INTRODUCTION OF

COMPANY

Structure of Co. Act 2013

 New Company Law has been framed on Skelton Approach

 It consists of 29 chapters, 470 Sections, 7 schedules, 95
definitions.

History of Company Law in India

The history of the Modern Company Law in India in England began

in 1844 when the Joint Stock Companies Act was passed. The Act
provided for the primary time that an organization might be
incorporated by registration without obtaining a charter or
sanction by a statute of the Parliament. The office of the
registrar of Joint Stock Companies was also created. But the
Act denied to the members the power of financial obligation.
The English Parliament in 1855 passed the indebtedness Act
providing for liability to the members of a registered company.
The Act of 1844 for superseded by a comprehensive Act of 1856,
which marked the start of a new era in Company Law in England.
This Act introduced the modern mode of making companies
employing memorandum and articles of associations.

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The first enactment up-to-date to the title of Companies Act
was the Companies Act 1862. By these Acts, a number of the
modern provisions of the corporate were laid down. First of
all, two documents, namely: the memorandum of association and
articles of an association formed an integral part of the
formation of an indebtedness company. Secondly, an organization
can be formed with liability limited by guarantee. Thirdly, any
alteration within the object clause of the memorandum of
association was prohibited. Provisions for winding up were also
introduced.

Thus, the fundamental structure of the corporate as we all know

had taken shape. Sir Francis Palmer described this Act as the
Magna Carta of co-operative enterprises. But the businesses
(Memorandum of Association) Act, 1890 made relaxation
concerning the change within the object clause under the leave
of the court obtained on the grounds of a special resolution
passed by the members in the general meeting. The liability of
the administrators of the organization was the mandatory audit
of the companies account was enforces under the Companies Act,
1990.

The concept of the Private Company was initiated for the first
time within the Companies Act, 1908 (the previous ones were
called Public Companies). Two successive Acts were passed in
1908 and 1929 to consolidate the initial Acts. The Companies
Act 1948, which was the Principal Act operative in England was
supported the report of a committee under Lord Cohen. This Act
introduced inter alia another new formation of a company known
as an exempt private company.

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Another feature of the 1948 Act was importance on the general
public accountability of the firm. In generally recognized
principles of accountancy got statutory force and had to be
applied within the preparation of the record and profit and
loss account. Furthermore, the legislation of 1948 extended the
protection of the majority (sec 210) and therefore the powers
of the Board of Trade to order an investigation of the
companies affair (sec a64-175) and for the primary time, the
shareholders in the general meeting got the ability to remove a
director before the expiration of his period of office. The
Independence of the auditor‟s vis-à-vis the directors was
strengthened.

APPLICABILITY
According to section 1 of the Companies Act, 2013, the Act
extends to whole of India and the provisions of the Act shall
apply to the following:-

(a) Companies incorporated under this Act or under any

previous company law;
(b) Insurance companies, except in so far as the said
provisions are inconsistent with the provision s of the
InsuranceAct,1938 (4 1938) or the Insurance Regulatory and
DevelopmentAuthorityAct,1999
(c) Banking companies, except in so far as the said
provisions are inconsistent with the provisions of the Banking
Regulation Act,1949
(d) Companies engaged in the generation or supply of
electricity, except in so far as the said provisions are
inconsistent with the provisions of the Electricity Act,2003
(e) Any other company governed by any special Act for the
time being in force, except in so far as the said provisions
are inconsistent with the provisions of such special Act; and

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(f) Such body corporate, incorporated by any Act for the time
being in force, as the Central Government may, by notification,
specify in this behalf, subject to such exceptions,
modifications or adaptation, as May be specified in the
notification.

Meaning of Company
 The word "Company" is the combination of two words "Com"
and "Panies". The word “Com” means with or together and the
word “panies” means bread.
 The word Company can be referred as an association of person
who took their meals together.
 It is an association of persons for some common objects.
 In simple terms Company may be described to means voluntary
association of persons who come together for carrying on some
business and sharing of money there from.

 In the words of Lord Justice Lindley, "A Company is an

association of many persons who contribute money or monies
worth to a common stock and employed in some trade or
business and who share the profit and loss arising there from.
The common stock so contributed is the share capital of the
Company.

Definition
 Section 2(20) of the Companies Act, 2013, provides that a
'company' means a company incorporated under this Act or under
any previous company law.

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CHARACTERISTICS/ FEATURES OF A COMPANY
(1) Incorporated Association
A Company is a registered group of persons. Minimum 7 members
are required in case of Public Company, 2 in case of Private
Company and 1 in case of OPC.

(2) Artificial Person

A Company is artificial legal person created with the sanction
of law. It is not a human being but it acts through human
beings. Thus, a Company is artificial person but not
fictitious. It is called an artificial person since it is
invisible, intangible, existing only in the contemplation of
law.
Case Union Bank of India v. Khader International Construction and
Law Other
In this case, the question which arose before the Court was
whether a company is entitled to sue as an indigent (poor)
person under CPC, 1908. The aforesaid Order permits persons
to file suits as pauper/indigent persons if they are unable
to bear the cost of litigation. The appellant in this case
had objected to the contention of the company which had
sought permission to sue as an indigent person. The point of
contention was that, the appellant being a public limited
company, it was not a „person‟ within the purview of Code
and the „person‟ referred to only a natural person and not
to other juristic persons. The Supreme Court held that the
word „person‟ mentioned in CPC, 1908, included any company
as association or body of individuals, whether incorporated
or not. The Court observed that the word „person‟ had to be
given its meaning in the context in which it was used and
being a benevolent provision, it was to be given an
Extended meaning. Thus a company may also file a suit as an
indigent person.

