Ch.

1 Introduction-Companies Act, 2013

Historical Information
Companies Bill, 2012 Passed in Lok Sabha on 18-12-2012
Companies Bill, 2012 Passed in Rajya Sabha on 8-8-2013
Companies Bill, 2012 President gave assent on 29-8-2013
Companies Bill, 2012 became Companies Act, 2013

Companies Act, 2013 notified in the Official Gazette of India 30-8-2013

Procedure adopted for the introduction of new Companies Act, 2013

Drafting of Companies Bill, 2012

Placed before Standing Committee of

Parliament and approved by the same

Approved by Lok Sabha

Approved by Rajya Sabha

Signed by President of India,

Companies Bill, 2012 becomes
Companies Act, 2013

Notified in Official Gazette of India

History of Company Legislation

The company legislation in India is primarily based on the company legislation in England. In
order to register Joint Stock Companies in India, the first enactment, i.e., Companies Act, was
passed in the year 1850, which was based on English Companies Act, 1844. Over the period of
time, a number of amendments were made in the Companies Act, closely following the
amendments made in the English law.
Till 1956, the companies in India were regulated by the Companies Act, 1913. In 1950, the
government of independent India appointed a Company Law Committee under the
chairmanship of Shri H.C. Bhaba to review the entire functioning of Indian Companies Act. The

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committee submitted its report in 1952. On the basis of recommendations of this committee in
general, a bill to enact The Companies Act, 1956, was introduced in the Parliament. The
Companies Act, 1956, by and large, once again followed the English Companies Act, 1948.
After a number of amendments in the Companies Act, 1956, this Act has been replaced by new
Companies Act, 2013, keeping in view the changed global economic scenario.

Introduction to Companies Act, 2013

COM +PANIES The word “company” is derived from the Latin term “COM” means “with
Meaning or together” and the term “PANIES” means bread).
Originally, it referred to an association of persons who took their meals
together.
In Smith v. It was observed as “a company may mean an association of individuals
Anderson formed for some purpose”.
A company may be an incorporated company (or a “corporation”) Or an unincorporated
company.
Incorporated An incorporated company is a company formed and registered under the
company prevailing law.
Unincorporated An unincorporated company, such as a partnership, is mere collection or
company aggregation of individuals. The partnership, which is governed by
Partnership Act, is the most apt example of an un-incorporated association.

Definition “Company” means a company incorporated under Companies Act, 2013 or

Sec 2(20) under any previous company law.”

Meaning A co. is a voluntary association of persons for some common purpose, with
capital divisible into parts, known as shares, and is an artificial person,
having separate legal personality with a perpetual succession and common
seal.

NATURE OF A COMPANY
Person Law divides persons into two categories: - Natural Persons (such as Human Beings)
and Legal Persons (such as Companies – which are created by law). So we have
natural persons and legal persons.
Human The natural persons are called human beings, which are created by a
Persons process of natural birth.
Legal The non-human (Legal Persons) are called Companies, which are
Persons created by a process other than natural birth, i.e., by complying with the
legal formalities to form a company.
A human person is a legal person all his life, but all legal persons are not human.
Law has granted same rights to legal persons in relation to running of business as have been
given to human being. But there are certain similarities and distinction in these two persons.

SIMILARTIES
Basis Natural Person Legal Person

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Contract Natural person can enter into Legal person can also enter into contract.
contract.
Buy assets Natural person can buy assets. Legal Person can also buy assets
Open Bank Natural person can open bank Legal Person can also open bank account.
account account

Business Natural person can start doing Legal Person can also start doing some
any lawful business lawful business
Sue and be Natural person can file suit Legal person can file suit against others and
sued against others and suit can be suit can be filed against it also.
filed against him also.

