Now, the question may arise whether this Veil of Corporate Personality can even be lifted or

pierced.

Before going into this question, one should first try to understand the meaning of the phrase
“lifting the veil”. It means looking behind the company as a legal person. Only in appropriate
circumstances, the Courts lift the corporate veil and that too, when questions of control are
involved rather than merely a question of ownership.

(i) Lifting of Corporate Veil

The following are the cases where company law disregards the principle of corporate
personality or the principle that the company is a separate legal entity:

Corporate Veil will be lifted

Where Where companies Where the device

corporate form other of incorporation
Trading with entity is used companies as To avoid a is adopted for
enemy to evade or their subsidiaries legal obligation some illegal or
circumvent to act as their improper
tax agent purpose

(1) To determine the character of the company i.e. to find out whether co-enemy or friend: In
the law relating to trading with the enemy where the test of control is adopted. It is true
that a company does not have mind or conscience; therefore, it cannot be a friend or foe
(enemy). It may, however, be characterised as an enemy company, if its affairs are under
the control of people of an enemy country. For this purpose, the Court may examine the
character of the persons who are really at the helm of affairs of the company.

(2) To protect revenue/tax: In certain matters concerning the law of taxes, duties and stamps
particularly where question of the controlling interest is in issue. [S. Berendsen Ltd. vs.
Commissioner of Inland Revenue]
(i) Where corporate entity is used to evade tax, the Court can disregard the corporate
entity [Juggilal vs. Commissioner of Income Tax AIR (SC)].
(ii) In the case of Dinshaw Maneckjee Petit, it was held that the company was not a genuine
company at all but merely the assessee himself disguised (masked) under the legal entity
of a limited company. The assessee earned huge income by way of dividends and interest.
So, he opened some companies and purchased their shares in exchange of his income by
way of dividend and interest. This income was transferred back to assessee by way of

Business Laws by CS Vinita Vaid (AIR) Inspire Academy (8989308989) 6.5

 loan. The Court decided that the private companies were a sham and the corporate veil
was lifted to decide the real owner of the income.

(3) To avoid a legal obligation: Where it was found that the sole purpose for the formation of
the company was to use it as a device to reduce the amount to be paid by way of bonus to
workmen, the Supreme Court upheld the piercing of the veil to look at the real transaction
(The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar vs. The
Associated Rubber Industries Ltd., Bhavnagar and another).
Workmen of Associated Rubber Industry Ltd., v. Associated Rubber Industry Ltd.: The facts
of the case are that “A Limited” purchased shares of “B Limited” by investing a sum of Rs.
4,50,000. The dividend in respect of these shares was shown in the profit and loss account
of the company, year after year. It was taken into account for the purpose of calculating
the bonus payable to workmen of the company. Sometime in 1968, the company
transferred the shares of B Limited, to C Limited a subsidiary, wholly owned by it. Thus,
the dividend income did not find place in the Profit & Loss Account of A Ltd., with the
result that the surplus available for the purpose for payment of bonus to the workmen got
reduced.
Here a company created a subsidiary and transferred to it, its investment holdings in a bid
to reduce its liability to pay bonus to its workers. Thus, the Supreme Court brushed aside
the separate existence of the subsidiary company. The new company so formed had no
assets of its own except those transferred to it by the principal company, with no business
or income of its own except receiving dividends from shares transferred to it by the principal
company and serving no purpose except to reduce the gross profit of the principal company
so as to reduce the amount paid as bonus to workmen.

(4) Formation of subsidiaries to act as agents: A company may sometimes be regarded as an

agent or trustee of its members, or of another company, and may therefore be deemed to
have lost its individuality in favour of its principal. Here the principal will be held liable for
the acts of that company.
In the case of Merchandise Transport Limited vs. British Transport Commission (1982), a
transport company wanted to obtain licences for its vehicles but could not do so if applied
in its own name. It, therefore, formed a subsidiary company, and the application for licence
was made in the name of the subsidiary. The vehicles were to be transferred to the
subsidiary company. Held, the parent and the subsidiary were one commercial unit and the
application for licences was rejected.

