Liability The creditors of firm is the creditors of its partners. The creditors of company Can proceed against only the company not its members.
4 Relationship The partners are Agents of the Partnership firm. The members of company are not the Agents of company.
5 Contractual Capacity A partner can’t contract with partnership firm. A member of company can enter into a contract with company.
6 Transferability of shares A partner can not transfer his share The Share of a company is easily transferrable
7 Liability A partner’s liability is unlimited A member’s liability is limited upto calls-in­arrears or amount of guarantee.
8 Succession Unless otherwise stated, death of a partner may cause the dissolution of firm A company has perpetual succession.
9 Audit of Accounts The accounts of firm are subject to audit as discretion. The accounts of company are mandatorily be audited by A Chartered Accountant.
10 Termination of existence A firm can any time dissolved by means of agreement between partners. A company is created by means of law &

therefore can be wind up with the operation of law.

(B) DISTINCTION BETWEEN HUF BUSINESS AND COMPANY:

SR. NO. BASIS OF DIFFERENCE HUF BUSINESS COMPANY
1 Composition A HUF contains homogenous members A company consists of heterogeneous/Diverse
which merely members of a family. Members.
2 Authority In HUF Business, The KARTA is the sole There is no such system in a company.
authority of business. All the major decisions of business has been taken by karta itself.
3 Member A person become a member of HUF Suo- motu by his birth. There is no such provision in the company.
4 Registration No registration is compulsory for conducting the business. Registration of a company is compulsory with ROC.

(C) DISTINCTION BETWEEN LLP AND COMPANY:

SR. NO. BASIS OF DIFFERENCES LIMITED LIABILITY PARTNERSHIP (LLP) COMPANY
1. Governing law LLP is governed by “THE LLP ACT,2008” Companies are prevailed by “THE COMPANIES ACT,2013”.
2. Name of entity The LLP contains “LLP ”as suffix. The company contains “Pvt. Ltd. OR Ltd.” As suffix.
3 Registration Registration with Registrar of LLP is required Registration with ROC is required
4. Distinct Entity LLP is a distinct entity under The LLP Act,2008 Company is a distinct entity under The Companies Act,2013
5. Charter Document The LLP Agreement is the Charter Document for a LLP. The MOA & AOA are the charter documents for the company.
6. Principal/Agent Relationship The Partners of LLP act as agents of LLP The directors of company act as agents of company.

4. DOCTRINE OF LIFTING OF OR PIERCING THE CORPORATE VEIL:

The separate personality of a company is a statutory privilege and it must be used for legitimate business purposes only. Where a fraudulent & dishonest  use of it is made then the concerned persons will not allowed to take shelter  behind the corporate personality. The Court will break the corporate shell &  apply the principle/doctrine of what is called as “Lifting of or piercing the  corporate veil”.

5. STATUTORY RECOGNITION OF LIFTING OF CORPORATE VEIL:

The companies act, 2013 contains some provisions which lifts the corporate veil to reach the real forces of action. Some of the provisions are as follows:

A. Punishment for incorporation of a company by fraudulent means

B. Liability for making fraudulent application for removal of name of company from ROC

C. Liability for fraudulent conduct of business during the process of winding

6. LIFTING OF CORPORATE VEIL UNDER JUDICIAL INTERPRETATION:

Where the corporate veil has been used for commission of fraud or improper In such a situation, Courts have lifted the veil and looked at the realities of the situation.

Case Law: Jones v. Lipman

B. Where a corporate facade is really only an agency

Case Law: Re. R.G. Films Ltd

C. Where the conduct conflicts with public policy, courts lifted the corporate veil for protecting the public policy.

Case Law: Connors Bros. v. Connors

D. In Daimler Co. Ltd. v. Continental Tyre & Rubber Co., it was held that a company will be regarded as having enemy character if the persons having De-Facto Control are resident of an enemy country.

E. Where it was found that the sole purpose for which the company was formed was to evade taxes the Court will ignore the concept of separate entity.

Case Law: Sir Dinshaw Manakjee Petit

F. Avoidance of welfare legislation is as common as avoidance of taxation.

Case Law: The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar v. The Associated Rubber Industries Ltd., Bhavnagar and another.

G. Where it is found that a company has abused its corporate personality is used against the justice, convenience and interests of revenue or workmen or are against public interest.

7. USE OF CORPORATE VEIL FOR HIDING CRIMINAL ACTIVITIES:

Where the defendant used the corporate veil to conceal the criminal activities  (evasion of customs & excise duties, GST payable by the company), the Court could lift the corporate veil and treat the assets of the company as the realisable property of the shareholder.

8. ILLEGAL ASSOCIATION:

For the purpose of prevent the mischief activities from large trading activities  the law has put a ceiling on number of persons constituting an association. An unincorporated company, association or partnership consisting of large  number of persons has been declared illegal.

An illegal association:

A. cannot enter into any contract;

B. cannot sue any member, or outsider, not even if the company is subsequently registered;

C. cannot be sued by a member, or an outsider for recovery of any debts;

D. cannot be wound up by an order of the Court. In fact, the Court cannot entertain a petition for its winding up as an unregistered company.

Point to be remember that an illegal association is liable to be taxed. 

Case law: Kumara Swamy Chattiar v. Income Tax Officer

The members of an illegal association are individually liable in respect of all acts or contracts made on behalf of the association.

9. DEVELOPMENT OF COMPANY LAW IN INDIA:

  • Company Law in India has been modelled on the English Company Law.
  • In India after independence, the Companies Act, 1956 was enacted with a view to consolidate and amend the earlier laws relating to companies.
  • The Companies Act, 2013 was passed by the Lok Sabha and Rajya Sabha on 18th December,20 12 and 8th August, 2013 respectively.
  • it received the assent of Hon’ble President of India on 29th August, 2013 & was notified in the Gazette of india on 30th August, 2013.
  • The Companies Act, 2013 has replaced the Companies Act, 1956.
  • The Companies Act, 2013 has 29 Chapters, 470 Sections & 7 Schedules.

10. REVIEW QUESTIONS:

A. Which of the following activities are barred to an association that is considered illegal?

(a) Entering into any contract.

(b) Suing any member or an outsider by a company.

(c) Sued by a member or an outsider against the company.

(d) Liable to be taxed.

Correct answer: (a), (b) and (c)

(Refer Concept: 8 for details)

B. Under which of the following circumstances does the Court permit the lifting of the corporate veil?

(a) Where the company has abused its corporate personality for an unjust and inequitable purpose.

(b) Where the veil has been used for evasion of taxes.

(c) Where the Corporate Veil conflicts with public policy.

(d) Avoidance of welfare legislation by the company Correct answer: All

(Refer Concept:6 for details)

Author Bio

Qualification: Post Graduate
Company: Magnitude Consultancy Services
Location: Rajasthan, IN
Member Since: 24 Jul 2020 | Total Posts: 4
Author is currently working as partner in Magnitude consultancy Services in the field of Indirect Taxes.Author can be reached at Magnitude.mcs@gmail.com View Full Profile

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