DISSIMILARITIES
Birth Natural person gets birth through Legal person gets birth through compliance
the process of nature. with the legal formalities.
Physical It has a physical existence and It has no physical existence and not visible
body visible to others. to others except to law. These physical
disabilities make a company an artificial
person.
A co., being an artificial person, can do
everything like a natural person except that:
It cannot take oath,
It cannot be sent to jail,
It cannot marry,
It cannot practice a profession like medical
& it cannot vote.

Company as an artificial person

Whatever rights, the law has granted to natural person to do business, the same rights to do
business are also granted companies. Since, Human being come into an existence through natural
process, they are therefore, termed as natural persons. But company come into an existence
through compliance of legal process, therefore, company can be termed as legal person or juristic
person. However, a natural person has body, mind and soul. Legal person does not have any
body, mind or soul but still it is a person. Therefore, a company is an artificial person created by
law. It is called an artificial person since it is invisible, intangible, existing only in the
contemplation of law. It is capable of enjoying rights and being subject to duties. Since law has
created it, it is considered as a legal person which can enter into contracts, possess properties in
its own name, sue and can be sued by others etc. It is not a human being but it acts through
natural person (human beings).

COMPANY – ITS CHARACTERISTICS

1. Separate Independent Legal Entity

A co. is a legal entity quite distinct and separate from its members. It is an artificial person
created by law. Though it exists only in the contemplation of law, it has the qualities similar to
those of individuals. It can hold, and deal with in any type of property, of which it is owner. It can
enter into a contract.

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Effect of It can open a bank account in its own name.
separate It can sue and be sued by its members as well as outsiders.
Legal Entity A co. cannot be the property of the person who owns all the shares in the co., nor
can it be considered to be his agent.
The rights and obligations of a co. are distinct from its constituent members.
A co. can enter into partnership with one or more individuals or another co.
It can buy shares and debentures of another co.
The principal of separate legal entity of the company is clarified in the following
case.

Salomon V. Salomon & Co. Ltd.

Salomon carried on business as a leather merchant. He sold his proprietorship business for a sum
of £30,000 to a company formed by him along with his wife, a daughter and four sons. The
purchase consideration made by the company was as follow: -
Allotment of 20,000 shares of £1 each and issue of secured debentures worth £ 10,000 to Mr.
Salomon. The other family members subscribed for one share of £ 1 each. Mr. Salomon was also
the managing director of the company. The company immediately ran into difficulties and
eventually became insolvent and winding up commenced.
At the time of winding up, the financial position of the company is as follow: -
Total assets - £6,050;
Liabilities: - £10,000 secured debentures
£ 8,000 owing to unsecured trade creditors
Contention of Unsecured creditors: one man cannot owe money to himself. The unsecured
creditors contended that Salomon was carrying on business in the name of Salomon & Co. Ltd.
Thus, Salomon and Co. Ltd. was a mere agent for Salomon. The unsecured creditors claimed the
whole of the company's assets, viz. £6,050 on the ground that the company was a mere agent for
Salomon.
Decision of the Court:
1. Once the certificate of incorporation is issued, the company comes into an existence and it
becomes a separate legal entity which is different from those seven persons who formed
such company.
2. Even if almost all the shares of the company are held by one individual and the company
is virtually a “One Man Company”, controlled by such individual, still it has its own
separate legal existence apart from such individual.
3. A single individual can be shareholder as well as creditor of the company simultaneously.
Therefore, the contention of the trade creditors could not be maintained, because the company
being in law a person quite distinct from its members, could not be regarded as an agent of
Salomon.
Also, the company's assets must be, applied in payment of the debentures as a secured creditor is
entitled to payment out of the assets on which his debt is secured in priority to unsecured
creditors.
Held that, in this case, Mr. Salomon, being a secured creditor, shall be paid before other
unsecured creditors.
Lee v. Lee Air Farming Ltd.

Lee, a qualified pilot, held all but one of the shares in the company. He was appointed governing
director of the company and chief pilot. Lee was killed while piloting the company's aircraft, and
his widow claimed compensation for his death under the Workmen Compensation Act.

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Contention by the company
The company opposed the claim on the ground that Lee was not a 'worker' as the same person
could not be employer and the employee.

