Thursday, 2 October 2014

Companies Act 1956: Preliminary

Company Law

Companies Act 1956

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Meaning of Company:
Company is a body of persons which is formed under companies Act 1956. This body is defined under section 3(1) of the Companies Act. Following is the basic definition of company according to different judgement.
  • Smith Vs Anderson:- In this judgement the company was defined as an association of person and company is a artificial legal person created by law.
  • Sheffield Vs Sy Society:- In this case it was decided that every company is a legal person and company is different from physical persons, hence every company has no physical existence.
  • According to Palmer:- Every company is  a group of persons who contribute money and share profits and losses. According to palmer every company is created for earning profit and distribution of profits.
  • According to section 3(1):- Every company means a company which is created under Companies Act 1956 or any earlier law applicable in India

Features of Company:
Every company has following basic features.
  • Company is a legal person different from its members.
  • Company is an artificial person and the companies are different from human beings.
  • Every company is a group of human beings so one man cannot form a company.
  • Companies are created by law hence companies are different from partnership firms because partnership firms are create by agreements.
  • Every company can purchase property in its own name.
  • Every company has a common seal and seal is the signature of company. So the companies are capable of making the contracts.

Legal Personality/Corporate veil:
Every company is a legal person hence when a company carries on business then the business of company is different from the business of shareholders and company is entirely a different person independent of shareholders. In the following cases the legal personality of company was discussed by the court.

Salomon VS Salomon Co. 1895:
“In this case Salomon had a shoe making business and he started a company to expand his business. The company issued one equity share each to the family members of Salomon and the company issued almost all the equity shares to Salomon. The company also issued 10000 pond secured debentures to Salomon’s family and 7000 pound unsecured debentures to outsiders. The company suffered losses and was liquidated. During liquidation the company claimed that Salomon and his family were different from the company hence their secured liabilities would be paid before the liabilities of outsiders. The court in this case decided that Salomon was different from company and company was a separate legal person so the family members would be paid initially”.
B.F Gajdar Vs CIT: 1955
“In this case court decided that company was a different person from shareholders hence every company must pay its income tax upon its income and shareholders are different person and they must pay income tax on their income”.
Kondoli Tea Company Case: 1886
“In this case some share holders of a company transferred their assets to the company and upon the assets stamp duty was paid. The shareholders argued that the company and shareholders were same persons hence there was no need to purchase stamp papers. Court decided that shareholders and company were different persons hence it was necessary to purchase stamp papers”.
Raja Binoy Kumar Vs CIT:
“In this case Raja Binoy Kumar was the director and shareholder of an agricultural company. The agricultural income was not taxable at that time, it was argued by Raja Binoy Kumar that his income was also agricultural income and is not liable to pay income tax upon it. The court decided that the income was not an agricultural income because he was different from the company. The income of company was agricultural income and Raja Binoy Kumar’s income was dividend income”.
Lee Vs Lee Air Farming Company:
Mr Lee started a company and was M.D and Pilot of the company one day while working for the company he died and his widow claimed compensation by saying that he was different from the company. It was decided that Lee and Co. were two distinct persons so Mr Lee’s widow will get the compensation.


In exceptions company and shareholders are taken as same person this process is known as lifting of corporate veil. There are two types of exceptions in which the corporate veil is lifted.
  • Judicial Exceptions:- These are framed by court.
  • Statutory Exceptions:- These are given in law.

Judicial Exceptions:
Determination of character:
In Daimler Co. Vs Continental tyre and rubber company court decided that during war time, if the shareholders of the company are from the enemy country then the company is also considered as enemy and corporate veil is lifted.
Revenue Purpose:
In Dinshaw Manekji Case the company was created to evade tax. The shareholders of company took loan from the company and later on company claimed bad debts. The court decided that company and directors and shareholders are same persons and the shareholders were liable to pay tax on their income.
In Golford Motors Vs Hornay a person made an agreement for sale of some property to some other person after that he did not want to sell it due to price rise, so the person transferred the property to company. Court in this case decided that the co. And the person was same and the purpose was to commit fraud.
Labour Welfare:
In Workmen Vs A R Ind. Ltd company did not pay bonus to workers and it was decided by court that directors were personally liable for non payment of bonus. Hence for labour welfare purpose directors of a company are personally liable.
Economic Offences:
In Shantanu Ray vs UOI, company committed some offences regarding foreign currency. It was decided by court that when economic offences like smuggling is committed then directors are personally liable.
Illegal Purpose:
In PNB finance ltd vs S P jain it was decided by court that when company was formed to take a loan from PNB then directors are personally liable when the same was misused.
Contempt of Court:
In Joti Ltd Vs K K Baseen, the co. Did not fulfil the orders of court, the court imposed fine on Joti Ltd and it was further decided that the directors of Joti ltd were personally liable.
Sham Company:
In DDA Vs Skipper Construction Co. the company had given advertisements in the newspapers for construction of residential flats for sale, but the co. did not have any land for construction of building. Court in this case decided that co. had committed fraud and directors were personally liable for the fraud.

Statutory Exceptions:
Statutory Exceptions are those exceptions in which directors and shareholders of accompany are considered as same person as company, these exceptions are given in law (companies act and other laws). Following are the statutory exceptions:
                Reduction in membership: Section 45
If the number of members of a company is reduced below the limit of minimum numbers then company must increase the number of members to the minimum limit. If the company does not increase the number of members within six months then after six months the directors and remaining members are personally liable.
                Misdescription of name of company: Section 147
When the directors of a company make any agreement then they must write the name of the company correctly and if the name of company is written incorrectly then directors will be personally liable for such contract.
             Fraudulent Business: Section
When the directors commit fraud in any business then directors are personally responsible for such fraud.
Holding and Subsi Companies: Section 4
When a holding company has a subsidiary company then while preparing the books of accounts their accounts are prepared combined and both the companies are treated as single person.
             Misstatement in prospectus Section 62 and 63
When prospectus is issued by the company then any misstatement in prospectus then directors of company are personally liable for the misstatement and penalties are imposed upon them.
             Failure to return application money: Section 69
When prospectus is issued then shares must be allotted to the applicants otherwise their money is refundable. If the application money is not refunded then the directors of company are personally liable for the repayment of application money.
             Investigation of company Section 239 and Investigation of ownership Section 247:
When investigations are conducted in any company then the company and its directors are considered as same persons. So during investigation the personality of company is ignored.
             Liability for Ultra Vires Transactions:
When the directors of a company do some work beyond their powers then directors are personally liable for such work.             
             Liability under other laws:
When the other laws mention that the directors will be personally liable for offences then the legal personality of company is not relevant.

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