(5) Company formed for fraud/improper conduct or to defeat law: Where the company is
incorporated for some illegal or improper purpose, e.g., to defeat or circumvent law, to
defraud creditors or to avoid legal obligations. [Gilford Motor Co. vs. Horne]

Business Laws by CS Vinita Vaid (AIR) Inspire Academy (8989308989) 6.6

 CLASSES OF COMPANIES UNDER THE ACT

The Companies Act, 2013 has broadly classified the companies into various classes on the
following basis:

access to
liability members control Other
capital

1. On the basis of liability:

Company limited by Company limited by

Unlimited company
shares guarantee

(a) Company limited by shares: Section 2(22) of the Companies Act, 2013, defines that when
the liability of the members of a company is limited by its memorandum of association to
the amount (if any) unpaid on the shares held by them, it is known as a company limited
by shares. His separate property cannot be encompassed to meet the company’s debt.

(b) Company limited by guarantee: Section 2(21) of the Companies Act, 2013 defines it as
the company having the liability of its members limited to such amount as the members
may respectively undertake by the memorandum to contribute to the assets of the company
in the event of its being wound up.
Thus, the liability of the member of a guarantee company is limited upto a stipulated sum
mentioned in the memorandum. Members cannot be called upon to contribute beyond that
stipulated sum.
The common features between a ‘guarantee company’ and ‘the company having share
capital’ are legal personality and limited liability.
However, the point of distinction is that in the case of guarantee company, the members
may be called upon to discharge their liability only after commencement of the winding
up; but in the latter case, it can be during the company’s life-time or during its winding
up.
It is clear from the definition of the guarantee company that it does not raise its initial
working funds from its members. Therefore, such a company may be useful only where no
working funds are needed or where these funds can be held from other sources like
endowment, fees, charges, donations, etc.

(c) Unlimited company: Section 2(92) of the Companies Act, 2013 defines unlimited company
as a company not having any limit on the liability of its members. In such a company, the
liability of a member ceases when he ceases to be a member.

Business Laws by CS Vinita Vaid (AIR) Inspire Academy (8989308989) 6.7

 The liability of each member extends to the whole amount of the company’s debts and
liabilities but he will be entitled to claim contribution from other members. In case the
company has share capital, the Articles of Association must state the amount of share
capital and the amount of each share. So long as the company is a going concern the liability
on the shares is the only liability which can be enforced by the company. When the company
goes into liquidation, the liability of the members can be unlimited for their contribution
towards the liabilities and debts of the company.

Unlimited Co.

The liability Liability is Liability of each

No limit on the
ceases on when limited till the member extends to
liability of
he ceases to be time Company is amount of Company's
members
member not wound up. debt and liabilities

Member can be called to However, he can claim

contribute only in the event of contribution from other
winding up of Company members.

2. On the basis of members

One Person Company Private Company Public Company

(a) One person company: The Companies Act, 2013 introduced a new class of companies which
can be incorporated by a single person, to encourage entrepreneurship and corporatization
of business. Section 2(62) of the Companies Act, 2013 defines one person company (OPC)
as a company which has only one person as a member.
OPC is a separate legal entity with a limited liability of the member whereas in the case of
sole proprietary, the liability of owner is not restricted and it extends to the owner’s entire
assets constituting of official and personal.

OPC (One Person Company) - significant points

➢ Only one person as member.

➢ Minimum paid up capital – no limit prescribed.

➢ The member can be the sole member and director.

➢ The memorandum of OPC shall indicate the name

of the other person, who shall, in the event of the subscriber’s death or his incapacity to
contract, become the member of the company.

Business Laws by CS Vinita Vaid (AIR) Inspire Academy (8989308989) 6.8

 ➢ The other person whose name is given in the memorandum shall give his prior written
consent in prescribed form and the same shall be filed with Registrar of companies at
the time of incorporation.

➢ Such other person may be given the right to withdraw his consent.

➢ The member of OPC may at any time change the name of such other person by giving
notice to the company and the company shall intimate the same to the Registrar.

➢ Any such change in the name of the person shall not be deemed to be an alteration of
the memorandum.