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(3) Separate Legal Entity
Incorporation of a company renders it a separate legal
entity. A company is a legal person entirely distinct and
independent from its members. It has its own rights and
obligations. (Salomon v Salomon & Company Ltd- 1897)

Salomon v Salomon & Co. Ltd. (1897)

The case of Salomon VS. Salomon & Co. ltd. has clearly
established the-principle of separate legal entity. Salomon
had, for some years, carried on a prosperous business as a
leather merchant and. boot manufacturer. He formed a limited
company consisting of himself-his wife and a daughter, and
his four sons as the - shareholders, all of whom
subscribed for one share of 1 pound each. Salomon was the
managing director and two of his sons were other directors.
Salomon sold his business (which was perfectly solvent at
that time) to the Company for the sum of 38,782 pounds. He
got the following payments:
10,000 Secured Debentures of 1 pound each 10,000 pounds
20,000 F1.llly – paid Shares of 1 pound each 20,000 pounds
Cash 8,782 pounds
The company soon ran into difficulties and the debenture
holders appointed a receiver and the company went into
liqui4ation. The total assets of the company amounted to 6,050
pounds its liabilities were 10,000 pounds, secured „debentures

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and 8,000 pounds owing to unsecured trade creditors,
The unsecured trade creditors claimed the whole of the
company's assets, viz. 6,050 pounds on the ground that as the
company was a mere agent for Salomon and thus they were
entitled to payment of their debts in priority to Debentures.
-
The House of Lords rejected these contentions and held that a
company, on registration, has its own existence or personality
separate and distinct from its members and, as a result, a
shareholder cannot be equated with a company even if he holds
virtually the entire share capital-of the company.
Lee v Lee Air Farming Ltd. (1961)

 In this case, a company was formed for the purpose of aerial

top-dressing.
 Lee, a qualified pilot, held all except one of the share the
company.
 He voted himself the managing director and got himself
appointed by the articles as chief pilot at a salary.
 He was killed in an air crash while working for the company.
 His widow claimed compensation for the death of her husband
in the course of his employment.
 The company opposed the claim on the ground that Lee was
not a worker as the same person could not be the employer and
the employee.
 The Privy Council held that Lee and his company were distinct
legal persons which had entered into contractual relationships
under which he became the chief pilot and a servant of the
company.
 In his capacity of managing director he could, on behalf of
the company, give himself orders in his other capacity of
pilot, and the relationship between himself as pilot and the
company, was that of servant and master, Lee was a separate

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person from the company he formed and his widow was held
entitled to get the compensation.
 In effect the magic of corporate personality enabled him (Lee)
to be the master and servant at the same time and enjoy the
advantages of both.

Kondoli tea co. Ltd. (1886)

The decision of the Calcutta High Court recognised the

principle of separate legal entity even much earlier than the
decision in Solomon v. Salomon & Co. Ltd case
Certain persons transferred a Tea Estate to a company and
claimed exemptions from ad-valorem duty on the ground that
they themselves were also the shareholders in the company, it
was nothing but a transfer from them in one name to themselves
under another name.
Calcutta High Court rejected this and observed: "The Company
was a separate person, a separate body altogether from the
shareholders and the transfer was as much a conveyance, a
transfer of the property, as if the shareholders had been
totally different persons.

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(4) Separate property

A Company is a legal person in the eyes of law. A Company can

hold property in its own name. Thus, the property of the
company belongs to the company itself and not to its members.
R.F.Perumalv.H.John Deavin
It was held that no member can claim himself to be the owner of
the company‟s property during its existence or in its winding-
up. A member does not even have an insurable interest in the
property of the company.
Macaura Vs. Northern Assurance Company limited.
The undertaking is something different from the totality of
shareholders

(5) Capacity to sue and to be sued

A Company is a legal person with an independent existence. A
Company acts in its own name. Thus, a Company can sue others
and be sued in its own name. The creditors can make their
claim only against the Company and cannot proceed against the
shareholders of the company.

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Abdul Haq VS. Das Mal

An employee was not paid salary for several months. He filed a

suit against the director of the company for the recovery of
the amount of salary due to him. It was held that he will not
succeed because the remedy lies against the company and not
the directors or members of the company.

(6) Separate Ownership & Management

The members of a Company do not participate in the day to day
affairs of the Company. The Company is managed by elective
representatives of the shareholders known as Board of
Directors. The directors are appointed as well as removed by
the shareholders.

(7) Common Seal

Need to have common seal, has been abolished in any company (w.e.f
25th May 2015)
In Section 9, of the Principal Act, the words „and a common seal‟
has been omitted. In Section 22(2) of the Principal Act, the words
“under its common seal” has been substituted by “under its common
seal, if any”.
If the company has no common seal then, authorisation under this sub
section shall be made by-
 2 Directors or
 By a director and the Company Secretary where company has

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appointed one.
If a company has common seal, then the following documents are
required to have upon it the common seal of the company:
 Power of Attorney
 Share Certificate
 Share Warrant

(8) Transferability Shares

The shares (movable property) of a Company are freely

transferable in the manner provided in the Articles of the
Company. However, in case of Private Company there are certain
restrictions but not prohibition on transfer of shares.

