12.1.1
Definition of a company. The companies Act, 1956 defines the word ‘company’
as a company formed and registered under the Act or an existing company formed
and registered under any of the previous company laws (s.3). This definition does
not bring out the meaning and nature of the company into a clear perspective.
Also s.12 permits the formation of different types of companies. These may be
(i) companies limited by shares, (ii) companies limited by guarantee and (iii)
unlimited companies. The vast majority of companies in India are with limited
liability by shares. Therefore, it is advisable to define the term ‘company’
keeping in mind this types of companies. However, a brief description of other
types of companies will be given later.
Lord Lindley has described the company as “an association of many persons who, contribute money or money’s worth to a common stock and employ it in some trade or business; and who share the profit and loss (as the case may be) arising therefrom”. The common stock so contributed is denoted in money and is ‘the capital’ of the company. The persons who contribute it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his ‘share’. The member may sell his share in the company, thus withdrawing himself and making someone else a member to whom he transfers shares. Thus, shares in a company are transferable. As a natural consequence of transferability of shares, the company ha what is commonly known as perpetual succession. With the withdrawal or death of a member of a comp-any, the latter does not come to an end. The life of the company is independent of the lives of the members of the company. Members may come and members may go, the company continues until it is dissolved.
Lord Lindley has described the company as “an association of many persons who, contribute money or money’s worth to a common stock and employ it in some trade or business; and who share the profit and loss (as the case may be) arising therefrom”. The common stock so contributed is denoted in money and is ‘the capital’ of the company. The persons who contribute it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his ‘share’. The member may sell his share in the company, thus withdrawing himself and making someone else a member to whom he transfers shares. Thus, shares in a company are transferable. As a natural consequence of transferability of shares, the company ha what is commonly known as perpetual succession. With the withdrawal or death of a member of a comp-any, the latter does not come to an end. The life of the company is independent of the lives of the members of the company. Members may come and members may go, the company continues until it is dissolved.
Gower, L.C.B. in his book entitled ‘The Principles of Modern Company Law’ gives an interesting example. He says, ‘During the war all the members of one private company, while in general meeting, were killed by a hydrogen bomb. But the company survived, not even a hydrogen bomb could have destroyed it’.
Section 34(2) gives the effect of registration of a company by identifying the features it acquires as a consequence thereof. The section provides that:
From the date of incorporation mentioned in the certificate of incorporation, such of the subscribers of the memorandum and other persons, as may from time to time be members of the company, shall be a body corporate by the name contained in the memorandum, capable forthwith of exercising all the functions of an incorporated company and having perpetual succession and a common seal, but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is mentioned in the Act.
12.1.2 Features of a Company. On the basis of the above observations, we may spell out the following characteristic features of a company:
1. Incorporated association. A company must be incorporated or registered under the Companies Act. Minimum number required for the purpose is 7, in case of a public company and 2, in case of a private company (s.12). It may also be mentioned that as per s.11, an association of more than 10 persons, in case of banking business and 20 in case of any other business, if not registered as a company under the Companies Act, or under any other law for the time being in force, becomes an illegal association.
2. Artificial person. A company is created with the sanction of law and is not itself a human being, it is therefore, called artificial: and since it is clothed with certain rights and obligations, it is called a person. A company is accordingly an artificial person.
3. Separate legal entity. Unlike partnership, company is distinct from the persons who constitute it. Section 34(2) says that on registration, the association of persons becomes a body corporate by the name contained in the memorandum. Lord Macnanghtan in the famous case of Salomon v. Salomon & Co. Ltd. (1877) AC 22 observed that:
A company is at law a different person altogether from the subscribers…..; and though it may be that after incorporation the business is precisely the same as it was before and the same persons are managers and the same hands receive the profits, the company is at law not the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided in the Act.
The facts of the famous Salomon’s case were as follows:
Salomon carried on business as a leather merchant. He sold his 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 was satisfied by allotment of 20,000 shares of £1 each and issue of debentures worth £10,000 secured by floating charge on the company’s assets in favour of Mr Salomon. All the other shareholders subscribed for one share of £1 each. Mr Salomon was also the managing director of the company. The company almost immediately ran into difficulties and eventually became insolvent and winding up commenced. At the time of winding up, the total assets of the company amounted to £6.050; its liabilities were £10,000 secured by the debentures issued to Mr Salomon and £8,000 owing to unsecured trade creditors. The unsecured sundry creditors claimed the whole of the company’s assets, viz. £6.050 on the ground that the company was a mere alias or agent for Salomon.