➢ Only a natural person who is an Indian citizen whether resident in India or otherwise
and has stayed in India for a period of not less than 120 days during the immediately
preceding financial year

• shall be eligible to incorporate a OPC;

• shall be a nominee for the sole member of a OPC.

➢ No person shall be eligible to incorporate more than one OPC or become nominee in
more than one such company.

➢ No minor shall become member or nominee of the OPC or can hold share with beneficial
interest.

➢ Such Company cannot be incorporated or converted into a company under section 8 of

the Act. Though it may be converted to private or public companies in certain cases.

➢ Such Company cannot carry out Non-Banking Financial Investment activities including
investment in securities of any body corporate.

OPC

Encourage Procedural
One Private enterpreneurship requirements Separate
Limited
member Company and are simplified Legal
Liability
Company in nature corporatization through Entity
of business exemptions

Business Laws by CS Vinita Vaid (AIR) Inspire Academy (8989308989) 6.9

 (b) Private Company [Section 2(68)]: “Private company” means a company having a minimum
paid-up share capital as may be prescribed, and which by its articles—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to 200:
Provided that where two or more persons hold 1 or more shares in a company jointly,
they shall be treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were
members of the company while in that employment and have continued to be
members after the employment ceased,

shall not be included in the number of members; and

(iii)prohibits any invitation to the public to subscribe for any securities of the company;

Private company - significant points

No minimum paid-up capital requirement.

Minimum number of members – 2 (except if private company is an OPC, where it will

be 1).

Maximum number of members – 200, excluding present employee-cum-members and

erstwhile employee-cum-members.

Right to transfer shares restricted.

Prohibition on invitation to subscribe to securities of the company.

Small company is a private company.

OPC can be formed only as a private company.

Small Company: Small company given under the Section 2(85) of the Companies Act,
2013 which means a company, other than a public company—

(i) paid-up share capital of which does not exceed Rs. 4 crores or such higher amount as
may be prescribed which shall not be more than Rs. 10 crore; and

(ii) turnover of which as per profit and loss account for the immediately preceding
financial year does not exceed Rs. 40 crore or such higher amount as may be prescribed
which shall not be more than Rs. 100 crore:

Exceptions: This clause shall not apply to:

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act.

Business Laws by CS Vinita Vaid (AIR) Inspire Academy (8989308989) 6.10

 (c) Public company [Section 2(71)]: “Public company” means a company which—
(i) is not a private company; and
(ii) has a minimum paid-up share capital, as may be prescribed:

Provided that a company which is a subsidiary of a public company shall be deemed to be

public company for the purposes of this Act even where such subsidiary company continues
to be a private company in its articles;

Public company - significant points

 Is not a private company (Articles do not have the restricting clauses).
 Shares freely transferable.
 No minimum paid up capital requirement.
 Minimum number of members – 7.
 Maximum numbers of members – No limit.
 Subsidiary of a public company is deemed to be a public company.

3. On the basis of control:

Holding Subsidiary Associate

Company Company Company

(a) Holding and subsidiary companies: A company is a holding company in relation to one or
more other companies which are its subsidiary companies. [Section 2(46)]
For the purposes of this clause, the expression “company" includes any body corporate.

Whereas section 2(87) defines “subsidiary company” in

relation to any other company (holding company),
means a company in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total
voting power either at its own or together with one
or more of its subsidiary companies. HOLDING COMPANY

Provided that holding companies can have layers of subsidiaries upto the prescribed limit.

For the purposes of this section —

(i) holding company can have the control through its another subsidiary company;
(ii) the composition of a company’s Board of Directors shall be deemed to be controlled by
another company if that other company has the power to appoint or remove all or a
majority of the directors;
(iii)the expression “company” includes any body corporate;
(iv)“layer” in relation to a holding company means its subsidiary or subsidiaries.

Business Laws by CS Vinita Vaid (AIR) Inspire Academy (8989308989) 6.11

 Example: A will be subsidiary of B, if B holds more than 50% of the share capital of A.

