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(..1..)
FORMS OF CORPORATIONS & NON-CORPORATE ORGANISATIONS
QUESTION BANK
Q.1 Define company. Explain its characteristics.
Q.2 Define company. Distinguish between the company and other forms of
association.
Q.3 Define company. Explain the advantages of the company.
Q.4 Define company. Distinguish between company and partnership.
Q.5 Define company. What are the different types of companies?
Q.6 Define the kinds of companies. Discuss the nature and advantages of
Government companies.
Q.7 Write a detailed note on the kinds of companies.
Q.8 What is a private company? When can it become a public company?
Q.9 The Company is invisible, intangible and exists only in the eyes of the law.
Explain.
Q.10 Define Company and explain the special features of the company.
Q.11 Explain in detail the meaning of the company and the advantages of
Incorporation in detail.
SHORT NOTES
(1) Lifting the corporate veil.
(2) Holding Company and Subsidiary Company.
(3) Saloman V/s Saloman.
(4) Certificate of commencement of business.
Table of content
The Companies Act. 1956 and object of new Companies Act. 2013
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Perpetual Succession:-..................................................................................7
Transferability of Shares (S. 44):-................................................................7
No Prospectus:-.....................................................................................9
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Tata Motors, Reliance Industries, Infosys, Wipro, Indian Oil Corporation,
Volkswagen etc.
THE COMPANIES ACT 1956 AND OBJECT OF NEW COMPANIES ACT
2013:-
The Companies Act 1956, which consolidated and amended the law relating
to companies and certain other associations, was in force for about fifty years and
has undergone several amendments. However, a need was felt to enact new
legislation to meet the changing national and international economic environment
and further accelerate the expansion and growth of the economy. Therefore, the
Companies Act 2013 came into existence, repealing the earlier Companies Act 1956.
The present Companies Act 2013 has brought important and vital changes to
the 1956 Act. 1956 Act was repealed by coming into force of Companies Act 2013
on 12 September 2013. The Companies Act 2013 contains 470 sections and 7
Schedules, whereas the Companies Act 1956 contained 658 sections and 15
Schedules. The Companies Act 2013 contains some new provisions; it has changed
the contents of some provisions of the Companies Act 1956.
Honâble Madras High Court observed that the provisions of the Companies
Act 2013 override the provisions of the Companies Act 1956.
The Court denied the company's request to raise deposits in violation of S.
74 (1) of the Companies Act 2013, even though the Companies Act 1956 permitted
it.
1 (WA No. 1227 of 2015)
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Even the Companies Act 2013 was amended a number of times, i.e., in 2015, 2017,
2019, 2020, and 2021, etc. The major amendment was carried out in 2020. The
amendment carried out in 2020 reduced penalties considerably and added a new
chapter 21-A of producer companies to the Act. We will, therefore, study the
Companies Act 2013.
I]
NEED OF COMPANY:-
Commercial corporations have played a very important role in the
development of the country, specifically (i) to increase the economic status of
society and (ii) distribution of wealth among citizens. Companies produce goods and
provide services so that the community's economic life is uplifted. Modern
corporations are also instruments of social charge.
Modern companies not only have some interest of their shareholders or
creditors, but the interest of the public is also to be served. It uplifts not only the
economic status of its shareholders but also employees. The object of a company
should not only be profit-making but to protect the interest of the public.
Due to the formation of a company, huge capital can be collected, and the
collection of such huge capital is out of the individual's capacity. Management of
such a huge business is possible due to the number of directors and especially skilled
managerial staff. A number of directors can make appropriate decisions. The
company's profit is distributed among a number of shareholders instead of the
individual proprietor. The Companies fulfil the needs of society by supplying goods
and services, etc. For the above reasons, corporations/companies are necessary for
society.
II]
(1)
DEFINITION OF COMPANY:-
âCompanyâ means âa company incorporated under this Act or under any
previous company lawâ.
(2)
According to Lindley, the term âcompany is an association of many persons
who contribute money or moneyâs worth to a common stock and employ it for a
common purposeâ.
(3)
Justice Marshal defined âcompanyâ as âa person, artificial, invisible,
2 The word âSâ denotes âsectionâ, and the word âSs.â denotes sections.
3 (for the sake of brevity âthe Companies Act, 2013â is called as âthe Actâ.)
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intangible and existing only in contemplation of lawâ.
