Company Law
Companies Act 1956
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.
Exceptions:
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.
Fraud:
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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