(9) Perpetual Succession

The term perpetual succession means continued existence. A

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Company has a perpetual succession. Thus, death, insolvency or
insanity of the members does not affect the existence of the
Company. Life of the company does not depend upon the life of
its members.

Case Study
XYZ Ltd., Company is a Company having seven members only. All the members of the company were
attending meeting in New Delhi in relation to some business. A bomb blast took place and all of them died.
Answer with reasons, under the Companies Act, 2013 whether existence of the company has also come to the
end?

Answer:
 The existence of the company does not come to an end
 Since the existence of the company does not depend upon
the life of any or all the members of the company. Since the
existence of the company can come to an end only in accordance
with the provisions of law, viz. dissolution of the company.
 Since one of the characteristics of the company is
'perpetual succession'.

(10) Limited Liability

a) Company limited by shares

Limited to the amount remaining unpaid on the shares held by
them.
b) Company limited by Guarantee without share capital
Limited to the amount guaranteed by them.

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c) Company limited by Guarantee having share capital
Limited to the aggregate of the amount remaining unpaid on the
shares and the amount guaranteed by them.
d) Company with Unlimited Liability
Unlimited i.e. they have to contribute till the entire debt of
the Company is paid.

(11) One-man Company

One-man company is a company in which almost the entire share
capital of a company is held by one person. The case of Salomon
Vs. Salomon & Co. Ltd. has clearly established this concept.
Note: - One Man Company is different from One Person Company
T.R.Pratt ( Bombay) Ltd. Vs. E.D. Sasson & Co. Ltd

It was held that "Under the law, an incorporated company is a

distinct entity, and although all the shares may be practically
controlled by one person. In law a company is a distinct entity
and it is not permissible or relevant to enquire whether the
directors belonged to the same family or whether it is as
compendiously described a one-man company"

(12) Experience of a Shareholder as Experience of a Company

New horizons ltd. Vs. Union of India. (1994)

The experience of a shareholder of a company can be regarded as

experience of a company. The tender of the company, New Horizons
Ltd., for publication of telephone directory was not accepted by the
Tender Evaluation Committee on the ground that the company had
nothing on record to show that it had the technical experience
required to be possessed to qualify for tender. On appeal the
rejection of tender was upheld by the Delhi High Court.

The judgment of the Delhi High Court was reversed by the

Supreme Court which observed asunder: "Once it is held that
NHL (New Horizons Ltd.) is a joint venture, as claimed by it

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in the tender, the experience of its various constituents
namely, TPI (Thomson Press India Ltd.), LMI (Living Media
India Ltd.] and WML (World Media Ltd.) as well as IIPL
(Integrated Information Pvt. Ltd.) had to be taken into
consideration, if the Tender Evaluation Committee had adopted
the approach of a prudent business man."

"Seeing through the veil covering the face of NHL, it will be

found that as a result of re-organisation in 1992 .the
company is functioning as a joint venture wherein the Indian
group (TPI, LMI and WML) and Mr. Aroon Purie holds 60% shares
and the Singapore based company (NPL) holds 40% shares. Both
the groups have contributed towards the resources of the joint
venture in the form of machines, equipment and expertise in
the field."

The company is in the nature of partnership between the Indian

groups of companies and. Singapore based company who have
jointly undertaken this commercial enterprise wherein they
will contribute to the assets and share the risk. In respect
of such a joint venture company, the experience of the company
can only mean the experience of the constituents of the joint
venture i.e. the Indian group of companies (TPI, LMI and WML)
and the Singapore based company (IIPL).

(13) 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.
British Thomson-Houston company Vs. Sterling accessories Ltd.

A member of a company cannot sue in respect of torts committed

against it, nor can be sued for torts committed by the company.

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(14) Limitation of Action
A company cannot go beyond the powers of its Charter - the
Memorandum of Association. The action and objects of the
company are limited within the scope of its memorandum of
association.

(15) Voluntary Association for Profit

A company is a voluntary association for profit, It is

formed for the accomplishment of some public goals and
whatsoever profit is gained is divided among its
shareholders.

(16) Termination of Existence

It has the existence only in contemplation of law. It is
created by law, carries on its affairs according to law
throughout its life and ultimately is dissolved by law.
Generally, existence of a company is terminated by means of
winding up.

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 Advantages of Company

1. A company is a legal entity, distinct and independent of

those persons who from time to time are called its members.
2. The liability of the company's members are limited to
the extent they have agreed to contribute towards the capital
of the company with reference to the number of shares and/or
the amount of guarantee respectively undertaken by them.
3. As the company is having an independent personality of
its own, its members are not personally liable for any act or
omission on the part of the company, unless the law expressly
provides otherwise.

4. The company being a juristic person, distinct from the

members constituting it, a company can acquire, own, enjoy and
alienate property in its own name. As such the property would
be that of the company and no member can make any claim upon
it so long as the company is a going concern.
5. The company being a legal entity can sue and also be sued
in its own name.
6. The continuity of the company and its functioning-is not
effected by the death, disability or retirement of any of its
members. The company continues to exist, irrespective of
change in its membership. It is commonly referred to as
"perpetual succession"
7. Transfer of member's interest in the company can be
readily attained without in any way adversely affecting its
property, business, or existence.
8. Transferability of the company's shares provides an
element of liquidity to the investors in respect of their
investment in the shares of the company and thus facilitates
increased investment in the company's funds without, in any
way, adversely affecting its economic stability.

