Salomon V Salomon & Co Ltd. • Aron Salomon was specialized in manufacturing leather boots. By 1892,. Salomon incorporated his business as a Limited Liability Company, Salomon & Co. Ltd. • Minimum required seven share holders were Mr. Salomon, his wife, daughter and four sons. Two of his sons became directors; Mr. Salomon was managing director and two sons, directors. Salomon owned 20,001 of the company's 20,007 shares, and other share holders one each. • Mr. Salomon sold his business to the new corporation for almost £39,000, of which £10,000 was a debt to him.
Salomon V Salomon & Co ltd - liquidation. • When the company went into liquidation, the liquidator argued that the debentures used by Mr. Salomon as security for the debt were invalid, on the grounds of fraud. • The judge, Vaughan Williams J. accepted this argument, ruling that since Mr. Salomon had created the company solely to transfer his business to it, the company was in reality his agent and he as principal was liable for debts to unsecured creditors.
Salomon v Salomon – in brief Trade Creditors SALOMON £10,000 SALOMON LTD DEBENTURES BUSINESS 6 Shares 20001 Shares Salomon’s wife and 5 children SALOMON sole Proprietor The Companies Act 1862 required 7 shareholders
Assets & liabilities - Salomon Ltd Secured Creditors (Salomon) Aron Salomon Ltd’s Assets Unsecured Creditors (trade) Shareholders
The Appeal • The Court of Appeal also ruled against Mr. Salomon: • Mr. Salomon had abused the privileges of incorporation and limited liability, • which the Legislature had intended only to confer on "independent bona fide shareholders, who had a mind and will of their own and were not mere puppets". • The Lords Justices of Appeal described the company as a myth and a fiction and said that the incorporation of the business by Mr. Salomon had been a mere scheme to enable him to carry on as before but with limited liability.
The House of Lords held: • The company was duly constituted in law. • The 1862 Act created limited liability companies as legal persons separate and distinct from the shareholders. • "Either the limited company was a legal entity or it was not. If it were, the business belonged to it and not to Mr Salomon. If it was not, there was no person and no thing to be an agent [of] at all; and it is impossible to say at the same time that there is a company and there is not.“ • Though after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands received the profits, the company is not the agent of the shareholders or trustee for them. Nor are they liable in any shape or form, except as provided for by the Act.
Meaning • The word ‘company’ is derived from the Latin (‘com’ =with or together; ‘panis’= bread), and originally referred to an association of persons who took their meals together. • In the leisurely past, merchants took advantage of festive gatherings, to discuss business matters. • Now a days business matters have become most complicated and cannot be discussed at length on festive gatherings.
Development of Indian Company Law • The first Companies Act was passed in India in 1850. • The amending act of 1857 conferred the right of registration with or without limited liability. • The Companies Act, 1956 repealed all the previous Acts and is in force at present. • The Companies Bill, 2009 is introduced in the LokSabha: • (a) to revise and modify the existing Act • (b) to delete redundant provisions and regroup the provisions • (c) to re-wrie various provisions for easy interpretation; and • (d) to adapt to the changing economic and technical environment.
What is a Company ? • Company is a voluntary association of persons • formed for the purpose of doing business • having a distinct name and limited liability. • It is a juristic person having a separate legal entity distinct from the members who constitute it, • capable of rights and duties of its own and endowed with the potential of perpetual succession. • Sec. 3(1)(i) of The Companies Act, 1956, states that 'company' includes company formed and registered under the Act or an existing company i.e. a company formed or registered under any of the previous company laws.
Bodycorporate • A company is a corporate body. • The word corporation is derived from the Latin term ‘corpus’ which means ‘body’ • Company is called a body corporate because the persons composing it are made into one body by incorporating it according to the law and clothing it with legal personality, and so turn it into a corporation. • Section 2(7): "body corporate" or "corporation" includes a company incorporated outside India but does not include-(a) a corporation sole; (b) a co-operative society registered under any law relating to co-operative societies; and(c) any other body corporate not being a company as defined in this Act which the Central Government may, by notification in the Official Gazette, specify in this behalf;
Corporation • Corporation is legal person created by the process other than natural birth. It is for this reason something called artificial legal person. • As a legal person, this corporate being is capable of enjoying many of the rights, and incurring many of the liabilities of a natural person- a human being. • But the company is not merely a legal institution. It is rather a legal device for the attainment of any social or economic end. It is therefore a combined political, social, economic and legal institution.
