What is Company?

Form of association to carry on the business. Business can be carried out through partnership, or
sole partnerships, LLP, co-operative society, HUF, company.

Company is a dominant business organization.Ffr

Company is an entity which comes in three ways through 1. Charter 2. Registration 3. Statute.

Charter –e.g., East India Company. Now we do not have Charter companies.

By Registration – When the companies has been registered under the companies Act, it becomes a
legal entity.

Statute – LIC, FTI – parliament has made a law and by virtue of that they came into existence.

Companies Act, 2013 – Companies registered under this companies act or previous companies act.

These companies need to follow certain rules and regulations.

1. It is an incorporated association – So for this you need members. So a public company, at least 7
members are required. If the company is a pvt company – 2.

Company is an artificial person i.e. the origin of the company is by virtue of law.

UK High Court has declared river Ganga as an artificial person.

In a certain case, even rats were declared as artificial person. They were directed to leave a certain
piece of agricultural land and occupy another land – but those rats will be protected.

A person has rights and obligations, similarly a company also has rights and obligations.
When companies come into existence – they become a separate legal entity. The company is
different from the members. The asset of the company is different from that of its members and vice
versa.

Solomon vs Solomon, 1897

There was a leather merchant Mr. Solomon. He used to manufacture shoes and sell in market.
Business as sole proprietor. His business was in profit. He one day registered one company. He
became MD and wife, daughter and 4 sons became members (7 members).

Some money was given as cash and the rest was given as security. One it was transferred. The
company then went into loss.
The Company’s liability was more than the asset. Company gave Solomon 8k. Other members went
to the court and said company is nothing but Solomon so he should give money to everybody else.

Why Solomon filed a case against the company? READ ABOUT THE ENTIRE CASE

Solomon’s claim was a secured claim and for the other members was an unsecured claim.

Solomon got the money from money then why did he still file a suit in the court?
 This is another case

Then he became director of the company and also employed himself as a pilot.

One day he was flying the aircraft and met with an accident.
Company denied compensation.

Went to court – Court said Court is different from Company so the company is entitled is liable to
pay the compensation for the deceased husband

LIMITED LIABILITY

Company’s liability is unlimited. So if there is loss. Then the company’s assets were be sold off. But
the member’s properties are safe.

SEPARATE PROPERTY

Company can have a separate property in its name.

Macuara vs Nortern association case

Case – transferred the timber to company. Went to insurance – insured in his name. Then timber
was destroyed by fire. Insurance company denied that you are not the owner of the timber,
company is the owner. Court- the contention of the company was upheld and he was denied
insurance money. Had the timber being registered in the company’s name then he could have got it.
COMMON SEAL

Because the company is an artificial person and can’t sign, thus it requires a common seal wherein
company’s name and number is given.

Under Articles of association, if directors have a right even they can sign on company’s behalf.

Perpetual Existence

A company once formed will never die. Dhirubhai Ambani die but Reliance still remains.

Lifting the corporate

1. Separate legal entity – The company is different from members and the company.
There is a thin line between company and members. The veil distinguishes the company from the
person. This veil is known as corporate veil. The company is incorporated for doing any business or
any act which is prohibited by law or to escape the liability. The company is created by the person –
the people, the members. In order to ascertain the true facts, the true intention why the company
has been incorporated. The court lifts the veil meaning that it ignores the separateness between the
members and the company.

There are two circumstances wherein the veil of the company can be lifted by the company. 1.
Statutory provisions – the directors and the other person responsible will get the punishment.

2. Judicial cases – Court has said that the veil of the company can be lifted. For e.g. when the person
is trying to escape his liability for not paying the revenue.