Decision of court
It was held that Lee was a separate person from the company he had formed.
There is a valid contract between Lee and the Company, and Lee was, therefore, a worker.
Therefore, he could be legally employed under the company.
As he was killed in the course of employment under the company, Mrs. Lee's was entitled to get
compensation.

Bacha F. Guzdar v. The Commissioner of Income-Tax

A shareholder received dividend income from a company carrying on agricultural business.

The income from agriculture business was exempt from tax.
Contention by the shareholder
The shareholder contended that her dividend income should be treated as agricultural income and
therefore exempt from tax.
Decision of court
The Court held that the company was a separate person from its members, having its own business,
and its own income. The income received by the shareholders was not the same income as earned
by the company.
2. Limited Liability

In case of company limited by shares, the liability of the members of a company is limited to the
extent of the nominal value of the shares held by them. In no event can a shareholder be asked
to pay anything more than the unpaid value of his shares.

3. Perpetual Succession (permanent existence)

Section 9 of the Companies Act, 2013 states that an incorporated company has perpetual
succession. The term perpetual means continuous and the term succession means one after
another. This means that the death or insolvency of individual members does not in any way,
affect the corporate entity, its existence or continuity. The company shall continue to exist
indefinitely till it is wound-up in accordance with the provisions of the Companies Act.
Members may come and members may go but the company can go on for ever. In case of
partnership firm having just two partners, if any one of the two partners dies, then the
partnership firm stands dissolved. In case of a company, even if all the members of a company
die, still that company is alive. As the company gets its birth by complying with the provisions
of law (i.e., procedure for incorporation) similarly, it goes out of existence by following other
provisions of law (i.e., procedure for the winding up). However, in case of “One Person
Company” having one member, if such member dies, then his shares are transmitted to his
nominee, and still the company continues to exist.

4.Transferability of Shares

The capital of a company is divided into parts, called shares. The shares are movable property
and freely transferable. In the case of a private company, the Companies Act requires it to put

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certain restrictions on the transferability of shares. In the case of a public limited company,
every member having fully paid-up shares is at liberty to dispose them off according to his
choice. Any absolute restriction on the right to transfer shares is void.

5.Separate Property

The company is entitled to own and hold property in its own name. No member can claim
ownership of any item of the company’s assets.
Although its capital is contributed by its shareholders, they are not the private or joint owner of
its property.

Gramophone “The property of the company is not the property of the shareholders; it is
& Typewriter property of the company.”
Co. v. Stanley
Bacha F. The Supreme Court, in this case, held that, though the income of a tea
Guzdar v. company is entitled to be exempted from Income-tax up to 60% being partly
Commissioner agricultural, the same income when received by a shareholder in the form of
of I.T, dividend cannot be regarded as agricultural income for the assessment of
Bombay income-tax.
It was also observed by the Supreme Court that a shareholder is not the part
owner of the company or its property, he is only given the certain rights by
law, e.g., to vote, to attend meetings, or to receive dividend. No member can
individually or jointly claim any ownership rights in the assets of the co.
during its existence or on its winding up.

Macaure v. Even where a shareholder held almost entire share capital, he did not even
Northern have an insurable interest in the property of the company.
Assurance Co. In this case, Mr. Macaure held all except one share of a timber company. He
Ltd., insured the company's timber in his personal name. On timber being destroyed
by fire, his claim was rejected for want of insurable interest. The Court
applying principle of separate legal entity held, the insurance company was
not liable.

6. Common Seal

In order to enter into some contract, the company needs to sign the documents. Since a company
is an artificial person, it cannot sign documents in order to enter into some contract. It performs
this formality by making use of the common seal of the company to act as the official signature
of a company. The name of the company must be engraved on its common seal. A rubber stamp
does not serve the purpose. A document not bearing common seal of the company is not
authentic and has no legal force behind it.
The common Seal must be kept in the custody of a director or any other responsible officer of
the company. The Article of Association of the company specifies that whose manual signature
shall be affixed along with the common seal on a document belonging to the company.