(4) According to Buckely âthe term company involves two ideas: first, the
members of the association are so numerous that it cannot be described as a firm or
a partnership, and secondly, the consent of all the other members is not required to
the transfer of a memberâs interestâ.
Thus, from the above definitions, a company is a juristic person with perpetual
succession, in which shares are transferable and liability is limited.
III] CHARACTERISTICS OF THE COMPANY:-
From the above definition, the following characteristics of the company may
be laid down. These are also the advantages of an incorporated or registered
company over the other forms of associations viz-
1)
Independent Personality (S. 9):-
A company is regarded just as a human being. A company comes into
existence by its incorporation/registration. It has a corporate existence independent
from its members after registration. On the contrary, a partnership firm does not have
a separate corporate existence distinct from partners. The life of a partnership firm
depends upon the life of its partners. The assets of the partnership firm are, in fact,
assets of partners and not of the firm separately.
On Incorporation, the company becomes a corporate body with perpetual
succession and a common seal. The survival or death of members does not affect the
company's life; members may come or go, and the company still continues.
Facts- One Salomon was a boot and shoe manufacturer. He incorporated a
company with the name âSaloman Co. Ltdâ. He had taken all shares in his name
except each share to the rest of his six family members. Saloman had purchased
debentures of the Company in his name. However, the company went into
liquidation. Other creditors brought an action against the company, requesting court
that the Company is nothing but Saloman himself and, therefore, before paying off
Salomanâs debentures, other creditors should be paid first. Thus, creditors contended
in court that the company has no separate entity from Saloman. The Company and
Saloman are one and the same persons.
4 1897 A.C. 22
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Held- Corporation in law is equal to a natural person and has a legal entity
of its own, which is separate from its shareholders. Therefore, Saloman Co. Ltd. has
a separate existence from Saloman.
The exception to lifting the corporate veil [discussed later in notes at the end
of this topic].
2)
Perpetual Succession:-
Being a legal or artificial person company is not subject to death or illness as
a natural person. In other words, members may come or go, but the existence of the
company continues, even after its promoters or directors die. Professor Grower has
described the perpetual succession of the company as âmembers may come or go,
but the company go on forever. During the war, all members of one company (while
in a general meeting) were killed by a bomb, but the company survived; not even a
hydrogen bomb could have destroyed itâ. Similarly, even though Dhirubhai Ambani
had formed Reliance Company and he was a sole premotor, the company continued
even after his death. In other words, the death, insanity or insolvency of members
does not affect the company's continued existence.
3)
Limited Liability:-
The liability of the members of a company is generally limited. It is limited to
the nominal value of the share. Shareholders are not bound to pay a company's debt
more than its share's nominal value, e.g., if the nominal or face value of the share is
Rs.100/- and the shareholder has already paid Rs. 50/-. The shareholder's liability is
to pay the remaining Rs.50/- only (when called) and not more than that.
4)
Separate Property:-
A company is a distinct person separate from its members. Unlike a
partnership, it belongs to money and property separately. In the eyes of the law, the
shareholders are not the part owners of the companyâs assets. No shareholder has
any right to any property owned by the company.
5)
Transferability of Shares (S. 44):-
The shares in the company are moveable property, transferable in the manner
5 âArticles of Associationâ is referred many times as âArticleâ.
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company may impose restrictions upon the transferability of shares; however, it
cannot prohibit total transferability. In the absence of restrictions in the articles, the
shareholders can transfer their shares without anybody's consent. The transferability
of shares enables shareholders to sell their shares in the open market and to get back
their investment without withdrawing money from the company. It serves two
purposes, namely-
(i)
It provides liquidity to shareholders and
provides stability to a company.
(ii)
6)
Suing and Being Sued:-
A company is legal and may sue or be sued in its own name like a natural
person.
IV]
KINDS OF COMPANIES:-
There are the following kinds of companies, viz.
A)
STATUTORY COMPANY:-
A company formed by a Special Act of Parliament or any State legislature is
called a âstatutory companyâ. It is governed by the statute by which it is incorporated.
States incorporate such companies, taking into consideration their public
importance. These companies are also called âpublic corporations.â
The Minister of that particular Government Department is responsible for the
affairs of such a corporation. He submits the statutory corporation's annual report to
the parliament or State Legislature. Such corporations raise their capital by
borrowing, which the state's treasury secures.
Even though the Government owns public corporations, they are a separate
legal entity. A public corporation cannot be regarded as a Government Department,
and its employees are not Government Employees.