Case – In Re Dinshaw Manik jee Patel

What happened? Dinshaw Manik jee (A) – a very rich person, having huge property. He did nothing
for his living. Due to huge property – living life king size. One day – state govt enacted a statute – if
any person has property valuing more than 100 Rs he will come under the purview of this statute
and has to give certain revenue to the state. A came under this and he had to give revenue. He
incorporated 4 companies. A,B,C,D. He divided the property equally among these 4 companies. 25
each. He did not have anything now, and all companies below 25 and they did not come under the
purview of the statute. The companies invested this very money and whatever they gained – profit
was given as a loan to Mr. A and again he had the money which he never returned to the company
and no interest was also not given. No tax paid.

Court - These companies were incorporated by A because he did not want to pay tax to the govt. So
court treated that the property of the company is property of A.

The intention has to be seen if it is wrong – then the veil can be lifted.

PIERCING THE CORPORATE VEIL

2 types of person – one who dies due to scarcity of food.

Other person dies because the other person has a lot and dies out of jealousy
Gilforde vs Horne

Horne left the company – cannot carry out the same business and solicit the customers of the
company.

So one day he created a company – wife member but he did not become MD or member. But he did
audit, financial statements, what company has to do, did not has to do.

Gilfrde company wanted the court to lift the veil – so it was horne same as company. So court said
that there is breach of contract and directed Horne not to carry out such business and give
compensation to Gilforde.

Lipman vs Jones

A and B – They had a sale agreement. C got to know and asked A to give it to him, I will give you 5
times more. A incorporated a company and then he transferred the property to company and then
sold to C.

B went to court – Property was transferred to company after the sale agreement which is wrong and
court ordered A to give the property to B.

Enemy character of a company

Legal person – Company enjoys certain rights.

Company is a person but not a citizen.

Company can have nationality.

So company has FR but not the ones not enjoyed by non-citizens.

So in which article – it says no person – company yes

In the articles – citizen – company NO.

Tyre company – A German company. B – English company. All the members of company B were
German citizens.

1st World War –

Incorporation of the company

1. Promotion of the company

2. Registration of the company – then it becomes a separate legal entity

3. Commencement of the company

IDEA – to do business in certain activities in that field – then decide whether LLP, Partnership or
corporate entity etc. So a person who promotes the company is a promotor. Person who brings
company into existence and conceives the idea is called promotor. He does each and every thing to
bring the company into existence. Whatever work he does in order to bring the company into
existence is called promotion of the company.

Once the company comes into existence – no relation between the promotor and the company. He
can become the director of the company or hand over to another director but not related.
So then why he incorporated his company ? Because he’s not the director – but the directors are
under his control and he also gets the profit

relationship between a company and a promoter – It is that of an agency. There should be two
parties in existence.

So company and promoter is fiduciary relationship which is based on faith, trust & confidence
wherein promotor is going to do for the company then it is for the benefit of the company and
promotor would not be having any secret profit – he has to tell the directors.

SHORT

What is a company?

Characteristics:

1. Separate Legal Entity - Solomon v. Solomon (At a time either there can be an existence of
company or not. If it is in existence by the act, then it is a legal entity with its own business but not
belonging to Salomon and if a Company is not in existence in reality, then it is just a myth or fiction
and there is no point to work as an agent by the company) , Lee v. Lee Farming (promoter Lee was
also the employee of the company, his identity was different than that of the company. On his
death, his family deserved compensation under the workman compensation act), Macaura v.
Northern Assurance Co. (insurance taken in the name of the promoter/creditor for timber of the
company)

2. Artificial Person

3. Perpetual Entity

4. Common seal

Lifting the corporate veil OR piercing the corporate veil

1. In Re Dinshaw Manechjee Petit - Avoidance of tax

2. Gilford Motors v. Horne - Company was created to avoid breach of contract and solicit clients.
(Fraudulent conduct)

3. Jones v. Lipman - To try to avoid a specific performance order, the promoter conveyed property to
a company formed for that purpose alone, which he alone owned and controlled. (concealment of
facts/ Fraudulent conduct)

4. Enemy state case: Against public policy

5. Statutory provisions (example cheque bouncing)