Held: 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 ‘alias’ or agent or trustee for 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.
In Lee v. Lee Air Farming Limited (1960)3 All ER 429 PC, a company was formed for the purpose of manufacturing aerial top-dressing. Lee, a qualified pilot, held all but one of the shares in the company and by the articles 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. 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.
Held: There was a valid contract of service between Lee and the company and Lee was, therefore, a worker. Mrs Lee’s contention was upheld.
In Bacha F. Guzdar v. The Commissioner of Income-Tax, Bombay [AIR (1955) SC.74], the facts of the case were as follows:
The plaintiff (Mrs Guzdar) received certain amounts as dividend in respect of shares held by her in a tea company. Under the Indian Income-tax Act, agricultural income is exempted from payment of income-tax. As income of a tea company is partly agricultural, only 40 per cent of the company’s income is treated as income from manufacture and sale and, therefore, liable to tax. The plaintiff claimed that the dividend income in her hands should be treated as agricultural income up to 60 per cent, as in the case of a tea company, on the ground that dividends received by shareholders represented the income of the company.
Held: By the Supreme Court, that though the income in the hands of the company was partly agricultural yet the same income when received by Mrs Guzdar as dividend could not be regarded as agricultural income.
4. Limited liability. The company being a separate person, its members are not as such liable for its debts. Hence, in the case of a company limited by shares, the liability of members is limited to the nominal value of shares held by them. Thus, if the shares are fully paid up, their liability will be nil. However, companies may be formed with unlimited liability of members or members may guarantee a particular amount. In such cases, liability of the members shall not be limited to the nominal or face value of the shares held by them. In case of unlimited liability companies, members shall continue to be liable till each paise has been paid off. In case of companies limited by guarantee, the liability of each member shall be determined by the guarantee amount, i.e., he shall be liable to contribute upto the amount guaranteed by him.
Unlimited liability of a member of a limited liability company. In the following cases, a shareholder or member shall lose the privilege of limited liability:
(i) Where members of the company are reduced below the statutory minimum, viz., 7 in case of a public company and 2 in case of a private company and the company carries on the business for more than 6 months while the members are so reduced, every person who is a member during the time that it so carries on business after those 6 months and is aware of the fact that it is operating with fewer than the requisite number shall be personally liable for the whole of the debts contracted during that time (s.45).
(ii) Where in the course of winding up, it appears that any business of the company has been carried on with intent to defraud creditors, the Court may declare the persons who were knowingly parties to the transaction personally liable without limitation of liability for all any of the debts or other liabilities of the company (s.542).
5. Separate property. Shareholders are not, in the eyes of the law, part owners of the undertaking. In India, this principle of separate property was best laid down by the Supreme Court in Bacha F. Guzdar v. The Commissioner of Income Tax, Bombay (Supra). The Supreme Court held that a shareholder is not the part owner of the company or its property, he is only given certain rights by law, e.g., to vote or attend meetings, to receive, to receive dividends. Similarly, in R.F. Perumal v. H. John, it was observed that no member can claim himself to be owner of the company’s property during its existence or on its winding up. In still another case, it was observed that even where a shareholder held almost entire share capital, he did not even have an insurable interest in the property of the company. It was the case of Macaure v. Northern Assurance Co. Ltd. and the facts were as follows:
’Macaure’ held all except one share of a timber company. He had also advanced substantial amount to the company. He 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 that the insurance company was not liable.
6. Transferability of shares. Since business is separate from its members in a company form of organization, it facilitates the transfer of member’s interests. The shares of a company are transferable in the manner provided in the Articles of the company (s.82). However, in a private company, certain restrictions are placed on such transfer of shares but the right to transfer is not taken away absolutely.
7. Perpetual existence. A company being an artificial person cannot be incapacitated by illness and it does not have an allotted span of life. The death, insolvency or retirement of its members leaves the company unaffected. Members may come and go but the company can go forever. The saying “King is dead, long live the king” very aptly applies to the company form of organization.