Following are some of the illustrations of public Corporations, viz.
(i)
The Reserve Bank of India.
(ii)
The Industrial Financial Corporation.
(iii) The Life Insurance Corporation of India.
(iv) The Damodar Valley Corporation.
(v)
The Food Corporation of India etc.
(vi) Maharashtra State Transport Corporation (ST).
Companies registered under the Companies Act:-
B]
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Companies registered under The Companies Act are as follows-
Private Company:-
1)
a)
Definition of Private Company:-
According to (S. 2 (68):-
Private Company means a company â
(i)
Which has a minimum paid-up share capital as may be prescribed (by the law),
and
(ii)
Which by its articles â
(a)
(b)
Restrict the right to transfer its shares,
Limits the (maximum) number of members to 200 (excluding persons
who are or have been in the employment of the company) [provided
that where two or more persons hold two or more shares in a company
jointly, they shall be treated as a single member]
(c)
Prohibits any invitation (offer) to the public to (subscribe) for any
securities, i.e. shares, debentures, deposits, etc.) of the company.
Earlier, a private company was required to have a minimum share
capital of Rs. One lac, but the 2015 Amendment Act removed this
requirement.
A Private Company is also called a âClose Corporationâ in America because
its members are connected by bonds of kinship, friendship, or similar close ties.
b)
Number of Members S. 2 (68):-
Any two or more persons can form a private company. However, the
maximum number of members should not exceed 200.
c)
Restrictions on Transferability of Shares:-
In a Private Company, the right to free share transfer is restricted because
members are closely related and do not want a stranger to join.
d)
No Prospectus:-
A Private Company cannot invite the public to subscribe to its shares or
debentures; therefore, it cannot issue a prospectus.
e)
Article of Association (S. 5):-
A Private Company shall have an Article of Association.
Advantages of Private Company:â
f)
A private company has the following advantages-
(i) Minimum two subscribers (S. 3):-
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From its formation, a Private Company requires a minimum of two members.
Thus, a private company is the most convenient device for running friendly or family
concerns.
(ii) Exemption from the issue of Prospectus:-
A Private Company cannot invite the public to subscribe to its shares or
debentures; therefore, it cannot issue a prospectus.
(iii) Further issue of Capital:-
Private companies need not follow the procedure under S. 62 for further issues
with their share capital. With some permission, they can also share shares with
strangers, which is impossible in a public company. A public company needs to offer
further issues (of shares) to existing shareholders.
(iv) Minimum two Directors (S. 149):-
At least two directors are required in a private company; they can be lifetime
directors, but this is not so in a public company.
(v) Demand of Poll (S. 109):-
In a Private Company, any resolution poll may be demanded even by one
member present in person or through a proxy who does not have less than one-tenth
of the total voting power.
Earlier, no person other than a member could inspect copies of the profit and
exists in the present Companies Act.
2)
PUBLIC COMPANY:-
(a)
Definition:-
According to (S. 2 (71)), a Public Company means âa company which-
(i)
is not a private company.
(ii)
law).
(iii) subsidiary of a company which is not a private company,
(iv) is a private company, (but) is a subsidiary of a company that is
not private.
Conversion of âPublicâ into âPrivateâ Company and vice versa:-
(b)
6 S. 220 of the Companies Act 1956.
7 âof five lakh rupees or such higher paid-up capitalâ omitted by 2015 Amendment.
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A public company may be converted into a private company and vice versa.
Such change can be made by passing a special resolution to that effect of changing
its articles of association to include requirements of the private company or public
company in which the existing company is to be converted. However, such
However, even after a conversation between one class of company and
another class of company and after its registration, the debts, liabilities, obligations,
or contracts incurred or entered into shall not be changed, varied, or modified.
(c)
(i)
Differences between Public and Private Companies:-
Number of Members:-
In a public company, the minimum number of members required is seven.
However, there is no limitation on the maximum number of members (S. 3).
The minimum number of members required in a private company is only two;
however, the company should not have more than two hundred members (S. 2(68).
(ii)
Invitation to the Public:-
A public company may invite the public to subscribe to its share capital by
issuing a prospectus.
On the contrary, a private company cannot invite the public to subscribe to
its shares.
(iii)
Public and private companies without share capital may commence business
immediately after getting a certificate of Incorporation. However, Public and Private
Companies with share capital can only commence business after getting a âcertificate
of commencement of businessâ.