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9. The members of the company equitably share the profit by
way of dividend and the company's assets in the event of its
winding up distributed in proportion of its capital
respectively contributed by them.
10. Shares of small denomination afford an opportunity to
the small investors to invest according to their capacity.
11. Increased investment in the company's funds is further
ensured by permitting large number of persons to subscribe to
the company's shares.
12. Incorporation of a company affords better opportunity for
strengthening capital resources, growth and development of the
enterprise.
13. The corporate form of business organisation affords
opportunity for professionalization of its management and
entrusting the administration of its affairs to persons of
professional competence and standing.
14. Incorporation of company provides better borrowing
facilities as the company can raise large amount, on
comparatively easier terms, by issue of debentures, especially
those secured by a floating charge or by accepting deposits
from the public. Even banking and financial institutions
prefer to render financial assistance to incorporated
companies.
15. In certain cases, an incorporated company comparatively
stands in a better position from the point of view of taxation
on its income.
16. Once the company is brought into existence on its
incorporation, it can only be dissolved with the
provisions of the law.

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 Disadvantages of Company

1. Formalities and expenses: Incorporation of Company is

coupled with many complexes and legal formalities. Even after
the Company is incorporated, it has to comply with the various
legal provisions. Various documents and returns have to be
filed with various government agencies from time to time,
which lead to heavy expenditure.
2. Corporate disclosure: Various corporate information has
to be disclosed from time to time to the members of the
Company, hence no secrecy.
3. Separation of control from ownership: Members of the
Company do not have the control over the Company. Although
they have interested in money and are the owner of the Company
but still they do not have active control over the Company.
4. Greater social responsibility: The Companies have the
great impact on the society, due to this reason the Companies
are called to show greater social responsibility in their
working.
5. Greater tax burden: Tax burden in case of the Company is
more than any other form of business organisation. A Company
is liable to pay tax without any minimum taxable limit and it
has to pay tax on its whole income in other words Basic
exemption limit for Companies is Nil.
6. Detailed winding-up procedure: The Act provides for a
very detailed and lengthy procedure to wind up the Company,
which is more expensive and time consuming.

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 Difference between Company and Partnership Firm

Basis Company Partnership

1. Distinct Distinct legal Not distinct

person from persons
who form
partnership
2. Property Belong to Is of individual
company not
to individual
3. Creditors Can only Creditors of
proceed individual
against partners
company not
against the
4. Agents Members are Partners are
not agents of agents
company
5. Disposal of Member has no Partners have
property such power
6. Transfer of Member of Partners
shares company can generally
transfer cannot
shares transfer
(freely or (always
restricted) restricted)
7. Liability Limited or Unlimited
unlimited
8. Perpetual Death or Partnership may
succession insolvency be dissolved
does not effect

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9. Accounts Audited by At discretion
Chartered of partners
Accountant (mandatory if
(mandatory) turnover
Exceeds
Rs.1crore)
10. Dissolution Dissolved by Can be
operation of law dissolved by
agreement among
partners
11. Regulating Companies Act, Indian
Act 2013 Partnership Act,
1932
12. Mode of Registration is Registration is
creation compulsory optional

Difference between Company and HUF

Basis Company HUF

1. Members Heterogeneous Family Members
2. BOD or members Karta
Authority
3. No provision By virtue of
Membership birth
4. Compulsory Not Compulsory
Registratio
n
5. Members Coparceners
Stakeholder
s

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Difference between Company and LLP

Basics Company LLP

1.Act Company Act, 2013 LLP Act, 2008

2.Number of Private Min = 1, Min = 2, Max =

Members Max = 200 Unlimited
Public Min =
7, Max =
Unlimited
Designated
3.Management BOO - Management
Partners
-
Management

4.Documents AOA LLPA

5. DIN DPIN

6.Liability Limited or Limited liability

unlimited
liability

If its annual
turnover in a
7.Audit Audit – Mandatory
financial year
exceeds Rs.40
lakhs OR its
contribution
exceeds Rs.25
lakhs.

Quarterly BM and
8.Meetings No such meeting is
AGM are
required.
mandatory.

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LEGAL STATUS OF A COMPANY
Citizenship of a Company
Although, a company is regarded as a legal person (though
artificial), it is not a citizen either under the
Constitution of India or the Citizenship Act, 1955. This is
also the conclusion of the special bench of the Supreme
Court in State Trading Corporation of India Ltd. Vs.
Commercial Tax Officer.

One of the contentions put forth on behalf of STC was that

if the corporate veil is pierced, one sees three persons
who are admittedly the citizens of India and therefore the
corporation should also be regarded as a citizen.