8. Common seal. A company being an artificial person is not bestowed with a body of natural being. Therefore, it has work through its directors, officers and other employees. But, it can be held bound by only those documents which bear its signature. Common seal is the official signature of a company.
Seal of company when to be used – The articles of association of the company provide for putting the seal of the company on documents. Apart from those documents, the company seal is to be put on power of attorney, deed of lease, share certificates, debentures, debenture trust deed, deed of mortgage, promissory notes, negotiable instruments (except cheques), agreement of hypothecation, loan agreements with banks and financial institutions, contract of employment, guarantees issued by the company and all formal documents and documents executed on stamp papers.
Use of seal outside India (s.50). Where a company has any business or transaction in a place outside India a facsimile (exact reproduction) of the common seal may be kept there. The seal should also contain the name of the place where the seal would be used. For such use there must be power in the articles. A person must be properly authorized to use the seal, who shall his name and also put the name of the place and the fact that he has been authorized to do so by the specified resolution.
As per s.48, a company may, by writing under its common seal, empower any person, either generally or in respect of any specified matters, as its attorney, to execute deeds on its behalf in any place either in or outside India. It further provides that a deed signed by such an attorney on behalf of the company and under his seal where sealing required, shall bind the company and have the same effect as if it were under its common seal.
9. Company may sue and be sued in its own name. Another fall-out of separate legal entity is that the company, if aggrieved by some wrong done to it may use or be sued in its own name. In Rajendra Nath Dutta v. Shibendra Nath Mukherjee (1982) (52 Comp. Cas. 293 Cal.), a lease deed was executed by the directors of the company without the seal of the company and later a suit was filed by the directors and not the company to avoid the lease on the ground that a new term had been fraudulently included in the lease deed by the defendants. Held that a director or managing director could not file a suit, unless it was by the company in order to avoid any deed which admittedly was executed by one of the directors and admittedly also the company accepted the rent. The case as made out in the plaint was not made out by the company but by some of the directors of the company and the company was not even a plaintiff. If the company was aggrieved, it was the company which was to file the suit and not the directors. Therefore, the suit was not maintainable.
12.1.3 Lifting of the Corporate Veil. The advantages of incorporation are allowed to be enjoyed only by those who want to make an honest use of the ‘company’. In case of a dishonest and fraudulent use of the facility of incorporation, the law lifts the corporate veil and identifies the persons (members) who are behind the scene and are responsible for the perpetration of fraud.
Following are some such cases:
(ii) Where the company is acting as agent of the shareholders, then the shareholders will be held liable for its acts. There may be an express agreement to this effect or such agreement may be implied from the facts of a particular case.
(iii) Where a company has been formed by certain persons to avoid their own valid contractual obligation, the court may proceed on the assumption as if no company existed.
Example. A sold his business to B and agreed not to compete with him for a given number of years within reasonable local limits. A, desirous of re-entering business, in violation of the contractual obligation, formed a private company with majority shareholdings. B filed a suit against A and the private company and the court granted an injunction restraining A and his company with going ahead in the competing business (Gilford Motor Co. v. Horne (1933) 1 Ch. 935).
(iv) Where a company has been formed for some fraudulent purpose or is a ‘sham’, the court will lift the corporate veil to identify the perpetrator of the fraud.
In Delhi development Authority v. Skipper Construction Company (p) Ltd. [1969] 4 SCALE 202, the skipper construction company failed to pay the full purchase price of a plot to DDA. Instead construction was started and space sold to various persons. The two sons of the directors who had business in their own names claimed that they had separated from the father and the companies they were running had nothing to do with the properties of their parents. But no satisfactory proof in support of their claim could be produced. Held, that the transfer of shareholding between the father and the sons must also be treated as a sham. The fact that the director and members of his family had created several corporate bodies did not prevent the court from treating all of them as one entity belonging to and controlled by the director and his family.
(v) Where a company formed is against public interest or public policy, for the purpose of determining the character of the members, the Court may lift the corporate veil.