(iv)
Directors:-
(a) A private company must have at least two directors, while a public
company must have at least three directors.
8 General Circular No.18 dated 11th June, 2014 issued by Ministry of Corporate Affairs-
Considering, the difficulties being faced by the stakeholders while filling INC-27 for
Conversion of a Public Company into a Private Company, the Ministry has clarified that since
proviso to section 14(1) and section 14(2) have not been notified under Companies Act, 2013, the
corresponding provisions of Companies Act, 1956 [Section 31(1) and 31(2A)] shall remain in
force till the corresponding provisions of Companies Act, 2013 are notified.
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(b)
The directors of a public company have to retire by rotation, whereas
directors of a private company need not retire by rotation, and there may be lifetime
directors.
(c)
In a public company, an interested director cannot participate in the
Boardâs meeting. In a private company, the director can take part in the boardâs
meeting even though he is interested in the transaction.
(v)
Transferability of Shares:-
Shares of a public company are freely transferable. There is no restriction on
the transferability of shares.
In the case of a private company, its articles impose restrictions on the transfer
of shares.
3)
UNLIMITED COMPANY:-
An âunlimited companyâ is a company that does not have any limit on the
liability of its members (S. 2 (92)).
In other words, the liability of shareholders in such a company is like that of
a partner in a partnership firm. However, such companies are rarely formed.
Such a company shall register articles of association, which must state the
number of members with which the company is registered. It need not have any
shares or capital.
An unlimited company, by registration, gets status independent from its
shareholders, unlike a partnership firm. It is a legal person; however, a partnership
firm is not so. Moreover, unlimited companies can be converted into limited ones
(S. 65).
An Unlimited Company having a share capital may, by a resolution for
registration as a limited company, do either or both of the following things, namely-
(i)
Increase the nominal amount of its share capital by increasing the
nominal amount of each of its shares, subject to the condition that no
part of the increased capital shall be capable of being called up except
in the event and for the purposes of the company being wound up,
Provided that a specified portion of its uncalled share capital shall not
be capable of being called up except in the event and for the purposes
of the company being wound up.
(ii)
4)
LIMITED COMPANY:-
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A âlimited companyâ is âa company where the liability of its members is
limited. A limited company may be either limited by shares or limited by guaranteeâ.
A company limited by shares may be a Public Company or Private Company.
(a)
Companies Limited by Shares (S. 2 (22):-
âCompany limited by sharesâ is âa company having the liability of its members
limited by the memorandum to the amount, if any, unpaid on the shares respectively
held by themâ. According to the memorandum of a company, the share capital of a
company is divided into a number of shares of a fixed amount, e.g. if the share capital
of a company is five lakh rupees divided into 5000 shares of Rs.100/ each, the
amount or price of each share is Rs.100/-.
It is the most important and usual form of a company. In such companies, the
terms âmembersâ and âshareholdersâ are used synonymously. The liability of
shareholders is limited to the amount of the face value of the share (i.e. Rs. 100 in
the above case). If the value of the share is fully paid up, the shareholder's liability
is nil. A company limited by shares may be a Public or private company.
(b)
Companies Limited by Guarantee (S. 2 (21)):-
A âLimited Company by Guaranteeâ is a company having the liabilities of its
members limited by its memorandum, to such amount as the members may
respectively undertake by the memorandum, to contribute to the assets of the
company in the events of its being wound-up.
Such a company shall have a memorandum and article of association. The
memorandum should also state the amount that each member has guaranteed to
contribute.
Company Limited by Guarantee may or may not have share capital. If the
company has a share capital, the shareholders should be liable to pay the amount
which remains unpaid on their shares in addition to the amount payable under the
guaranty. However, the amount guaranteed cannot be called up except in the case of
the company's winding-up. Such a company cannot purchase its own shares.
5)
GOVERNMENT COMPANY:-
According to S. 2 (45), the Government company means âany company in
which not less than fifty-one per cent of the paid-up share capital is held by (i) the
Central government, or (ii) by the State Government, or (iii) partly by the Central
government and partly by the one or more State Governments, and (iv) includes a
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company which is a subsidiary of a government.
If the government is unable to pay its debts, the remedy is to wound up the
(a)
Audit of Government Companies:-
The provisions relating to the audit and account of other companies are also
applicable to the audit and account of Government Companies (S. 394)
The Comptroller and Auditor General of India shall appoint the auditor of a
Government Company.