But is was held that neither the provisions of the

Constitution of India nor The Citizenship Act,

1955, either confer the right of citizenship on or

recognize as citizen any person other than a natural person

In the words of Justice Hidayatullah: "If all of them (the

members) are citizens of India, the company does not become
a citizen of India, any more than, if all are married, and
the company would be a married person:'

The Supreme Court further stated in this case that a

company is however, a person in the eyes of law and it can
claim the protection of such fundamental rights as are
guaranteed to all persons, whether citizens or not.
For instance, "Right to Equality" under Article 14 of
Constitution of India. A company cannot claim the
protection of such fundamental rights as are expressly
granted to citizens only. For instance, "Right to Freedom"

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under Article 19 of Constitution of India.
However, where shareholder rights are equally affected if
the rights of the company are affected, it can claim the
protection of all such rights, which are guaranteed to
citizens through shareholders or directors of the company.

Is Company a National or a Residence?

A joint stock company resides where its place of
incorporation is, where generally the meetings of company
are held and where its governing body meets in bodily
presence for the purposes of the company. Residential status
of company is to be determined for the purpose of Income Tax
liability.

Body Corporate (or) Corporation (or) Corporation [Sec

2(11)]
Body corporate or corporation includes a company incorporated
outside India, but does not include-
i. A co-operative society registered under any law relating to
co-operative societies; and
ii. Any other body corporate (not being a company as
defined in this Act), which the Central Government may, by
notification, specify in this behalf.

Body corporate includes a private company, public company,

one person company, small company, limited liability
partnership, foreign company etc.

BOARD OF TRUSTEE Vs. STATE OF DELHI

A society registered under the Societies Registration Act, 1860

has been held by the Supreme Court not to come within the term
'body corporate' under the Companies Act.

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Thus, the term body corporate includes not only companies
within the meaning of Companies Act, 2013 and corporations
established under Special Acts of Parliament but also
foreign companies. It will further include all public
financial institutions as well as nationalized banks.
Thus, the term 'body corporate' is wider than the
expression company.

Note: A company is a body corporate but bodies corporate

need not be a company
MADRAS CENTRAL URBAN BANK Ltd. Vs. CORPORATE OF MADRAS (1932)

An incorporate company is a body corporate but many bodies

corporate are not incorporate companies

ILLEGAL ASSOCIATION
Sec 464 read with Rule 10 of Co. (Miscellaneous) Rules 2014
No association or partnership consisting of more than such
number of persons as may be prescribed (i.e. 100 as per the
Sec 464 but 50 as per Rules, (Rules shall be prevailed here))
shall be formed for the purpose of carrying on any business
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 under this Act
or is formed under any other law for the time being in force.

However the restrictions shall not apply to

 Hindu Undivided Family carrying any business OR

 An Association or Partnership formed by professionals who
are governed by special Acts.

TEST OF ILLEGAL ASSOCIATION

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The sole test to determine an illegal association is whether
it carries on business for the purpose of gain.
Jennings vs. Hammond
Associations like charitable, religious or scientific, which
are not formed for the purpose of gain, are excluded from the
scope of this section.
Kumara Swamy Chattiar v. Income Tax Officer
An illegal association is liable to be taxed
Wilkinson v. Levison
The members of an illegal association are individually liable
in respect of all acts or contracts made on behalf of the
association; they cannot either individually or collectively,
bring an action to enforce any contract so made, or to recover
any debt due to the association

LIABILITY OF MEMBERS
Every member of an illegal association is:
a) Personally liable for all liabilities incurred in
carrying on the business of, or by, the illegal
association; and
b) Punishable with fine up to Rs.1,00,000/-

Gangayya vs. Venkatramiah

If the Kartas of 2 HUFs form a partnership to carry on business
for the acquisition of gain and their families consist more
than 25 adult members. The partnership shall be treated as
legal as it consists of only two partners.

When the Karta of HUF enters with outsiders in business, the

other members of such family do not ipso facto become partners.

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 Theories of Corporate Personality
Persons are of two kinds namely, Natural Persons and Legal
Persons. There are three kinds of Legal persons i.e.
Corporations institutions and fund or estate. Corporate
personality is a fiction of law. It is an artificial
personality given to corporation whereby certain rights and
duties are attributed to it.

Corporation:
A corporation or Company is an artificial or fictitious Person
created by the personification of a group or a series of
individuals. The individual forming the corpus of the
corporation is called its members. There are two kinds of
Corporation or a Company. 1) Corporate sole and 2) Corporate
Aggregate.

Theories of Corporation

There are many theories of Corporate Personality. Different

Jurists propounded different theories to explain the nature of
corporate personality, but the best-known theories of a
Corporate Personality are as follows

1) Fiction Theory:
The Fiction theory was propounded by Savigny. According to
Savigny "a personality is attached to corporations,
institutions and funds by a pure legal fiction. The Personality
of Corporation is different from the personality of its members
that means there is a double fiction in the case of
Corporation. Salmond and Holland are the supporters of this

26
theory. According to Salmond, corporation is nothing more than
the outcome of metaphor and fiction. The main defect of this
theory is that it exists in the eyes of law only.

2) Realist theory:
Realist Theory was propounded by the great German Jurist
Gierke. It was followed by Sir Fredrick Pollock, Geldart, and
Maitland etc. According to Gierke, Corporation is a real but
mysterious entity; every group has a real mind, a real will and
real power of action. According to this theory, every group
comes to have personality of its own whether that group is
social or political one.

3) Concession Theory:
Salmond, Savigny and Dicey are the main supporters of this
theory. According to this theory, the only realities are
sovereign and individual. The other groups cannot claim
recognition as persons. They are treated as persons merely by a
concession and the part of the sovereign. Legal personality is
conferred only by law.
Corporate personality is nothing but a concession given to
group or body of individuals by law to act as one body.

