Module V

Companies Act 1956

IntroductionMeaning and definition of CompanyFeatures/Characteristics of CompanyTypes of Company

COMPANY• A company in general terms means a group of persons

associated together for the attainment of a common end, social or economic.

• Lindley’s Definition- A company is an association of many persons who contribute money to a common stock, and employ it in some common trade or business, and who share the profit or loss arising there from.

• As per Companies Act 1956- No specific definition is given for company. It only includes registered company which is incorporated under this Act mostly for business but may also be formed for promoting art, charity, research, religion, commerce or any other useful purpose.

Main Features/Characteristics of a Company-

• Voluntary Association

• Separate Legal entity

• Limited Liability

• Perpetual Succession

• Common Seal

• Transferability of Shares

• Separate Property

• Capacity to sue

• Artificial Personality

Corporate personality has been described as the ‘most pervading of the fundamental principles of company law”. It constitutes the bedrock principle upon which company is regarded as an entity distinct from the shareholders constituting it. When a company is incorporated it is treated as a separate legal entity distinct from its promoters, directors, members, and employees; and hence the concept of the corporate veil, separating those parties from the corporate body, has arisen. The issue of “lifting the corporate veil” has been considered by courts and commentators for many years and there are instances in which the courts have negated from the strict application of this doctrine. This doctrine has been established for business efficacy, necessity and as a matter of convenience.

In the doctrine of ‘Lifting the Corporate Veil’, the law goes behind the mask or veil of incorporation in order to determine the real person behind the mask for the purpose of holding them liable.

But for clarity as to ‘Lifting of the Corporate Veil’, an understanding of the corporate personality of a company is required, along with study of the provisions of Indian law that pave the way for courts to pierce the corporate veil. Various grounds for piercing of the corporate veil and elements of lifting of corporate veil analyzed through the lens of leading case laws and judgements form the crux of this project report.

Corporate Veil and Lifting of Corporate Veil

COMPANY AS SEPARATE LEGAL ENTITY

The company as a separate entity was firmly established in the landmark decision in Salomon v. Salomon & Co. Ltd. Salomon, a sole trader, sold his manufacturing business to Salomon & Co. Ltd. (a company he incorporated) in consideration for all but six shares in the company, and received debentures worth 10 thousand pounds. The other subscribers to the memorandum were his wife and five children who each took up one share. The business subsequently collapsed, and Salomon made a claim, on the basis of the debentures held, as a secured creditor. The liquidator argued that Salomon could not rank ahead of other creditors because, in fact, the company and Mr. Salomon were one and the same–or alternatively, that the company carried on business on Salomon’s behalf.

On appeal, the House of Lords held that Salomon & Co. Ltd. was not a sham; that the debts of the corporation were not the debts of Mr. Salomon because they were two separate legal entities; and that once the artificial person has been created, “it must be treated like any other independent person with its rights and liabilities appropriate to itself.”

Kinds of Companies

• On the basis of incorporationStatutory Companies- which are created by special Act of Legislature as RBI,

LIC, UTI etcRegistered Companies- which are formed and registered under Companies Act,

1956 or any earlier acts.Charted Companies- which were formed under Common law of UK. as East

India Co. (Now obsolete)

• On the basis of liabilityCompanies with Limited Liability- By Shares OR By GuaranteeCompanies with unlimited Liability [Sec-12(2)]• On the basis of number of membersPrivate Company and Public Company• On the basis of controlHolding Co. and Subsidiary Co.• On the basis of ownershipGovernment Co. Foreign Co. One man Co.

Formation of a Company• Promoter- A person who do all the necessary preliminary work

incidental to the formation of a company. They are the first persons who control company affairs. The promoters conceive the idea of forming the company with reference to a given object and then set it going. They provide the company with share and loan capital and acquire the business or property which it is to manage and finally hand over the control to its directors.

• Documents to be filed with the Registrar

Memorandum of Association duly signed,

Article of Association,

Any agreement made prior to incorporation

List of Directors

Declaration stating that all requirements of Companies Act related to registration of a company have been compiled with.

◘ Certificate of Incorporation

Memorandum of Association• MoA is the fundamental document of a proposed CompanyIt lay down the areas of operation of a company, regulates

external affairs in relation to outsiders, shows the object and scope of a Company. As per sec- 15 MoA of a company shall be printed, divided into paragraphs, numbered consecutively and signed by the subscribers.

Contents of Memorandum includes the following clauses1) Name clause2) Registered office clause3) Object clause4) Capital clause5) Liability clause6) Association clause● Alteration of Memorandum

Article of Association• AoA are the rules, regulations and bye-laws for the internal

management of the affairs of a company. They are framed with the object of carrying out the aims and objects as set out in MoA. It contains provisions relating to the following-

• Share capital, rights of shareholders, share certificate• Lien, call, transfer and transmission of shares• Alteration of capital, conversion of shares into stock • General meetings and proceedings• Voting rights of members• Directors, managers, secretary• Accounts, audits and borrowing powers• Capitalisation of profits• Winding up

SHARE CAPITAL• Means the share of the owners in the

company.• Types of share capital:1. Authorised share capital2. Issued share capital3. Subscribed share capital4. called-up share capital5. Paid-up share capital

Types of Meetings

Two types of meeting:

1. Shareholders meeting• Statutory meeting• Annual General Meeting• Extra Ordinary General Meeting

2. Directors Meeting

Directors

A Director may be defined as a person having control over the direction, conduct, management of the affairs of the company.

Number of Directors: Every public company shall have at least 3 directors and

every other company at least 2 directors. However a public company having –a) Paid-up capital of Rs. 5 crore or moreb) one thousand or more small shareholders,Shall have atleast one director elected by such small

shareholders.

Powers of Directors

1.General powers of the Board

2. Powers to be exercised in the board meetings.

3.Powers to be exercised with the approval of company in general meeting.

4.Power to make political contributions

Qualification Of Directors

• The Companies Act has not mentioned any specific qualification for the directorship, in terms of Academic, Technical and share holding Qualification.

• But director must have certain Qualification:– He must be an individual, having the capacity to

contract.– He must be a shareholder of the company.– He must not act as a director for more then 15 public

companies at a time.– He must hold a minimum qualifying amount of share.

Nominal value of share shell not exceed Rs. 5000. and must hold at least one share, where the nominal value exceeds Rs. 5000.

Disqualification Of Director

• If he is a person of Unsound Mind.• If he is an undercharged insolvent.• If he is declared fraudulent by a court.• If he holds more than 15 companies of public

companies.• If he absents himself from three consecutives

Board meetings.• If he fails to acquire qualification share within 2

months from the date of appointment.• If he accepts loan from the company without the

approval of Central Bank.

DISQUALIFICATION UNDER SUB CLAUSE (A) OF SECTION 274 (1) (g)

• a person shall not be capable of being appointed as a director of any company, if he is a director of a public company and such public company has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first day of April, 1999. 

DISQUALIFICATION UNDER SUB CLAUSE (B) OF SECTION 274 (1) (g)

• a person shall disqualified from being appointed as a director of a company, where any public company of which also he is a director: 

• has failed to repay the deposits on due date; or• has failed to pay the interest on deposits on due

date; or• has failed to redeem its debentures on due

date; or• has failed to pay dividend, and