The company and the Auditor General of India have the power to direct the
manner in which the companyâs accounts shall be audited. He may also conduct a
test audit from another auditor to obtain additional information.
(b)
Annual Report of Government Companies:-
The concerned government shall make a copy of the annual report (on the
working and affairs of the company) to be prepared within 3 months of the annual
general meeting. It should be placed before both the houses of the Parliament or
State legislatures, as the case may be.
(c)
The Act empowers the Central Government to declare by notification in the
official Gazette that any of its provisions shall not apply to any Government
company.
(6)
HOLDING AND SUBSIDIARY COMPANY :-
In a case where the relationship between any two companies is such that one
of them is in a position to exercise a certain kind of control over the other, the
controlling company is known as the âholding companyâ and the controlled one as
a âsubsidiary companyâ, (S. 2 (87) defines, âa company is deemed to be a subsidiary
of another if the other (i.e. holding company)-
(i)
controls the composition of its board of directors, or
(ii)
exercises or controls more than one-half of its total voting power, or
(iii) holds more than half of its nominal equity share capital, or
(iv) It is a subsidiary of the subsidiary company, e.g. Company B is a subsidiary
10 Nagendra Kumar Jain V/S District, Judge, Mordbed AIR 2001, All 289).
11 By Notification of Government of India Published on 5 June 2015.
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of Company A. Company C is a subsidiary of Company B. Company C will be
treated as a subsidiary of Company A. Similarly if Company D is a subsidiary of
company C, Company D will also be considered a subsidiary of company B as well
as of company A.
A subsidiary cannot be a member of its holding company; therefore, the
transfer of shares of the holding company to a subsidiary company shall be void,
except in the following case-
(i)
Where the subsidiary is concerned as a legal representative of a
deceased member of the holding company or
(ii)
Where the subsidiary is concerned as a trustee, or
(iii) Where it was the member of the holding company before the
commencement of this Act or before becoming a subsidiary of the
holding company.
The subsidiary company cannot be considered an agent of a holding company
because, in law, both companies have separate and independent personalities.
7)
FOREIGN COMPANY (S. 2 (42):-
Foreign company means-
Any company or body corporate incorporated outside India, which-
(a) has a place of business in India, whether by itself or through an agent,
physically or through electronic mode, and
(b) Conduct any business activity in India in any other manner.
The foreign company is even treated as an Indian Company (S. 379)-
(i) Where not less than 50% of the paid-up share capital-
(ii) (whether equity or preference or partly equity and partly preference) of a
foreign company
(iii) is held
a) by one or more citizens of India, or
b) by one or more companies or bodies corporate, incorporated in India
or
(iv) whether singly or in aggregate,
(v) Such a company shall comply with provisions of Chapter XXII of the
Companies Act (i.e. as if it were incorporated in India).
In other words, such companies shall be treated as if they were
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incorporated in India.
Statutory Requirements:-
Provide documents (S. 380):-
Foreign companies which established a place of business in India are required
(A)
i)
to deliver the following documents to the Registrar within thirty days of the
establishment of the place of business-
(a)
a certified copy of the charter, statute, memorandum of Association
and Articles of Association or documents defining its constitution. If
these instruments are not in English, the certified translated copies must
be appended.
(b)
(c)
(d)
the full address of the registered principal office of the company.
a list of directors and secretary of the company
the names and addresses of the persons entitled to receive notice on
behalf of the company in India.
(e)
(f)
The full address of the company's office is in India.
the full particulars of opening and closing a business place in India
on an earlier occasion.
(g)
A declaration that some of the company's directors or the authorised
representative in India have never been convicted or debarred from
the formation of companies and management in India or outside.
If any alteration is made in the above particulars, the company shall notify the
Registrar of such alteration.
ii)
Accounts of Foreign Company (S. 381)-
The duties of foreign companies are almost the same as that of Indian
Companies.
Every Foreign Company shall, in every calendar year-
(a)
(b)
Make out a balance sheet and profit and loss account, in such form,
containing such particulars, including and having annexed or attached
such documents, as under the provisions required in India.
deliver three copies of these documents to the Registrar.
A Central Government cannot exempt a foreign company from the
above requirements.
iii) Display of Names, etc. (S. 382):-
Every foreign company is required to exhibit its name and the name of the
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country (wherein it is incorporated) in English as well as in the local language.