7.Capacity to Sue and Be Sued

A company being a body corporate, can sue and be sued in its own name. All legal proceedings
against the company are to be instituted in its own name. Similarly, the company may bring an
action against anyone in its own name.

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8. Contractual Rights

A company, being a legal entity, is different from its members. It can enter into contracts for the
conduct of the business in its own name.
A shareholder cannot enforce a contract made by his company; he is neither a party to the
contract, nor be entitled to the benefit derived out of it. Similarly, a shareholder cannot be sued
on contracts made by his company.

9. Limitation of Action

A company cannot go beyond the power stated in its Memorandum of Association. The
Memorandum of Association of the company regulates the powers and fixes the objects of the
company. Any act done beyond the objects specified in the Memorandum of Association shall
be ultra vires.
10. Termination of Existence

A company, being an artificial juridical person, does not die a natural death. It is created by law,
carries on its affairs according to law throughout its life and ultimately is put to an end by law.
Generally, the existence of a company is terminated by means of winding up.

Doctrine of Lifting of or Piercing the Corporate Veil

A co. is a legal person distinct from its members. This is known as principle of the “veil of
corporation”. Yet in reality, it is an association of persons who are, in fact, the beneficial owner
of the co.’s property. Real persons behind a co. are disregarded once they have formed the co.
The persons working to assist the company in performing its functions have to work according
to rules. If these members work according to rules and regulations, then for all their acts, the
company is liable. However, if members abuse their powers and try to make the company liable
for their wrong deeds, then in that case, the company shall not be responsible for their acts;
rather they shall be held personally liable for all consequences.

Meaning of lifting up or piercing the corporate veil

Lifting up of corporate veil means ignoring the separate legal identity of a company.
Lifting of corporate veil means disregarding the corporate personality and looking back at the
persons who are actually controlling the affairs of the company.

Reasons for lift The advantages of incorporation are allowed to be enjoyed only by those
up of corporate who want to make an honest use of the 'company'.
veil In case of dishonest and fraudulent use of the facility of incorporation, the
law lifts the corporate veil and identifies the persons who are behind the
scene and are responsible for the perpetration of fraud
Therefore, corporate personality is to be respected, but when this benefit is
misused courts are not powerless to lift the veil.

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Circumstances The circumstances under which the courts may lift the corporate veil may
to lift up the broadly be grouped under the following two heads:
corporate veil (A) Under judicial interpretations
(B) Under statutory provisions

Cases falling under Judicial Interpretation

1. For the Daimler Co. Ltd. v Continental Tyre & Rubber Co. Ltd.
determination A company was formed in England for the purpose of selling tyres made by
of character of a German company. The German company virtually held the entire share
the company, capital of the English company. All the directors were German national and
whether it is an residents.
enemy co. During the First World War, the English company commenced an action to
(Doctrine recover a trade debt from another English company.
conflicts with Decision of the Court
public policy) It was held that the corporate personality of the company be ignored and the
persons in the ultimate control of the company shall be considered. Since
the persons controlling the company were enemies, the suit was not
maintainable.
Accordingly, the suit filed by the company to recover a trade debt was
dismissed on the ground that such payment would amount to trading with
enemy.

2.Protection of Where it was found that the sole purpose for which the company was
revenue formed was to evade taxes the Court will ignore the concept of separate
entity, and make the individuals liable to pay the taxes which they would
have paid but for the formation of the company.
Sir Dinshaw Maneckjee Pettit, Re: An assessee was receiving huge
dividend and interest income on certain investments. In order to avoid the
payment of taxes, he formed four private companies. The whole of the
investments were transferred to these private companies. The interest and
dividend received by these companies were within the exempted limits
under the Income Tax Act of that time. These companies did not have any
business or asset except these investments. The income received on
investments by these companies was diverted to the assessee in the form of
pretended loans, which were never paid back by him.
Decision of the Court
The Court held that the only purpose of incorporating these private
companies was to evade taxes. Each of these companies was a sham.
Therefore, income earned by all these private companies was treated as the
income of the assessee.