Characteristics of a Company. • Separate Legal Entity • Limited Liability. • Perpetual Life. • Common Seal • Ownership of property. • Transferability of shares. • Separate ownership and Management • Capacity to sue and be sued. • Company though a legal person is not a citizen either under the Constitution of India or under the Citizenship Act. This has been the conclusion of a special bench of the Supreme Court in State Trading Corpn. Of India Ltd. v CTO AIR 1963 SC 1811.
Separate Legal entity The importance of the separate entity was firmly established in Salomon v. Salomon & co. Ltd.(1897) A.C. 22. Tata Engineering and Locomotive Co Ltd. v State of Bihar, AIR 1965 SC 40 “ The corporation in law is equal to a natural person and has a legal entity of its own. The entity of the corporation is entirely separate from that of its shareholders; it bears its own name and has a seal of its own; its assets are separate and distinct from those of its members” Lee v Lee air Farming Ltd (1960) All ER 429 PC: Lee, a qualified pilot held all but one of the shares in the company. He was appointed the governing director of the company and chief pilot. He was killed while piloting the company’s aircraft. His widow’s claim of compensation was opposed on the ground that Lee was not a worker, as the same person cannot be employer and employee. Held that there was a valid contract of service between Lee and the company and so Lee was a worker.
Limited Liability The liability of the members of the company is limited to the face value of shares held by him. They are liable to pay only the uncalled money due on shares held by them called upon to pay and nothing more, even if liabilities of the company far exceeds its assets. Unlimited Liability: a. Section 45 : if the members are reduced below the statutory minimum and the Co carries on business for more than 6 months, the members who are aware of the fact of such reduction, shall be personally liable for the debts contracted during that time. b. S. 542: If in the course of winding up it appears that the company was carried on to defraud creditors, the court may declare the defaulting parties to be personally liable.
Perpetual succession. “King is dead. Long live the King.” A company does not die or cease to exist unless it is wound up or the task for which it was formed has been completed. Membership of a company may keep on changing from time to time but that does not affect life of the company. Death or insolvency of member does not affect the existence of the company. “ Even where during war all the members of a private company, while in general meeting was killed by a bomb, the company survived; not even a hydrogen bomb could have destroyed it” Principles of Modern company law, Grower LCB. [ Meat Supplies (Guildford) Ltd; (1966) 3 All E.R.320]
Common Seal. • The company acts through its agents (Board of Directors , directors, employees etc) for carrying out its activities. • Common seal is considered to be the official signature of the company to bind the company. The name of the company must be engraved on the common seal • The common seal is affixed on important documents such as share certificates etc. • Articles usually provide regulations relating to the use of common seal, and it should be affixed in the manner provided in the Articles.
Ownership of Property • The company’s property is its own . It can own and dispose off its property in its own name. • A member cannot claim to be owner of the company’s property during the existence • Macaure v Northern Assurance Co Ltd.Macaure held all but one share of the company and advanced substantial sum to it. Insurance claim on Timber destroyed by fire was rejected since he had insured the same in his personal name. Held: rejection of claim valid. • Bacha F Guzdar v CIT Bombay -AIR (1955) SC 74: Mrs. Guzdar claimed exemption form Income tax on dividends from her Tea company since the company is doing Agricultural activity as is exempted from Tax to that extent. Held: Share holder is not the part owner of the company or its property and he is only given certain rights to vote, attend meetings, to receive dividends etc
Transferability of shares • S. 82 - Shares in a company are freely transferable in the manner provided in the Articles of the company. • In a Private Limited company, some restrictions are there on transfer, but the right to transfer is not taken away. • No shareholder is permanently or necessarily wedded to a company. • When a member transfers his shares to another person, the transferee steps into the shoes of the transferor and acquires all the rights of the transferor in respect of those shares.
Ownership and Management • A company is managed by the elected representatives of the shareholders, the Board of Directors. • Since company ownership is separate from the share holders, share holders cannot manage the company by virtue of their shareholding. • On legal and practical grounds, the Management is on elected representatives of the share holders. • Legal provisions are made for the protection of the rights of shareholders and creditors.
Capacity to sue and be sued. • The company may sue or be used in its own name. RajendraNathDutta v ShibendraNathMuhkerjee – (1992) 52 CC 293 Cal : A lease deed was executed by the directors of the company without the seal of the company.A suit was filed by the directors to avoid the lease on the ground of fraudulent alteration of the lease deed by the defendants. Admittedly, the lease deed was executed by one the directors and the company accepted rent. Held: If company was aggrieved, it was the company which was to file a suit and not the directors. Therefore the suit was not maintainable. Bank Nationalisation case - R. C Cooper v Union of India AIR (1970) 1 SCC 564 : where the legislative measures directly touch the company of which the petitioner is a shareholder, he can petition on behalf of the company, if by the impugned action, his rights are also infringed.. It is, therefore, to be noted that an individual rights is not lost by reasons of the fact that he is a shareholder of the company.
