Company- Form, Nature, Advantages & Disadvantages

Evolution
• 17th-18th Century- Body corporate could be brought into
existence either by a Royal charter or by a special Act of
Parliament.
• Later, large unincorporated partnerships for trading-
membership was very large, management of the business was
left to the trustees- hence, separation of ownership from
management.
• The Bubbles Act 1720- Got repealed in 1825
• The Joint Stock Companies Act 1844- first legislative measure to
facilitate registration; principle of unlimited liability was
maintained
• The right to trade with limited liability was granted in 1855. In
1856,the Joint Stock Companies Act 1856 was consolidated.
• The English Companies Act 1948, 1985, 1989, 2006
• Company means a company incorporated under the Companies
Act 2013 or any other previous company law.- Sec 2(20)
• Previous Company Law- Sec 2(67)
• A Company is a legal person or legal entity, separate from, and
capable of surviving beyond the lives of its members- Salomon
v. Salomon
• A legal devise for attainment of social, economic end and
publicaly and socially responsible.
• A combined political, social, economic and legal institution.

Acts relating to companies in force before the present Act

 The Indian Companies Act 1866
 The Indian Companies Act 1882
 The Indian Companies Act 1913
 The Indian Companies Act 1956
 Company- Extent of Applicability {Sec 1(4)}
(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 provisions of the Insurance Act, 1938 (4 of 1938) or the Insurance
Regulatory and Development Authority Act, 1999 (41 of 1999);
(c) banking companies, except in so far as the said provisions are inconsistent with
the provisions of the Banking Regulation Act, 1949 (10 of 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 (36 of 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
(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.
 Features/ Characteristics of a company

 Separate Legal entity/ Independent Corporate Existence-

existence of a company is separate from its members. A member
can’t be held liable for the acts of a company even if he holds a
substantial part of company’s share capital.

Sec-9 Effect of Registration- From the date of incorporation

mentioned in the certificate of incorporation, such subscribers to
the memorandum and all other persons, as may, from time to
time, become members of the company, shall be a body corporate
by the name contained in the memorandum, capable of exercising
all the functions of an incorporated company under this Act and
having perpetual succession with power to acquire, hold and
dispose of property, both movable and immovable, tangible and
intangible, to contract and to sue and be sued, by the said name.
Salomon v. Salomon & Co. Ltd (1897) AC 22

Kondoli Tea Co Ltd.. Re ILR (1886) 13 Cal 43-

Re: The Kondoli
Tea Co. Ltd. (1886) ILR 13 Cal. 43 - Ninja
Macaura v. Northern Assurance Co. (1925)

Dhulia Amalner Motor Transport Ltd. V.

Raychand Rupsi Dharamsi AIR 1952 Bom 337
 Limited Liability (Except under sec 3A as per Companies
Amendment Act 2017)- Company, being a separate person, is
the owner of its assets and bound by its liabilities. Members,
are neither the owners of the company’s undertaking, not liable
for its debts.
 Perpetual succession- “King is Dead; Long Live the King”
Punjab National Bank v. Lakshmi Industrial & Trading Co. (P) Ltd.
AIR 2001 All 28- The guarantors of a co’s loan could not claim to be
relieved of liability by reason of the fact that the co’s management
had totally changed including the MD.

Amit Products (India) Ltd v. Chief Engineer (2005) 7 SCC 393- The
liability of the Co. for electricity dues remained the same, though
the arrears belonged to a period when the co. was in the hands of
some other persons.
 Separate Property-
Bacha F. Guzdar v. CIT AIR 1955 SC 74- The company is the real
person in which all its property is vested, and by which it is
controlled, managed & disposed of.
Macaura v. Northern Assurance Co Ltd. 1925 AC 619- A member
does not even have an insurable interest in the property of the
company.
Gramophone & Typewriter Co. Ltd v. Stanley (1908) 2 KB 856-
The property of the company is not the property of the
shareholder; it is the property of the company. Even if a
shareholder acquires all shares of a co, business of the co. does
not become his business.
Chamundeshwari v. CTO, Vellore Rural (2007) Mad- A Co. being
a legal entity by itself, any dues from company have to be
recovered only from company and not from its directors.
Transferable Shares- Sec 44- “The shares or
debentures or other interest of any member in a
company shall be movable property, transferable in
the manner provided by the articles of the
company.”
Capacity to sue and be sued
Professional Management-
Finances- The company has the privilege of raising
capital by public subscriptions, either by way of
shares or debentures.
Infinite membership-
Ease in control & Management
 Disadvantage of incorporation
• Lifting of the Corporate Veil-
 The entire Corporate Law is based on the
theory of separate legal identity of the
company.
 In reality, the business is carried on by, and for
the benefit of, some individuals.
 “For while, by fiction of law, a corporation is a
distinct entity, yet in reality it is an association
of persons who are in fact the beneficial
owners of all the corporate property”.
• Rustom C. Cooper v. UoI (1970) SC
• Bennet Coleman & Co. v. UoI (1972)
• Charanjit Lal Chowdhary v. UoI (1951)

• Lee v. Lee Air Farming Ltd (1961)- Master and servant/

Director and employee at the same time.