3. Commission Where the corporate veil has been used for commission of fraud or
of fraud or improper conduct, Courts have lifted the veil and looked at the realities of
improper the situation.
conduct Gilford Motor Co. Ltd. v Horne
An employee entered into a contract with his employer that he will not
solicit the customers of the employer after leaving the employment.

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 After leaving the employment, the employee formed a company along with
his wife and one other person. The company started soliciting the customers
of the employer.
Decision of the Court
The Court held that the purpose of formation of the company was to avoid
a legal obligation arising from a contract. Therefore, the company was
restrained from soliciting the customers of the employer.

Jones v. Lipman
L agreed to sell certain land to J. Pending completion of formalities of the
said deal, L sold and transferred the land to a company which he had
incorporated with a nominal capital of £100 and in which he and a clerk
were the only shareholders and directors. This was done in order to escape a
decree for specific performance in a suit brought by J.
Decision of the Court
The Court held that the company was the creation of L and a mask to avoid
recognition. In the eyes of law L must complete the contract, since he had
the full control of the limited company in which the property was vested.

(4) Formation of In Merchandise Transport Limited v. British Transport Commission, a

Subsidiaries to transport company wanted to get licenses for its vehicles, but it could not do
act as agent so if it made the application in its own name. It, therefore, formed a
subsidiary company and the application for licenses was made in the name
of the subsidiary. The vehicles were to be transferred to the subsidiary.
Decision of the Court
Held, the parent and the subsidiary company were one commercial unit and
the application for licenses was rejected.

In Re. R.G. Films, a subsidiary company (in Britain) was incorporated by

the holding company (of USA) only as an instrument (tool). Holding
company transferred its entire business to its Subsidiary company due to
lower tax rates in Britain and Subsidiary company (in Britain) had no real
business of its own.
Decision of the Court
The Court held that in this case, the corporate veil shall be lifted up and the
income of Subsidiary company in Britain can be taxed as income of
American Holding company.
5. To avoid Workmen of Associated Rubber Industry Lid. v. Associated Rubber
welfare Industry Ltd.
legislation A company was earning huge profits. According to the Bonus Act, some
amount of bonus was to be paid to the workers in proportion of the profits
of the company.
The company incorporated a subsidiary company and transferred some
valuable investments to it. The subsidiary company did no business, and
had no assets except the investments.
Decision of the Court
Looking at the purpose of formation of the subsidiary, the Supreme Court
lifted the corporate veil. It was held that the subsidiary was formed merely
for the purpose of reducing the liability of bonus payable under the Bonus
Act.

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 It amounted to avoiding welfare legislation by escaping the liability to pay
bonus. Such an action was not permissible, and therefore the profits earned
by the subsidiary company were held to be the profits of the holding
company.

6. In case of Santanu Ray v. Union of India

economic In case, a company has committed an economic offence, e.g., not paying the
offences taxes, directors of the company can be held liable for wrong.
Decision of the court
The Court held that the veil of the corporate entity could be lifted by
adjudicating authorities so as to determine as to which of the directors was
concerned with the evasion of the excise duty by reason of fraud,
concealment or wilful misstatement or suppression of facts or contravention
of the provisions of the Act and the rules made there under.

Cases falling under provisions of Companies Act, 2013

Sec 7(7) Section 7(7) deals with punishment for incorporation of company by
furnishing false information.
Sec 34 & 35 Misstatement in the prospectus
Sec 39 Failure to return application money
Sec 12 Mis-description of Name
Sec 219 To facilitate the task of an inspector appointed u/s 210, 212, or 213 to
investigate the affairs of the company
Sec 216 For investigation of the ownership of the company
Sec 339 Fraudulent conduct
Liability for Ultra-Vires acts

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