Illegal association • As per Sec. 11, not more than 10 persons can carry on any banking business and not more than 20 in case of any other business, unless the association is registered under the Companies Act or any other law. • If not, it is an illegal association except: • A Joint Hindu Family business. But where two or more Joint Hindu families form a partnership, the total number of members (excluding Minors) cannot exceed 10 or 20 as the case may be. • Any association of charitable, religious, scientific trust which is not formed with a profit motive • Foreign companies. • An illegal association cannot enter into any contract, sue or can be sued. The members are personally liable. They are also punishable.
The corporate Veil • The basic principle, that the company is a distinct legal entity from its members, is regarded as a curtain or a veil between members of the company and the Public. • In case of dishonest and fraudulent use of the facility of incorporation, the law lifts the corporate veil and indentifies the persons who are behind the scene and are responsible for the perpetration of fraud. • The corporate veil cannot be lifted to see the identity of the persons behind it except in a few exceptional circumstances/situations, which have developed over a period of time through judicial pronouncements.
Lifting the corporate Veil • to determine whether, it is an enemy company; Daimler Co Ltd v Continental tyre co. (1916)2 A.C 307 HL German nationals residing in Germany floated a company in London for trading in tyres manufactured in Germany. On a suit for recovery of debit filed by the company during I world war, the defendant argued that if the debts are repaid , it will amount to trading with enemy. Held that a company will be regarded as having enemy character, if the persons having de facto control of its affairs are resident in an enemy country, or wherever they may be, are acting under instructions from or on behalf of the enemy. • If it is used for evasion or to circumvent tax obligation; In re DinshawManeckjee Petit – AIR (1927) Bom 379: To avoid surtax, a rich person formed four companies, in which he was majority shareholder. The companies made investments and whenever dividends were received, he availed loans from the company and never repaid.
Lifting the corporate Veil - 2 • when it is formed to defeat or circumvent law or defraud creditors or to avoid legal obligations; Gilford Motor Co v Horne - (1933)1 Ch935: A sold his business to B and agreed not to compete with him for a given number of years. A formed a Private Limited company with majority share holdings and re-entered the business. In a suit fied by B, the court granted injunction restraining a and his company from going ahead with the competing business. • where the companies are in relationship of holding and subsidiary companies; The court may, on the facts of the case, treat a subsidiary company as merely a branch or department of one large undertaking owned by the holding company. [Firestone Tyre & rubber co v Llewellin – (1957) 1 WLR464 HL& LIC of india v Escorts (1986)comp LJ 91]
Lifting the corporate Veil - 3 • by implying in certain cases that the company is an agent or the trustee of its members; There may be an express agreement or agreement may be implied from the facts of the particular case. • a shareholder has lost the privilege of limited liability; eg. Reduction of membership below Statutory minimum, misrepresentation of company name etc. Hendon v Adieman (1973) New LR 637: the directors of L and R Agencies Ltd, signed a cheque in the name f the company stating the company’s name as ‘L.R. Agencies Ltd. Held tht they are personally liable for not properly mentioning the name of the company. • Violation of the laws relating to foreign exchange control
Lifting the corporate Veil - 4 • where the corporate entity is used for a fraudulent purpose; D D A v Skipper Construction Co. (P) Ltd. (1996) 4 Comp. LJ 233 (SC: The company failed to pay the purchase price of a plot to DDA. Construction started and space sold to various persons. Two sons of directors who had business of their own s claimed that they had separated from the father and their companies had nothing to do with the properties of their parents. In the absence of proof, it was held that the transfer of shareholding between the father sons must be treated as sham. The fact aht the director and members of his family had created several corporate bodies did not prevent the court from treating all of them as one entity belonging to and controlled by the director and his family. • where the corporate shield was blatantly used to disobey the orders of the Court wilfully.
Public Limited Company A company defined under section 3(1)(iv) of the Companies Act, 1956 is a public company which: - • is not a private company; • has a minimum paid-up capital of Rs. 5 lakhs or such higher capital as may be prescribed; • is a private company but subsidiary of a public company. • Minimum number is members is 2 (7 in case of public Companies) – S. 12
Private Limited Company Section 3(1)(iii) defines a private company as one which— (a) has a minimum paid-up share capital of Rs. 1 Lakh or such higher capital as may be prescribed; and (b) by its Articles of Association: • restricts the right to transfer its shares; • limits the number of its members to 50 which will not include:- A. members who are employees of the company; and B. members who are ex-employees of the company and were members while in such employment and who have continued to be members after ceasing to be employees; • prohibits any invitation to the public to subscribe for any shares or debentures of the company; and • prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.