4) Purpose Theory:
According to this theory, Personality is only enjoyed by human
being. German jurist Brinz and Bekker are the main supporter of
this theory.
Salmond criticized this theory, According to him, it is not
applicable to a corporation sole.

5) Bracket Theory:
Ihering is the chief exponent of Bracket theory. Bracket theory

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is also known as symbolise theory. According to this theory,
the members of a corporation are the bearers of the rights and
duties which are given to the corporation for the sake of
convenience It is not always practicable or convenient to refer
to all the innumerable members of a corporation. A bracket is
placed around them to which a name is given. That bracket is
the corporation.
The weakness of this theory lies in the fact that it is not
able to indicate when the bracket may be removed and the mask
lifted for the purpose of taking note of the members
constituting the corporation.

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 LIFTING OR PIERCING CORPORATE VEIL

A company is formed by the members and managed by the Board of

Directors with the assistance of officers and employees. On
incorporation, law gives separate legal entity to the company.
Thus, a fiction is created by law by which the rights, powers,
duties, functions, liabilities and property of a company is
differentiated from the rights, powers, duties, functions,
liabilities and property of the members, Directors, officers
and employees of the company. This fiction of law is called
Veil of Incorporation or Corporate Veil.
Or
“Lifting of Corporate Veil” means ignoring the separate legal
entity of the company and looking behind the company to
identify the real persons who controls the company.

Effect of Corporate Veil

The effect of this Corporate Veil is that only Company can
be held liable for the acts and defaults done in the name of
the company, even though members, Directors, officers or
employees had acted on behalf of the company.

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When a Company has been formed and registered under the Act,
all dealings with the Company will be in the name of the
Company and the persons behind the Company will be
disregarded, however important they may be. This principle is
called “Veil of Incorporation”.
The advantages of incorporation are allowed to be enjoyed only
by those who honestly use the veil of Company for the
collective benefit of the Company and its members. In case of
dishonest and fraudulent use of the facility of incorporation,
the law can remove/lift the “Corporate Veil”.

Lifting of Corporate Veil under Companies Act

Corporate veil can be ignored under:

A. Statutory provisions
B. Judicial Pronouncements

A. STATUTORY PROVISIONS UNDER WHICH CORPORATE VEIL IS

REMOVED.
(1) Reduction of membership
Where the number of members falls below statutory minimum and
the Company carries on business for more than 6 months while
the number is so reduced, then every person who is a member of
the Company at the time the Company so carries on business
after 6 months and is aware of the fact shall be severally
liable for the payment of the whole debts of the Company
contracted during that time and may be severally sued
therefor. (w.e.f. 3/1/18)

(2) Misrepresentation in Prospectus

In case of misrepresentation in prospectus, every director,
promoter and every other person who authorizes the issue of
such prospectus incurs liability towards those shareholders

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who subscribe shares on the faith of such prospectus.

(3) Failure to refund Application money

In case of public issue of shares by a Company, if minimum
subscription, as stated in the prospectus, has not been
received within 30 days of the date of issue of the prospectus
or with in such time as may be prescribed by SEBI, the Company
must refund the entire application money within such time as
may be prescribed.

(4) Mis-description of Company’s name

Where an officer of a Company signs on behalf of Company, any
contract, bill, promissory note, hundi, cheque or orders for
money or goods, such person shall be personally liable to the
holder if the name of the Company is either not mentioned or
is properly not mentioned.

(5) Holding and Subsidiary

Every holding Company shall attach to its Balance Sheet,
copies of Balance Sheet, Profit & Loss Account, Director‟s
Report and Auditor‟s Report etc. of Company each of its
subsidiary Company. Though holding Company and its subsidiary
Company have separate legal entities, Court may treat a
subsidiary Company as a branch or department of its holding
Company.

(6) Fraudulent Conduct

Where in the winding up of the Company, it appears to the
Court that any business of the Company has been carried on
with intent to defraud the creditors of the Company or any
other person, then, the Court may declare that any of the
Directors or officers who are parties to the fraud shall be
personally liable.

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(7) Liability under other Statues
Besides the Companies Act, the directors and other officers of
the Company may be held personally liable under the provisions
of other Statutes. For example, where any private Company is
wound up and if tax arrears of the Company in respect of any
income of any previous year cannot be recovered, every person
who was director of the Company at any time during the
relevant previous year shall be jointly and severally liable
for the payment of tax.

(8) Ultra Vires Act Directors and other officers of Company

shall be personally liable for all those acts which they have
done on behalf of the Company and which are Ultra Vires the
Company.

B. Lifting of Corporate Veil under Judicial interpretation

1. Protection of Revenue

The Court may ignore the Separate Legal Entity status of a

Company, where it is used for tax evasion.
Sir Dinshaw Maneckjee Petit
One person was receiving huge dividend and interest income on

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some investments and had to pay huge tax on that.

He formed 4 private companies and transferred whole of his

investments to these 4 companies. The dividend and interest
received by these companies were within the exempted limits of
tax. except these investments no other business was run by
these companies and had no other assets. The income received in
the form of interest and dividend, was transferred to that
person in the form of loan and was never returned.

It was held that these companies were created only to evade

taxes and therefore court ignored the separate legal entity
status of the company and whole of interest and dividend earned
by the company was treated as income of that person.