 The theory of corporate personality can’t be pushed to

unnatural limits. In exceptional circumstances, the court will
lift the corporate veil of incorporation in order to examine
the reality.
 Lifting of corporate veil is authorised either by-
i) statute; or
ii) By court’s volition
R v. Mc Donnell (1966)-
• “The corporate veil is said to be lifted when the
court ignores the co. and concerns itself directly
with the members or managers.”
• An adherence to the Salomon principle can’t be
strictly followed where this would cause an unjust
result.
State of Karnataka v. Selvi J. Jayalalitha (2017) SC
• Co. is a separate legal entity from the members
subject to the exception when corporate entity is
a mere cloak or sham used to misdirect
shareholders and authorities.
• United States v. Milwaukee
Refrigeration Transit Company
(1906) "A corporation will be looked
upon as a legal entity as a general
rule but when the notion of legal
entity is used to defeat public
convenience, justify wrong, protect
fraud or defend crime the law will
regard the corporation as an
association of persons."
Application of Doctrine include situations
like:
• Partnership of two separate corporate entities
with one acting as alter ego.
• Where actual control in the subsidiary co lies
with the parent co.
• Where the name of the co. is just a sham.
• Where two companies are interlinked.
 Grounds to lift the corporate veil- By
Court’s volition
• Determination of character
i) Daimler Co. Ltd V. Continental Tyre & Rubber Co. Ltd (1916)
ii) People’s Pleasure Park Co. v. Rohledger (1908)

• For benefit of revenue

i) Dinshaw Maneckjee Petit, re (1927)
ii) Bacha F. Guzdar v. CIT (1955) SC
iii) Vodafone International Holding BV v. UoI (2012)- where
holding & subsidiary companies are indulging in dubious
methods for tax evasion, corporate veil can be lifted. Once the
transaction is shown to be fraudulent/sham or a devise
designed to defeat the interest of the shareholders & also for
tax evasion, the court can lift the corporate veil and examine
the substance of the transaction.
• Fraud or Improper Conduct-
i) Gilford Motor Co. Ltd v. Horne (1933)
ii) Workmen v. Associated Rubber Industry Ltd (1985) SC- It is the
duty of the court in every case where ingenuity is expended to
avoid taxing & welfare legislation, to get behind the smokescreen
and discover the truth.

• Government Companies
i) Som Prakash Rekhi v. UoI (1981) SC

• Formation of Subsidiary to at as an agent

i) State of UP v. Renusagar Power Co.
ii) Merchandise Transport Ltd. V. British Transport Commission (1982)
iii) Smith, Stone & Knight v. Birmingham Corp. (1939)
iv) SAE (India) Ltd. V. EID Parry (India) Ltd 1998 Mad
• In case of Economic Offences
Santanu v. UoI (1989) Del
• Where Co. is used to avoid welfare legislation
Workmen of Associated Rubber Industry Ltd v.
Associated Rubber Industry Ltd (1986) SC
• For Determination of Technical Competence of the
Co-
New Horizon Ltd. V. UoI (1995) SC
• Where Co. is used for some illegal/improper purpose
State of Rajasthan v. Gotan Limes (2015) SC- Corporate
veil can be lifted in public interest or if there is
allegation of violation of law by using the device of
corporate entity.
Lifting of the Corporate veil- By Statute
• Personal Liability of directors & members-
a) Misstatement in prospectus (sec 34 &35)
b) Failure to return application money (Sec 39)
c) Mis-description of name (Sec 12)
d) Fraudulent conduct of business (Sec 339)
e) Liability of Ultra Vires acts
f) For investigation of ownership of company- (Sec
216)
g) Holding & Subsidiary company- sec2 (46) & 2(87)
 Other Disadvantages of incorporation
Formality & Expense
Company is not a citizen
Loss of Privacy
Divorce of control from ownership
Detailed winding up procedure
Control by few
Greater Public accountability
Possibility of frauds