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FORMS OF CORPORATION & NON CORPORATE ORGANISATIONS

Table of Contents

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.

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The present Companies Act 2013 has brought important and vital changes to the 1956 Act. 1956 Act was repealed by coming into force of Companies Act 2013 on 12 September 2013.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.

In Helios and Matheson V/s The State Represented by DYSP[1]

Hon’ble 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.

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] DEFINITION OF COMPANY:-

(1) According to S[2]. 2 (20) of the Companies Act, 2013[3]:-

“Company” means “a company incorporated under this Act or under any previous company law”.

(2) According to Lindley, the term “company is an association of many persons who contribute money or money’s worth to a common stock and employ it for a common purpose”.

(3) Justice Marshal defined “company” as “a person, artificial, invisible, intangible and existing only in contemplation of law”.

(4) According to Buckely “the 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 member’s interest”.

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[4] (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.

In Saloman V/s Saloman Co. Ltd[5]

Facts- One Salomon was a boot and shoe manufacturer. He incorporated a company with the name “Saloman Co. Ltd”. 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 Saloman’s 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.

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[6]:-

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 “members 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 it”. 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[7]:-

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[8]:-

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 company’s assets. No shareholder has any right to any property owned by the company.

5) Transferability of Shares[9] (S. 44):-

The shares in the company are moveable property, transferable in the manner provided by the Articles (of Association)[10] of the company. The articles of the 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

(ii) provides stability to a company.

6) Suing and Being Sued[11]:-

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[12]:-

A company formed by a Special Act of Parliament or any State legislature is called a ‘statutory company’. 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 “public corporations.”

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).

B] Companies registered under the Companies Act:-

Companies registered under The Companies Act are as follows-

1) Private Company[13]:-

a) Definition of Private Company:-

According to (S. 2 (68):-

Private Company means a company –

(i) Which has a minimum paid-up share capital[14] as may be prescribed (by the law), and

(ii) Which by its articles –

(a) Restrict the right to transfer its shares,

(b) Limits the (maximum) number of members to 200[15] (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 “Close Corporation” 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[16]:-

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.

f) Advantages of Private Company:–

A private company has the following advantages-

(i) Minimum two subscribers (S. 3):-

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 loss account of the company filed with the Registrar[17]. However, no such provision exists in the present Companies Act.

2) PUBLIC COMPANY[18]:-

(a) Definition:-

According to (S. 2 (71)), a Public Company means “a company which-

(i) is not a private company.

(ii) has a minimum paid-up share capital[19] as may be prescribed (by 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.

(b) Conversion of “Public” into “Private” Company and vice versa:-

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 alternation shall be approved by the Company Law Board[20].

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) Differences between Public and Private Companies:-

(i) 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) Commencement of Business[21]:-

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 ‘certificate of commencement of business’.

(iv) Directors:-

(a) A private company must have at least two directors, while a public company must have at least three directors.

(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 Board’s meeting. In a private company, the director can take part in the board’s 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 “unlimited company” 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-

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.

4) LIMITED COMPANY[22]:-

A “limited company” is “a company where the liability of its members is limited. A limited company may be either limited by shares or limited by guarantee”. A company limited by shares may be a Public Company or Private Company.

(a) Companies Limited by Shares (S. 2 (22):-

‘Company limited by shares’ is “a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them”. 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 “members” and “shareholders” 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[23] (S. 2 (21)):-

A “Limited Company by Guarantee” 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 “any 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 company which is a subsidiary of a government.

If the government is unable to pay its debts, the remedy is to wound up the company, unlike other companies, and not start insolvency proceedings[24].

(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 company’s 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) Saving Clause [25]:-

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 [26]:-

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 “holding company” and the controlled one as a “subsidiary company”, (S. 2 (87) defines, “a 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 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)[27]:-

Foreign company means-

Any company or body corporate incorporated outside India, which-

has a place of business in India, whether by itself or through an agent, physically or through electronic mode, and
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 incorporated in India.

(A) Statutory Requirements[28]:-

i) Provide documents (S. 380):-

Foreign companies which established a place of business in India are required 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) the full address of the registered principal office of the company.

(d) the names and addresses of the persons entitled to receive notice on behalf of the company in India.

(e) The full address of the company’s office is in India.

(f) 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) 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.

(b) 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 country (wherein it is incorporated) in English as well as in the local language. Moreover, suppose the foreign company is “limited”. 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-

the instrument of the constitution, or defining the constitution of the company,
the enactments under which the Incorporation of the company was effected,
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.
The date on which, and the country in which, the company would be or was incorporated, and
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 expert’s opinion in writing in this regard. (S. 388).

The foreign company is liable for criminal and civil liabilities for any misrepresentation made in Prospectus (S. 391).

(B) Winding-Up[29]:-

A foreign company may be would-up as an unregistered company.

(9) Illegal Associations[30] (S. 464):-

According to the section-

(i) No association or partnership-

consisting of more than such number of persons as may be prescribed[31] 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[32]:-

The Companies Act 2013 has introduced a new type of company: a’ One-Person Company. ‘ S. 2 (62) defines a ‘one-person company’ as a company with only one person as a member. Thus, one person’s company may be registered and incorporated in India.

NOTES

A] Lifting of Corporate Veil [33]:-

‘Lifting corporate veil’ 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 ‘legal’ or ‘juristic 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 Solmaon’s case was again upheld by the Privy Council in

In Lee v. Lee’s Air Farming Ltd [34].

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 Worker’s 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.

Held—that 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[35]:-

During wartime, it becomes necessary to determine a company’s character, i.e., whether it is an “enemy company” or not. This is done to avoid providing financial help to enemy countries’ companies.