2. Determination of enemy character of the Company

A company may assume an enemy character when persons in DE-
FACTO control of its affairs are residents in an enemy
country.
Daimler Co. Ltd. Vs. Continental Tyre & Rubber Co. Ltd
A company was formed in England for the purpose of selling tyres made
by a German Company.
This German company held almost all the shares of this new company
formed in England. Moreover all the directors of this company were
German. During the First World War, The English Company filed a suit
against another English company for recovery of a debt. Court
ignored the separate legal entity of the company and held that the
persons who had the ultimate control of the company were enemies and
therefore suit was set aside.

3. Prevention of fraud
Where a Company is used for committing frauds or improper
conduct, Court may lift the corporate veil and look at the
realities of the situation.

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Gilford Motor Company vs. Horne
An employee entered into a contract with his employer not to
solicit the customers of the company after leaving the
employment. After leaving the employment he created a company
and started soliciting the customers of the employer. It was
held that this company was created to avoid the legal
obligation arising out of contract. Therefore that employee and
company created by him was treated as one and thus the veil
between the company and that person was lifted.

4. Avoidance of Welfare Legislation

Where a Company tries to avoid its legal obligations, the
corporate veil shall be lifted to look at the real picture.
Workmen of Associated Rubber Industry Ltd. Vs. Associated
Rubber Industry Ltd.
A company was earning huge profits and thus had to pay huge
bonus to its employees. It created a subsidiary company and
transferred some of its investments to it so as to reduce some
of its profits. This subsidiary company had no other business.
It was held that this new company was formed just to avoid the
liability of bonus under the Payment of Bonus Act. Hence
profits earned by subsidiary company were held as profits of
holding company and had to give bonus on that profits also.

5. To punish for contempt of Court

Company being an artificial person cannot disobey the orders of
the Court. Therefore, the persons at fault should be
identified.

6. Subsidiary to act as an agent.

Merchandise Transport Limited vs. British transport commission
In the above case, a transport company wanted to obtain
license for its vehicles but it could not do so if it made the
application in its own name.

34
It, therefore, formed a subsidiary company and the application
for licenses was made in the Name of the subsidiary.
The vehicles were transferred to the subsidiary.
Held, the parent and the subsidiary company were one
commercial unit and the application for licenses was rejected.

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 Classification of Company
The basic types of companies that can be registered under the
Act are:
● Public Company
● Private Company
● One Person Company
A company to be called a public company requires a minimum of 7
members while, to be called a private company it requires a
minimum of 2 members. One person company shall also be
incorporated as a private company only having 1 member.
● Public Company:
According to Sec 2(71), a company is a public company that is
not a private company and has a minimum paid-up share capital.
A public company is an association having 7 members or more and
is registered under the Act. Any person wishing to acquire
shares or debentures in a public company can do so by paying
the price. The buying and selling of shares and debentures are
not restricted. The Act in Sec 58(2) provides that the shares
and debentures of the public company shall be freely
transferable.
A public company can be converted into a private company by
passing a special resolution. Restrictions may be imposed in
its articles as specified in Sec 2(68). However, the same must
be approved by the Tribunal.
● Private Company:
According to Sec 2(68), a private company is a company having a
minimum paid-up share capital as may be prescribed by the Act
and restricts the right to transfer the shares; limits the
number of members to 200 and prohibits the invitation to public
to subscribe for the securities of the company.

36
Although the number of members is limited to 200, debentures
can be issued to any number of persons by a private company.
However, the invitation to subscribe for debentures is
prohibited.
These restrictions, limitations and prohibitions must be
specifically provided in the Articles of the company. If at any
time a private company alters its Articles in a manner where
such restrictions, limitations and prohibitions are excluded,
or it fails to comply with the provisions of sec 2(68), then
the company shall cease to be a private company.
A private company can be converted into a public company by
passing a special resolution for deleting the requirements of
sec 2(68).
However, with the conversion of a private company into a public
company or vice versa, only its nature is changed. The identity
of the company remains unchanged.
● Small Company:
Section 2(85) provides for small companies under the Act of
2013. This new form of a private company has been classified as
a small company based on its paid-up capital and turnover. A
company will be said to be a small company if its paid-up
capital share does not exceed Rs. 2 Crores with a maximum
ceiling of Rs. 10 Crores; or if its turnover does not exceed
Rs. 20 Crores with a maximum ceiling of Rs. 100 Crores.
However, a holding or a subsidiary company; a company
registered u/s 8 or a company governed by a special Act shall
not be considered as a small company.
● One Person Company:
Under the Act of 2013, a single person can constitute a
company. One person company is a kind of private company having
only one member. With the introduction of the concept of one
Person Company, small businesses can now be corporatized. In
OPC, the legal, as well as the financial liability, is limited