Moreover, suppose the foreign company is âlimitedâ. In that case, the Company shall
mention it in the Prospectus, business letter, bills, papers, notices, etc. and outside
of its office, and at all places, it carries its business in English as well as in the local
language.
iv)
Deemed Service (S. 383):-
A foreign company shall be deemed to be sufficiently served if addressed to
any person whose name and address have been delivered to the Registrar of
Companies under S. 380. However, the service of such documents may be made by
postal service or delivered to the Registrar of Companies.
v)
Inspection of Documents (S. 384):-
Documents such as debentures, annual returns, registration of charges, and
books of accounts pertaining to the affairs of the foreign company are subject to
inspection by the Inspectors and serious fraud investigation Officers appointed by
the Central Government.
vi)
Issuance of Prospectus (S. 387):-
The foreign company is not permitted to issue any circular, Prospectus, etc.
unless it is dated, signed and contains certain particulars, as follows-
(i)
the instrument of the constitution, or defining the constitution of the
company,
the enactments under which the Incorporation of the company was
effected,
(ii)
(iii) address in India where the said instrument, enactments or provisions or
copies thereof (if the same are not in the English language), a certified
translation thereof in the English language can be imputed.
(iv) The date on which, and the country in which, the company would be or
was incorporated, and
(v)
Whether the company has established a place of business in India, and
if so, the address of its principal officer in India.
It is to be noted that aforesaid provisions would not be applied in the
case of a prospectus issued more than two years after the date at which the
company is entitled to commence business.
Moreover, foreign companies issuing Prospectus for inviting
subscriptions for securities must contain an expertâs opinion in writing in this
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regard. (S. 388).
The foreign company is liable for criminal and civil liabilities for any
misrepresentation made in Prospectus (S. 391).
(B) Winding-Up:-
A foreign company may be would-up as an unregistered company.
Illegal Associations (S. 464):-
(9)
According to the section-
(i) No association or partnership-
(ii)consisting of more than such number of persons as may be prescribed but in
any case, not exceeding one hundred,
(iii) shall be formed,
(iv) to carry on any business,
(iv) that has for its object the acquisition of gain by the association or partnership
or by the individual members thereof unless it is registered as a company
Exceptions- An association or partnership in following exceptional cases
need not be registered as a Company under this act, viz.
(i) an undivided Hindu family carrying on any business or
(ii) an association or partnership if it is formed by professionals who are
governed by special Acts.
In other words, any association or partnership carrying business for gain
for its members should not exceed one hundred members. Otherwise it
becomes an illegal association, it needs to be registered as a Company under
this Act.
Effect of Illegal Association-
Every member of an association or partnership carrying on business in
contravention of the above rule shall be punishable with a fine which may
extend to Rs. 1 lakh and shall also be personally liable for all liabilities
incurred in such business.
(10) ONE-PERSON COMPANY:-
The Companies Act 2013 has introduced a new type of company: a' One-
Person Company. ' S. 2 (62) defines a âone-person companyâ as a company with only
one person as a member. Thus, one personâs company may be registered and
incorporated in India.
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NOTES
A] Lifting of Corporate Veil :-
âLifting corporate veilâ is the exception to the company's corporate
personality. Some authors describe it as a disadvantage. However, lifting the
corporate veil is important in some circumstances. The corporation is clothed with
the veil of âlegalâ or âjuristic personality. However, that veil must be lifted or opened
in certain circumstances to avoid fraud or injury.
The rule of the separate, independent personality of the company (from its
members) stated in Solmaonâs case was again upheld by the Privy Council in
Facts:- Mr Lee formed a company he was the managing director of. He appointed
himself as the pilot. However, he lost his life in an air accident. His widow sued the
company for compensation under the Workerâs Compensation Act. The company
opposed her claim saying that Air Farming Company was its own company and a
person can not be both employer and employee.
Heldâthat a company is a corporate person independent from its members or
promoters. Therefore, Lee's wife is entitled to compensation as any other worker,
even though he has formed a company for himself.
Circumstances in which the Corporate veil can be Lifted:-
In the following circumstances, in the interest of the public or to answer the
demand for justice, the corporate veil can be lifted. It is allowed to fix liability on
those behind the veil (i.e. wrongdoers).
(1)
Determination of character:-
During wartime, it becomes necessary to determine a company's character,
i.e., whether it is an âenemy companyâ or not. This is done to avoid providing
financial help to enemy countriesâ companies.