Example: C is a subsidiary of B and B is a subsidiary of A. In such a case, C will be the

subsidiary of A. In the like manner, if D is a subsidiary of C, D will be subsidiary of B as
well as of A and so on.

(b) Associate company [Section 2(6)]: Associate company in relation to another company,
means a company in which that other company has a significant influence, but which is
not a subsidiary company of the company having such influence and includes a joint venture
company.
Explanation. — For the purpose of this clause —
(a) the expression “significant influence” means control of at least 20% of total voting
power, or control of or participation in business decisions under an agreement;
(b) the expression “joint venture’’ means a joint arrangement whereby the parties that have
joint control of the arrangement have rights to the net assets of the arrangement.

4. On the basis of access to capital:

Listed company

Listed company is a company which has any of its securities (shares, debentures, etc.)
listed on any recognised stock exchange.The reason for calling it “Listed” is because the
company and the Stock Exchange have signed a Listing Agreement for trading of shares in
the capital market.

Unlisted company

Unlisted company means company other than listed company

5. Other companies:

Government company Foreign Company Section 8 company

Dormant company Nidhi Companies Public Financial Institutions

Business Laws by CS Vinita Vaid (AIR) Inspire Academy (8989308989) 6.12

 (a) Government company [Section 2(45)]:

The Central Government, or

a company in which at
Government Any State Govt./s, or
least 51% of the paid up
Company
share capital held by
Partly by CG and partly by one
or more state Govt.

and the section includes a company which is a subsidiary company of such a Government
company.
Explanation: For the purposes of this clause, the “paid up share capital” shall be construed
as “total voting power”, where shares with differential voting rights have been issued.

(b) Foreign Company [Section 2(42)]: It means any company or body corporate incorporated
outside India which—
(i) has a place of business in India whether by itself or through an agent, physically or
through electronic mode; and

(ii) conducts any business activity in India in any other manner.

(c) Section 8 company (Formation of companies with charitable objects etc.):

Section 8 of the Companies Act, 2013 deals with the formation of companies which are
formed to
 promote the charitable objects of commerce, art, science, sports, education, research,
social welfare, religion, charity, protection of environment etc.

 Such company intends to apply its profit in promoting its objects and

 prohibiting the payment of any dividend to its members.

 Section 8 company is a company with limited liability without the addition of words
‘Limited’

Examples of section 8 companies are Infosys Foundation, Reliance Foundation, Tata

Foundation, Federation of Indian Chambers of Commerce & Industry (FICCI), National
Sports Club of India, Confederation of Indian Industry (CII), etc.

The Central government has the power to issue the license of Section 8 company on such
conditions as it deems fit. On registration of the company by the Registrar, the company
shall enjoy same privileges and obligations as of a limited company.

Business Laws by CS Vinita Vaid (AIR) Inspire Academy (8989308989) 6.13

 Revocation of license: The Central Government may by order revoke the licence of the
company

o where the company contravenes any of the requirements or the conditions of this
sections subject to which a licence is issued or
o where the affairs of the company are conducted fraudulently, or violative of the objects
of the company or prejudicial to public interest,
and on revocation the Registrar shall put ‘Limited’ or ‘Private Limited’ against the
company’s name in the register. But before such revocation, the Central Government must
give it a written notice of its intention to revoke the licence and opportunity to be heard
in the matter.

Order of the Central Government: Where a licence is revoked then the Central Government
may, in the public interest order that the company registered under this section should be
amalgamated with another company registered under this section having similar objects,
to form a single company with such constitution, properties, powers, rights, interest,
authorities and privileges and with such liabilities, duties and obligations as may be specified
in the order, or the company be wound up.

Penalty/punishment in contravention: If a company makes any default in complying with

any of the requirements laid down in this section, the company shall, without prejudice to
any other action under the provisions of this section, be punishable with fine which shall
not be less than Rs. 10 lakh but which may extend to Rs. 1 crore and the directors and
every officer of the company who is in default shall be punishable with fine which shall not
be less than Rs. 25 thousand but which may extend to Rs. 25 lakh.

Provided that when it is proved that the affairs of the company were conducted
fraudulently, every officer in default shall be liable for action under section 447.