Privileges of Pvt Ltd. Company • The companies Act 1956, exempts private Limited companies from the application of various sections of the Act. • Thus certain restrictions as applicable to Public companies are not applicable to Private companies and hence these provisions are considered as Privileges. • The annexure contains a list of certain such privileges. • The list is not exhaustive. Privileges of a Private Limited company.
Deemed Public Limited company. • A private company shall automatically become the public company under any one of the following circumstances:- • Where at least 25% of the paid up share capital is held by one or more bodies corporate. • Where the annual average turnover during the period of three consecutive financial years is not less than Rs 25 crores. • Where not less than 25% of the paid up capital of a public company limited is held by the private company. • Where a private company accepts deposits after the invitation is made by advertisement or renews deposits from the public (other than from its members or directors or their relatives).
Incorporation. • The process of incorporation can be divided into 4 stages: a) Promotion b) Registration or incorporation c) Capital Subscription d) Commencement of Business. • As regards a private company, it needs to go through the first two stages only. As soon it receives the certificate of incorporation, it can commence business. • Public Company has to go through all of the four stages.
Promotion. • Preliminary steps taken for the purpose of registration and floatation of the company. • entire process by which a company is brought into existence. • starts with the conceptualization of the birth a company and determination of the purpose for which it is to be formed. • Promoters: Persons who conceive the company and invest the initial funds. He may be any person competent to contract. • Person acting in the professional capacity do not thereby become promoters.eg. CAs, Advocates, etc, giving professional assistance. • They usually enter into contract to acquire some property or right for the company, which is yet to be incorporated. Such contracts are called Pre-Incorporation or Preliminary contracts.
Pre incorporation contracts The promoter is having the following duties:- • not to make any secret profit out of the promotion of company. • make full disclosure to the company of all relevant facts including to any profit made by him in transaction with the company. • In case of default on the part of the promoter in fulfilling the above duties, the company may :- • Rescind or cancel the contract made and if he has made profit on any related transaction, that profit also may be recovered • Retain the property paying no more for it then what the promoter has paid for it depriving him of the secret profit. • If these are not appropriate, the company can sue him to for breach of trust. Damages upto the difference between the market value of the property and the contract price can be recovered from him.
Promoters - Rewards. A promoter may be rewarded by the company for his efforts, in any way, including the following :- • Company pay some remuneration for the services rendered. • The promoter may make profits on transactions entered by him with the company after making full disclosure. • He may sell his property for fully paid shares in the company after making full disclosures. • He may be given an option to buy further shares in the company. • The promoter may be given commission on shares sold. • The articles of the Company may provide for fixed sum to be paid by the company to him.
Duties of Promoters • Fiduciary duties- • Disclosure of personal profits – Erlanger v. New Phosphate Co. (1878)3AppCas1218(HL) • Disclosure of any interest received by the promoter. • Failure to disclose the interest of the promoter in a transaction with the company, it is voidable at the option of the company. • Promoters are compelled to account for and pay back the secret profits • The company may also rescind the contract
Promoters - Liabilities • If the promoter fails to disclose the profit made by him in course of promotion or knowingly makes a false statement in the prospectus whereby the person relying on that statement makes a loss, he will be liable to make good the loss suffered by that other person. • The promoter is liable for untrue statements made in the prospectus. A person who subscribes for any shares or debenture in the company on the faith of the untrue statement contained in the prospectus can sue the promoter for the loss or damages sustained by him as the result of such untrue statement.
Steps for Formation • Selection of type of the company. • Selection of name for the proposed company. • Apply for Directors Identification Number and Digital Signatures, if does not have • Drafting of Memorandum and Articles of Association. • Stamping, digitally signing and e-filing of various documents. • Payment of Fees. • Obtaining Certificate of Incorporation. • Preparation and filing of Prospectus/Statement in lieu of Prospectus and e-Form 19/20 (in case of public companies). • Obtaining Certificate of Commencement of business (Public Co)
Certificate of incorporation • If the Registrar is satisfied that the requirements as per the Act have been complied with, he shall register the MOA, AOA and other documents and issue the Certificate of incorporation. • On registration, the company comes into existence. • Certificate of incorporation is the birth certificate. • It is conclusive evidence that all the requirements of the companies Act in respect of registration and of matters precedent and incidental thereto have been complied with. Jubilee cotton mills Ltd. V. Lewis, (1924) A.C. 958, On 6th January, the necessary documents were delivered to the registrar and two days after, the registrar issued the certificate dated it 6th January instead of 8th. On 6th January, shares were allotted to Lewis before issue of certificate of incorporation . Held, as per certificate of incorporation, company was formed on 6th January and, therefore, the allotment of shares was valid.