In Daimler Company Ltd. V/s Continental Tyre and Rubber Co [36].

Facts – 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 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 –That 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

In India, in Hyderabad, Sind Electric Supply Company Ltd. V/s Union of India[37]

Facts—The 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.

Held—As 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[38]:-

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[39]:-

The company disregards the corporate veil when there is fraud, misconduct, or improper conduct in the company’s affairs.

In Gilford Motor Company V/s Horn [40]

Facts—The 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 plaintiff’s customers; the court granted an injunction against Horn and his company from soliciting the plaintiff’s customers.

The appellate court – described the company as “a mere cloak or sham”. 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[41]:-

The Company’s Act lays down some provisions which permit the lifting of the corporate veil wholly or partly in certain circumstances. Those circumstances are as follows…

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 company’s Board of Directors or hold a majority of its shares. Such a controlled company is known as a “subsidiary company.” By law, both “holder” and “subsidiary” 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.

iv) For Investigating Company’s 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 to that class of a company, the corporate veil is allowed to be lifted; however, in the present company’s Act, there is no such provision.

*****

[1] (WA No. 1227 of 2015)

[2] The word “S” denote ‘section’, and the word “Ss.” denotes sections.

[3] (for the sake of brevity “the Companies Act, 2013” is called as “the Act”.)

[4] सभासदांपासून स्वतंत्र व वेगळे अस्तित्व. [सदस्यों से अलग और अलग अस्तित्व।]

[5] 1897 A.C. 22

[6] निरंतर अस्तित्व

[7] मर्यादित दायित्व /जबाबदारी [सीमित दायित्व/देयता]

[8] स्वतंत्र सम्पत्ती

[9] भागांचे हस्तांतरण /हस्तातरनिय भाग / शेयरों की हस्तांतरणीयता [ शेयरों का हस्तांतरण / शेयरों / शेयरों की हस्तांतरणीयता]

[10] ‘Articles of Association’ is referred many times as ‘Article’.

[11] कंपनीला स्वतंत्र अस्तित्व असल्यामुळे स्वतःच्या नावे दावा करता येतो तसेच तिच्याविरुद्ध दावा केला जाऊ शकतो. [एक कंपनी के एक अलग इकाई होने के नाते उसके स्वयं के अधिकार के साथ-साथ उसके खिलाफ भी मुकदमा चलाया जा सकता है।]

[12] विशिष्ट कायदा बनवून अस्तित्वात आलेली कंपनी/ स्वतंत्र कायद्याने अस्तित्वात आलेली कंपनी. [एक विशेष कानून के तहत निर्गमित कंपनी/एक अलग कानून के तहत निर्गमित कंपनी]

[13] खाजगी कंपनी [निजी कंपनी]

[14] “of one lakh rupees or such higher paid up capital” this matter is removed by the Amendment Act, 2015.

[15] It was ‘50’ by Companies Act 1956.

[16] भागांच्या हस्तांतरणावर मर्यादा/ शेयरों की हस्तांतरणीयता पर प्रतिबंध [शेयरों के हस्तांतरण पर प्रतिबंध/शेयरों की हस्तांतरणीयता पर रोक]

[17] S. 220 of the Companies Act 1956.

[18] सार्वजनिक कंपनी.

[19] “of five lakh rupees or such higher paid-up capital” omitted by 2015 Amendment.

[20] 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.

[21] व्यवसाय चालू करण्याचा दाखला/ कारोबार का प्रारंभ का प्रमाणपत्र [व्यवसाय शुरू करने का प्रमाण पत्र / व्यवसाय शुरू करने का प्रमाण पत्र]

[22] सभासदांची जबाबदारी मर्यादीत असते [सदस्यों की देयता सीमित होती है/]

[23] हमीचे प्रमाणात मर्यादित जबाबदारी. [वारंटी की सीमा तक सीमित देयता।]

[24] Nagendra Kumar Jain V/S District, Judge, Mordbed AIR 2001, All 289).

[25] By Notification of Government of India Published on 5 June 2015.

[26] मुख्य किंवा उप-कंपनी[मूल या सहायक कंपनी]

[27] विदेशी कंपनी.

[28] कायदेशीर आवश्यकता. [कानूनी आवश्यकताएं।]

[29] कंपनी कायमची बंद करणे [कंपनी का स्थायी बंद]

[30] बकायदेशीर संघटना [अवैधानिक संगठन]

[31] i.e. 20 in case of non-banking partnership and 10 in case of banking partnership.

[32] एक व्यक्ति कंपनी

[33] कंपनीच्या स्वतंत्र अस्तित्वाचा कायदेशीर पडदा दूर करून दुष्कृत्य करणाऱ्या व्यक्तीचा शोध घेणे. [कंपनी के स्वतंत्र अस्तित्व के कानूनी आवरण को हटाकर गलत काम करने वाले का पता लगाना।]

[34] (1961, A.C. 12)

[35] कंपनीची वर्तणूक/ शील तपासणे. [कंपनी के आचरण/नैतिकता की जांच करने के लिए।]

[36] 1961, 2A (307)

[37] (AIR 1959 Punjab 199)

[38] कर चुकविणे थांबवण्यासाठी. [कर चोरी को रोकने के लिए।

[39] फसवणूक अथवा अयोग्य कृती थांबवण्यासाठी. [धोखाधड़ी या अनुचित प्रथाओं को रोकने के लिए।]

[40] (1933 Ch. 935.)

[41] कायदेशीर अटी. [कानूनी शर्तें।]