Example. Company was floated in London for marketing tyres manufactured in Germany. The majority of C’s shares were held by the German nationals residing in Germany. During World War I, C company filed a suit against D company for the recovery of trade debt. The D company contended that C company was an alien enemy company (Germany being at war with England at that time) and that the payment of the debt would be a trading with the enemy. The Court agreed with the contention of the defendants [Daimler Co. Ltd. v. Continental Tyre and Rubber Co., (1916) 2AC 307].
(vi) Where the holding company holds 100 per cent shares in a subsidiary company and the latter is created only for purposes of holding [State of U.P.v. Renusagar Power Co. (1991) 70 Comp. Cas. 207 SC].
(vii) Where breach of economic offence is involved. [Santanu Ray v. Union of India(1989) 65 Comp. Cas 196 (Delhi)].
(viii) Where company is used as a medium to avoid welfare legislation. [Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. (1986) 59 Comp. Cas. 134 SC].
(ix) Where device of incorporation is used for some illegal or improper purpose [PNB Finance Ltd. v. Shital Prasad Jain (1983) 54 Comp. Cas 66(Delhi)]. S, the financial advisor of a financing public limited company was given a loan of Rs 15 lakhs by the company to purchase immovable properties in Delhi. A pronote with regard to the same was also executed by S. S diverted the amount of the loan three public limited companies floated by him and his son. These companies, in turn, applied the amount in purchasing immovable properties at New Delhi. The Delhi High Court refrained the defendants from in any manner alienating, transferring, disposing of or encumbering the properties in question.
(x) For determination of technical competence of a company the experience of the promoters could well be considered as the experience of the company [New Horizons Ltd. v. Union of India (1955) 1 Comp. L.J. 100 (S.C.)].
(xi) Where the number of members falls below the statutory minimum (i.e., seven in the case of a public company and two in the case of a private company) and the company continues to carry on business for more than six months while the number is so reduced. In such a case, every person who is a member of the company during the time that it so carries on business after those six months and has knowledge of that fact, shall be severally liable to the creditors for the payment of the company’s debts contracted during that period. Such a member can be sued severally (i.e., directly) by the creditors of the company. Both the privileges of limited liability and that of the separate legal entity are lost. The creditors are permitted to look behind the company to the shareholders for the satisfaction of their claims (s.45).
(xii) Where prospectus includes a fraudulent misrepresentation. In case of a prospectus containing fraudulent misrepresentation as to a material fact, Ss. 62 and 63 make the promoters, directors, etc., personally liable not only in damages but they may event be prosecuted in terms of fine upto Rs 50,000 or imprisonment upto 2 years or both.
(xiii) Where a negotiable instrument is signed by an officer of a company on behalf of the company without mentioning the name of the company thereon, he is personally liable to the holder of the instrument, unless the company has already made the payment on the instrument [s.147 (4) (c)].
(xiv) Holding and Subsidiary Companies (Ss. 212-213). In the eyes of law, the holding company and its subsidiaries are separate legal entities. However, in the following cases, a subsidiary company may lose its separate identity to c certain extent:
(a) Where at the end of its financial year, a company has subsidiaries, it may lay before its members in general meeting not only its own accounts, but also a set of group accounts showing the profit or loss earned or suffered by the holding company and its subsidiaries collectively and their collective state of affairs at the end of the year;
(b) The Central Government, where it feels desirable, may direct the holding and subsidiary companies to synchronize their financial years;
(c) The Court may, on the facts of a case, treat a subsidiary company as merely a branch or department of one large undertaking owned by the holding company.
(xv) Investigation into related companies. Section 239 provides that if it is necessary for the satisfactory completion of the investigation into the affairs of a company, the Inspector appointed to investigate may look into the affairs of another related company in the same management or group.
(xvi) For investigation of ownership of a company. The separate legal entity may be disregarded under s.247. This Section authorizes the Central Government to appoint one or more Inspectors to investigate and report on the membership of any company for the purpose of determining the true persons who are financially interested in the company and who control or materially influence its policy.
(xvii) Where in the course of winding up of a company, it appears that any business of the company has been carried on, with intent to defraud creditors of the company, or any other persons, or for any fraudulent purpose, the court on the application of the Liquidator, or any creditor or contributory of the company, may, if it thinks proper, declare that any persons who are knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct (s.542).
No comments:
Post a Comment