37
to the company alone. The conversion of OPC into a company u/s
8 of the Act has been barred by the Companies (Incorporation)
Rules, 2014.
These basic types of companies can further be classified into
the following heads:
1. On the basis of Incorporation
2. On the basis of Liability
3. Other forms of Companies
4. On the basis of Incorporation
1.1 Statutory Companies:-
Statutory companies are those companies that have been
constituted by an Act of Parliament or State Legislature. The
constitution, powers and scope of the activities of such
companies or corporations are provided under a special
enactment which can be altered only and only by a legislative
amendment. The statutory companies/ corporations are governed
by the Special Act itself. Nevertheless, the Companies Act 2013
is also applicable to statutory corporations to some extent. In
case of inconsistencies between the provisions of the Special
Act and the Companies Act 2013, the provisions of the Special
Act shall prevail.
For example: The Reserve Bank of India is a statutory company
constituted by a special Act of Parliament.
1.2 Registered Companies: –
These are the companies that have been incorporated under the
Act of 2013 or under any previous company law and registered
with the Registrar of the Companies.
2. On the basis of liability
A company incorporated under the Companies Act 2013 can either
be a limited company or an unlimited company.
2.1. Limited Company:
A company limited by either shares or by guarantee is termed as
a limited company. The liability of every member herein is

38
limited to the extent of the value of the shares that are held
by them or to the extent of such amount which a member
guarantees to contribute in the event of winding up of such
company.
2.1.1. Company Limited by Shares:
In a company that is limited by shares, the liability of the
members of such a company is limited to the nominal value of
the shares held by them. No member can be called upon to pay
anything more than the value of shares held by him. The company
can call upon the members to pay the unpaid portion of their
shares at any time irrespective of whether the company is a
going concern or is being wound up.
2.1.2. Company Limited by Guarantee:
A company wherein the members undertake to contribute to the
assets of the company in the event of winding up, such a
company is a company limited by guarantee. Unlike in a company
limited by shares, the liability of members to contribute the
guaranteed amount arises only when the company is winding up
and not when it is a going concern. That is to say that the
members are called upon to pay the guaranteed amount towards
the assets of the company when the company has gone under
liquidation.
2.2 Unlimited Company:
A company having no limit on the liability of its members is
termed as an unlimited company. The liability of members herein
may stretch to their personal assets in the event of winding up
of the company in order to contribute to the assets of the
company. The members, however, are not directly liable to the
creditors of the company. Their liability is only towards the
company. In the event of winding up, in order paying off the
debts of the company, the Liquidator may ask the members to
contribute to the assets of the company.
3. Other Forms of Companies

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3.1. Government Company:
A company in which 51% or more of the paid-up share capital is
held by either the Central Government or the State
Government(s) or partly by Central Government and partly by the
State Government(s), is a government company u/s 2 (45) of the
Act of 2013.
It is to be noted that any subsidiary of a government company
shall also fall under the classification of a government
company. However, a government company is neither a Government
establishment nor it is a Government Department irrespective of
the fact that major paid-up share capital is held by the
Government.
The companies incorporated under the Companies Act have a
corporate legal personality that is distinct from that of the
Government of India. The Government only owns the share
capital, the rest of other things like the land and buildings
are owned by the company itself.
A government company may also wind up like other companies
under the Act.
3.2. Foreign Company:
According to Section 2(42) of the Act, a „foreign company‟ is
any company or body corporate that is incorporated outside
India. However, such a company must either have a place of
business in India by itself or through its agent in a physical
or electronic manner or it must conduct any business activity
in India in any other manner.
A foreign company is required to register itself with the
Registrar of Companies within a stipulated time of 30days from
its establishment of business in India. Regardless of its
registration, if such a foreign company ceases to carry on its
business in India, it shall be wound up as if it were an
unregistered company under the Act.
3.3. Holding, Subsidiary and Associate Company:

40
The companies can be classified as holding, subsidiary and
associate companies on the basis of their control.
Holding Company u/s 2(46) of the Act means a company or a body
corporate that has subsidiary companies. A holding company may
have one or more other companies that are its subsidiaries. A
holding company is basically a parent entity that owns a
controlling interest in other companies known as its
subsidiaries.
According to section 2(87) of the Act, a company would be a
subsidiary company if the holding company has a control over
the composition of the Board of Directors or owns and controls
more than half of the share capital of such a company.
A subsidiary company cannot hold shares of its holding company.
If a holding company makes any allotment or transfer of shares
to any of its subsidiary companies, the same shall be void ab
initio. Nevertheless, there are certain exceptions to this rule
where a subsidiary company can hold the shares of its holding
company.
An Associate company under section 2(6) of the Act, is a
company in which other company has a significant influence. It
is different from subsidiary company. Herein, the company has
control on a minimum of 20% of share capital, and business
decisions of such associate company under agreement. The parent
company owns only a small stake in an associate company.
3.4. Dormant Company:
Dormant companies are a new set of companies that have been
recognized by the Companies Act 2013.
A dormant company means an inactive or an inoperative company.
A company can be formed for future projects without having any
significant accounting transactions. The only transactions that
take place are for maintaining and running the company so as to
comply with the statutory requirements. Such companies can
apply to the Registrar of Companies to obtain the status of a

41
dormant company under the Act.
3.5. Producer Company:
Producer companies have been provided under the Companies Act
1956. As per Sec 581A (1), a producer company is a body
corporate and has its objects and activities as specified in
Sec 581B.
However, as per Sec 465(1) of the Act of 2013, the Companies
Act, 1956 stands repealed. Nevertheless, the proviso attached
to Sec 465(1) states that the provisions of Part IX-A of the
Companies Act 1956 shall be applicable to the Producer
Companies in such a manner as if the Companies Act 1956 has not
been repealed. Thus, the producer companies are governed under
the Companies Act 1956.

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