COMPANY LAW

Sumit Tak

Assistant Professor

DES’ Shri. Navalmal Firodia Law College, Pune

� Concept, Nature and Meaning of Company �

� �Historical origin of company law in India and important definitions under the Company Act, 2013 � �

Historical Origin of Company Law in India

Colonial Era (Pre-Independence)

• East India Company
• The first concept of a "company" in India emerged with the East India Company, established under a Royal Charter in 1600.
• It operated with sovereign powers, blending corporate and administrative roles.
• Joint Stock Companies Act, 1850
• India’s first company law legislation was modeled after the UK’s Joint Stock Companies Act, 1844.
• It introduced the concept of registering companies.

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• Indian Companies Act, 1866
• Replacing earlier legislations, this act consolidated provisions and made it mandatory for companies to register.
• Indian Companies Act, 1913
• Based on the English Companies Act, 1908, this act governed companies in India for several decades and introduced the concept of private and public companies, directors' duties, and shareholder rights.

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Post-Independence Era

• Indian Companies Act, 1956
• After independence, this comprehensive legislation replaced the 1913 act.
• It regulated the formation, functioning, and dissolution of companies.
• The act underwent several amendments over the years to address the evolving business environment.
• Companies Act, 2013
• The Companies Act, 2013, replaced the 1956 Act to address modern business needs.
• It introduced several new provisions, including mandatory CSR (Corporate Social Responsibility), the concept of a one-person company, enhanced disclosure requirements, and strict compliance mechanisms.

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Characteristics of Company�

• Company as a Legal Person
• A company is considered a "legal person" in the eyes of the law.
• It can own property, enter into contracts, sue, and be sued in its name.
• A company exists independent of its members or shareholders.

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• Salomon v Salomon & Co. Ltd. (1897)
• Salomon v Salomon & Co. Ltd. is a landmark decision in corporate law that established a company as a separate legal entity from its shareholders.
• Shoe manufacturer Aaron Salomon incorporated his business under the UK Companies Act 1862, transferring it to a company in which he held most of his shares and debentures.
• When the company faced insolvency, the liquidator argued that the company was merely Salomon’s agent, seeking to hold him personally liable for its debts.
• However, the House of Lords ruled in Salomon's favour, stating that once incorporated, a company becomes a separate legal entity regardless of its ownership structure.
• The decision reinforced the doctrine of corporate personality and limited liability, ensuring that shareholders' personal assets are protected from the company's liabilities.
• It also established the precedent that courts will respect the corporate veil unless there is evidence of fraud or improper conduct.
• The case has had a profound impact on corporate law globally, making incorporation a safe and attractive business model.

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• Separate Legal Entity
• A company is distinct from its members. This principle means the company's debts and obligations are its own, not those of its members.
• Even if all shareholders die, the company continues to exist.
• Shareholders are liable only to the extent of their shares; personal assets are not at risk.

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• Lee v Lee’s Air Farming Limited (1961)
• Lee v Lee’s Air Farming Limited is a landmark decision in corporate law, confirming the principle that a company is a separate legal entity from its shareholders, even if one person has significant control.
• Lee, the sole shareholder, director and chief pilot of his company, had a contractual relationship with the company as an employee.
• After his death in a workplace accident, his widow sought compensation under the Workers' Compensation Act.
• The court held that Lee was both an employer (as the company's controlling shareholder and director) and an employee (as the company's pilot), because the company was a separate legal person capable of contracting with him.
• This decision reinforced the doctrine of corporate personality established in Solomon v Solomon & Co. Ltd., emphasizing that a company and its controlling shareholder are separate entities, even in terms of sole ownership and management.

• Perpetual Succession
• Perpetual succession is a defining characteristic of a company, which signifies its continued existence, regardless of changes in its membership or management.
• The death, bankruptcy, or retirement of members does not affect the existence of the company, as it is a separate legal entity from its members.
• This characteristic ensures the continuity and stability of the business, allowing the company to carry out its operations without interruption.
• “Members may come, members may go, but the company continues forever,” is a legal formula that appropriately describes this principle, emphasizing the enduring nature of the company despite the turnover of its human elements.

