1. What is a company?
• Meaning – It is an artificial person created by a process of law. It has a
perpetual succession and a common seal.
• Sec 2 (20) of the Companies act 2013 defines a company as
“Company means a company incorporated under this Act or under
any previous company law”
► A Company is a voluntary association of persons formed for the
purpose of doing business, having a distinct name and limited liability.
► Artificial Person- having no body or soul
2. Characteristics of a company
1. A company is considered as a SEPARATE LEGAL ENTITY from its
members, who can enter into a contract with the company as well. The
company’s money and property belong to the company and not to the
shareholders
3. Facts of the case : Salomon Vs Salomon
• Salomon transferred his business of boot making, initially run as a
sole proprietorship, to a company (Salomon Ltd.), incorporated with
members comprising of himself and his family. The price for such
transfer was paid to Salomon by way of shares, and debentures
having a floating charge (security against debt) on the assets of the
company. Later, when the company’s business failed and it went into
liquidation, Salomon’s right of recovery (secured through floating
charge) against the debentures stood prior to the claims of unsecured
creditors, who would, thus, have recovered nothing from the
liquidation proceeds.
4. • To avoid such alleged unjust exclusion, the liquidator, on behalf of the
unsecured creditors, alleged that the company was sham(fake), was
essentially an agent of Salomon, and therefore, Salomon being the
principal, was personally liable for its debt.
• It was held that the existence of a company is quite independent and
distinct from its members and that the assets of the company must
be utilized in payment of the debentures first in priority to unsecured
creditors.
5. Characteristics
2.Limited Liability – Limited by shares or limited by guarantee
3.Perpetual succession: Death of the member is not the death of the
company
4.Common Seal - having a legal personality, it can be bound by only those
documents which bear its signature. Therefore, the law has provided for the
use of common seal, with the name of the company engraved on it, as a
substitute for its signature.
5.Transferability of shares – The capital of the company is divided into shares
which are easily transferable
6.Separate Property – Co. is capable of owning, enjoying and disposing of
property in its own name.
7.Capacity to sue – A company can sue and be sued in its corporate name.
6. Lifting the corporate veil
As the company is a separate legal entity, it has been provided with a
veil, compared to that of individuals who are managing the company.
But if the court feels that such veil has been used for any wrongful
purpose, the court lifts the corporate veil and makes the individual
liable for such acts which they should not have done in the name of the
company.
7. Circumstances to lift the corporate veil…
The corporate veil can be lifted either under the
• ► Statutory provisions or
• ► Judicial interpretations
The statutory provisions are Provided under the Companies Act, 1956
The other circumstances are decided through Judicial interpretations,
which are based on facts of each case as per the decisions of the court
8. Statutory exceptions
• Reduction in members- Less than seven in public company and less
than two if it is a private company for more than six months.
• Failure to refund application money - Failure to refund application
money after the issue of shares to the public, the company has to pay
back the initial payment to the unsuccessful applicants (SEBI
Guidelines- 130 Days), if they fail to do so, the corporate veil can be
lifted.
• Mis-description of companies name - While signing a contract if the
company’s name is not properly described, then the corporate veil
can be lifted.
9. • Fraudulent Conduct- In case the company is carried on with an intent
to defraud the creditors, then the court may lift the corporate veil.
• Holding and subsidiary companies- A subsidiary has a distinct legal
entity from the holding company other than in a few circumstances,
so if otherwise shown, the court may under the Act , lift the
corporate veil of the subsidiary company.
10. Judicial interpretations
• When the court feels that there are no statutory provisions which can
pierce the corporate veil, and the identity of the company is not the
one which has to exist, and the court has to interfere in order to avoid
the activities that are done in the name of the company by persons
managing them, it has been empowered to do so…… The
circumstances are…..
11. • ► Protection of Revenue- When ever a company uses its name for
the purpose of tax evasion or to circumvent tax obligations
• ► Prevention of fraud or Improper conduct- The incorporation has
been used for fraudulent purpose, like defrauding the creditors,
defeating the purpose of law etc..
• ► Determination of the character of the company- Enemy company
or all the members being the citizens of the enemy country. (Daimler
Co. Ltd V. Continental Tyre & Rubber Co. Ltd)
• ► Where the company is a sham
• ► Company avoiding legal obligations.
12. • ► Company acting as an agent or trustee of the shareholders.
• ► Avoidance of welfare legislation.
• ► Protecting public policy.