Facts â Respondent Company was incorporated to sell motor car tyres made
in Germany by a German Company. The respondent (German) company had held
the bulk of the shares of the English company except for one share, and one director
was English. After the outbreak of war between England and Germany, an action
12 (1961, A.C. 12)
13 1961, 2A (307)
âLaw Masterâs Publications
âForms of Corporationsâ
Prof. .S. D. Bhosale
20
was commenced in the name of an English company for the payment of trade debt
from one Daimler Company. Daimler Company pleaded that the company
(Continental tires and Rubber) was an alien enemy and that the payment of the debt
to the company would be trading with the enemy.
Held âThat the continental company assumed an enemy character and was,
therefore, incapable of suing and that any payment to it would be illegal as trading
with the enemy
FactsâThe petitioner company was incorporated under the Indian Company
Act 1913. It had a registered office in Hyderabad (Sind) during the partition between
India and Pakistan. Eighty per cent of shareholders and six out of nine directors
migrated to India. The issue before the company was whether the nationality and
domicile of the company had changed with the change in the nationality of the
shareholders.
HeldâAs the company's registered office had never been changed from
Hyderabad (Pakistan) to India, it became a foreign company. However, the majority
of its shareholders and directors have migrated to India and become displaced
persons.
(2)
To prevent tax Evasion:-
The separate personality of the company (Corporate veil) may be disregarded
when the only purpose for which it appears to have been formed is the evasion of
tax so as to cause loss to the Government.
(3)
To prevent Fraud or Improper Conduct:-
The company disregards the corporate veil when there is fraud, misconduct,
or improper conduct in the company's affairs.
FactsâThe defendant, Horne, was a former employee of the plaintiff company. He
had contracted with the plaintiff company that he would not solicit the plaintiff's
customers. He, however, formed a separate company to carry on the same business,
and the company solicited the plaintiffâs customers; the court granted an injunction
against Horn and his company from soliciting the plaintiffâs customers.
14 (AIR 1959 Punjab 199)
15 (1933 Ch. 935.)
âLaw Masterâs Publications
âForms of Corporationsâ
Prof. .S. D. Bhosale
21
The appellate court â described the company as âa mere cloak or shamâ.
Moreover, the company and Horne were treated as one and the same.
However, in Association for Democratic Reforms v. Union of India
(Laws (SC) 2021-3-67)
The Supreme Court observed that the company's financial statements fall under the
public domain, per the Companies Act's provisions. Therefore, account information
is not behind the iron curtains of corporate personality. The corporate personality
needs not be pierced for information available in the public domain.
(4)
Agency or trust of Government Company:-
The separate existence of a company may be ignored when it is being used as
an agent or trustee. A corporate veil may be lifted to see whether the company in
question is a Government company or not. It is often required to decide whether
servants of a particular company are Government Servants or not. Whether
fundamental rights to be executed against the company? Because this can only be
done against government companies.
(5)
Statutory Provisions:-
The Companyâs Act lays down some provisions which permit the lifting of
the corporate veil wholly or partly in certain circumstances. Those circumstances are
as followsâŚ
i)
Miss Description of the Name of the Company (S. 12):-
If the name of the company is not fully or properly shown in any act or
contract of the company, to hold liable the persons behind that contract or act, the
corporate veil is permitted to be lifted of such company.
ii)
To Defraud Creditors (S. 339):-
If the company's business is conducted to defraud creditors, the veil is lifted
to hold guilty persons liable.
iii)
Holding and Subsidiary Company:-
A holding company is a company that has the power to control the
composition of another companyâs Board of Directors or hold a majority of its
shares. Such a controlled company is known as a âsubsidiary company.â By law,
both âholderâ and âsubsidiaryâ companies are treated as separate and independent.
However, the law requires these companies to show joint accounts and
financial positions. If it is found that the holding company controls the whole
conduct of its subsidiary, it shall incur liability for such conduct.
âLaw Masterâs Publications
âForms of Corporationsâ
Prof. .S. D. Bhosale
22
iv) For Investigating Companyâs Ownership (S. 216):-
The Central Government may appoint Inspectors to investigate and report on
the membership of any company to determine the true persons who are financially
interested in the company and who control its policies.
In earlier company law, when the number of members falls short of the
minimum prescribed limit for that class of a company, the corporate veil is allowed
to be lifted; however, in the present Companies Act, there is no such provision.
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