• Common Seal
• The common seal was traditionally used as the official signature of the company on documents requiring authentication.
• With the Companies (Amendment) Act, 2015, the use of a common seal is no longer mandatory, as the signature of authorized officials suffices.
• Companies that still opt for a common seal use it for legal and official purposes, such as signing deeds.

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• Limited Liability
• Shareholders' liability is limited to the unpaid amount on their shares (if any).
• Creditors cannot claim more than the company’s assets; personal assets of members are protected.
• Types of Limited Liability:
• Limited by Shares: Liability is restricted to the amount unpaid on shares held.
• Limited by Guarantee: Members' liability is confined to the amount they guarantee to contribute in the event of liquidation.

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� �Doctrine of Corporate Veil � & �Lifting up of Corporate Veil��

The doctrine of corporate veil

• The doctrine of corporate veil emerged as part of the broader development of corporate law, particularly with the recognition of companies as separate legal entities.
• Its historical evolution is closely tied to landmark cases and legislative developments, primarily in England, which influenced corporate jurisprudence worldwide.
• In the early days of corporate law, businesses operated primarily as partnerships, where members had unlimited liability.
• The concept of limited liability and separate legal personality began to take shape in the 19th century with the enactment of statutes like the Joint Stock Companies Act, 1844 and the Limited Liability Act, 1855 in the UK.
• These laws allowed businesses to incorporate and provided a legal framework for recognizing companies as distinct legal entities.

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• The doctrine of corporate veil is a fundamental principle of company law in India, derived from common law jurisprudence and codified through statutory provisions in the Companies Act, 2013.
• It upholds the concept that a company, upon incorporation, becomes a separate legal entity, distinct from its shareholders, directors, and employees.
• This doctrine ensures that the company can own assets, incur liabilities, and sue or be sued in its own name, while protecting the personal assets of its shareholders through limited liability.
• Salomon v. Salomon & Co. Ltd. (1897)
• This landmark case established the concept of corporate personality and the sanctity of the corporate veil.

• Lifting the Doctrine of Corporate Veil
• The doctrine of corporate veil establishes that a company is a separate legal entity distinct from its shareholders, directors, and employees.
• However, in certain circumstances, courts or statutory provisions allow for lifting the corporate veil.
• This means disregarding the company’s separate legal personality to hold its members, directors, or controllers personally liable for the company’s actions or debts.
• Lifting the corporate veil is an exception to the general rule, applied to prevent misuse of the corporate structure for fraudulent, illegal, or unjust purposes.

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• Fraud or Improper Conduct
• When a company is used to commit fraud or avoid legal responsibilities, courts may ignore its separate legal personality.
• Tax Evasion
• If the corporate structure is employed to evade taxes, authorities can look beyond the company to its members.
• Agency Relationship
• When a company is deemed to be acting as an agent for its shareholders.
• Statutory Exceptions
• Certain laws, like environmental regulations or labour laws, may explicitly allow for lifting the veil.

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• Gilford Motor Co. Ltd. v. Horne (1933)
• This case is an example of the corporate veil being lifted to prevent the evasion of legal obligations.
• Horne, a former employee of Gilford Motor Co., was contractually prohibited from soliciting its clients after leaving the company.
• To circumvent this restriction, he formed a company to solicit clients indirectly.
• The court pierced the corporate veil, ruling that the company was a mere façade to avoid the contractual obligations, and restrained Horne and his company from soliciting Gilford's clients.

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• Daimler Co. Ltd. v. Continental Tyre & Rubber Co. (1916)
• During World War I, the corporate veil was pierced to identify the true ownership and control of a company.
• Continental Tyre & Rubber Co., a UK-registered company, was found to be controlled by German nationals, making it an enemy entity under wartime regulations.
• The court ruled that the company’s nationality could be determined by the identity of its controllers, and its separate legal personality was disregarded in the interest of national security.

� �Difference between company and others forms of business organizations � �

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