Section 8 Company- Significant points

➢ Requirement of minimum share capital does not apply.

➢ On revocation of the license, Central Government may direct it to
 Converts its status and change its name
 Wind – up
 Amalgamate with another company having similar object.
➢ Can call its general meeting by giving a clear 14 days’ notice instead of 21 days.
➢ Requirement of minimum number of directors, independent directors etc. does not apply.
➢ Need not constitute Nomination and Remuneration Committee and Shareholders
Relationship Committee.
➢ A partnership firm can be a member of Section 8 company.

Business Laws by CS Vinita Vaid (AIR) Inspire Academy (8989308989) 6.14

 Formation •To promote Charitable objects

•To promote its objects

Application of profits
•No payment of dividends out of profit

•Limited Liability
Type of Co.
•Without the addition of words "Ltd" or "Pvt Ltd."

•The CG can grant such status

How status is granted •However, CG has delegated the power to grant
licence to ROC

•CG may revoke licence

•If conditions of section 8 are contravened, or
Revocation of licence
•affairs of the company are conducted
fraudulently, or prejudicial to public interest

Effect of revocation of licence •Co has to use words "Ltd." or "Pvt Ltd."

(d) Dormant company (Section 455): Where a company is formed and registered under this
Act for a future project or to hold an asset or intellectual property and has no significant
accounting transaction, such a company or an inactive company may make an application
to the Registrar in such manner as may be prescribed for obtaining the status of a dormant
company.
“Inactive company” means a company which has not been carrying on any business or
operation, or has not made any significant accounting transaction during the last two
financial years, or has not filed financial statements and annual returns during the last two
financial years.

“Significant accounting transaction” means any transaction other than—

(ii) payments made (iii) allotment of

(i) payment of (iv) payments for
by it to fulfil the shares to fulfil the
fees by a company maintenance of its
requirements of this requirements of
to the Registrar; office and records.
Act or any other law; this Act; and

Business Laws by CS Vinita Vaid (AIR) Inspire Academy (8989308989) 6.15

 (e) Nidhi Company [Section 406(1)]: In this section, “Nidhi” or “Mutual Benefit Society” means
a company which the Central Government may, by notification in the Official Gazette,
declare to be a Nidhi or Mutual Benefit Society, as the case may be. Nidhi Companies are
created mainly for cultivating the habit of thrift and savings amongst its members.

(f) Public Financial Institutions (PFI): By virtue of Section 2(72) of the Companies Act, 2013,
the following institutions are to be regarded as public financial institutions:
(i) the Life Insurance Corporation of India, established under the Life Insurance Corporation
Act, 1956;
(ii) the Infrastructure Development Finance Company Limited,
(iii)specified company referred to in the Unit Trust of India (Transfer of Undertaking and
Repeal) Act, 2002;
(iv)institutions notified by the Central Government under section 465 of this Act;
(v) such other institution as may be notified by the Central Government in consultation
with the Reserve Bank of India.

Conditons for an institution to be notified as PFI

At least 51% of the paid-up share capital

Established or constituted by or under any is held/controlled by the CG or by any
Central or State Act other than this Act or State Govt./s or partly by the CG and
partly by one or more State Govts.

MODE OF REGISTRATION/INCORPORATION OF COMPANY

PROMOTERS: The Companies Act, 2013 defines the term “Promoter” under section 2(69)
which means a person—
(a) who has been named as (b) who has control over the (c) in accordance with whose
such in a prospectus or is affairs of the company, advice, directions, or
identified by the company directly or indirectly instructions the Board of
in the annual return whether as a shareholder, Directors of the company
referred to in section 92; or director or otherwise; or is accustomed to act.

In simple terms we can say,

✓ Persons who form the company are known as promoters.

✓ It is they who conceive the idea of forming the company.
✓ They take all necessary steps for its registration.
✓ It should, however, be noted that persons acting only in a professional
capacity e.g., the solicitor (lawyer), banker, accountant etc. are not
regarded as promoters.

Business Laws by CS Vinita Vaid (AIR) Inspire Academy (8989308989) 6.16