Commencement of Business A Public Limited Company having share capital has to obtain a separate certificate of commencement of business aperS.149(2A) 1. If a company has share capital and has issued a prospectus:- • Shares up to the amount of minimum subscription must be allotted. • Every director has paid to the company on each of the shares, which he has taken the same amount as the public has paid on such shares. • No money is or may become payable to the applicants of shares or debentures for failure to apply for or to obtain permission to deal in those shares or debentures in any recognized stock exchange. • A statutory declaration in Form 19 signed by one director or the employee - company secretary or a Company secretary in whole time practice that the above provisions have been complied with must be filed. • If a company has share capital but has not issued a prospectus: • It must file a statement in lieu of prospectus with the Registrar of Companies • Condition ‘b’ and ‘d’ above to be complied with. e.
Memorandum of Association • Section 2(28) of the Companies Act, 1956 defines the term 'Memorandum' to mean the Memorandum of Association of the company as originally framed or as altered from time to time in accordance with the provisions of the Act. • The Memorandum is the charter of a company, which defines the ambit of the operations and the business to be carried on by the company. It is the basic document in the constitution of a company. • The main purpose of the Memorandum is to lay down the objects for which a company is formed.
Contents of Memorandum • Name clause: ending with ‘Limited’ or ‘Private Limited’. • Domicile clause: Registered office of company- which state. • Objects clause: the activities which a company can carry on. • Main objects of the company to be pursued by the company. • Objects incidental or ancillary to the attainment of the main objects • Other objects of the company not included above. • In case of the companies other than trading corporations whose objects are not confined to one state, the states to whose territories the objects of the company extend must be specified. • Liability clause: Limited by shares or guarantee etc. • Capital clause: The authorised Capital of the company. • Association clause: Declaration by 2/7 members. • Witness:, date and stamping.
Doctrine of Ulravires. • ‘Ultra vires’ means beyond the powers. • Company is legally restrained from pursuing other purposes which are ultra vires or beyond its powers • Limits the legal capacity of a company in fulfilling the objects with which it was incorporated. • Transactions outside the scope of the powers specified in the objects clause of the MOA and are not incidentally or necessary to the attainment of objects is ultra-viresand hence void. • No rights and liabilities on the part of the company arise out of such transactions and it is a nullity even if all members agree. • The Members cannot ratify an ultra viresact.
Consequences of Ulravires act. • The company cannot sue for enforcement of any of its rights. • No person can sue the company for enforcement of its rights. • The doctrine does not apply in the following cases :- • If an act is only ultra-vires of powers the directors • If an act is ultra-vires the articles of the company but it is intra-vires of the memorandum, the articles can be altered to rectify the error. • If an act is intra vires, but is irregularly done, shareholders can validate. • In case of ultra-vires borrowing or acquiring of the property under an ultra-vires contract, then the third party has right to follow his money or property, if it exist as it is, and obtain an injunction from the Court restraining the company from parting with it. • The lender of the money to a company under the ultra-virescontract has a right to make director personally liable. • Directors are personally liable to the company also.
Ultra vires - Cases. Ashbury Railway Carriage and Iron Co. v Riche (1875) LR 7 HL 653. The object of the company was "to make and sell, or lend on hire, railway carriages and wagons and all kinds of railway plant, fittings, machinery and rolling stock and to carry on the business of mechanical engineers and general contractors; to purchase, lease, work and sell mines, minerals, lands and buildings; to purchase and sell any such materials on commission or as agents; to acquire, purchase, hire, construct or erect works or buildings for the purpose of the company and to do all such other things as are necessary, contingent or conducive to all or any of such objects." The company contracted for the financing of the construction of a railway line in Belgium. Held that the contract was ultra viresthe company and observed that the Memorandum "states affirmatively the ambit and extent of vitality and power which by law are given to the corporation and it states negatively that nothing shall be done beyond that ambit and that no attempt shall be made to use the corporate life for any other purpose than that which is so specified."
Ultra vires - Cases. Dr. A. LakshmanaswamiMudaliar v LIC of India (1963) 33 CC 420 (SC). An ultra vires act cannot be ratified even by whole body of shareholders. RajendraNathDutta v ShibendraNathMukherjee (1982) 52 CC 293 (Cal). The execution of a document by the managing directors, without the common seal, is an ultra viresact and a subsequent resolution cannot ratify. Universal Mutual Aid & Poor Houses Association Ltd., In re (1934) 4 CC 256 (Mad). A contract, which is ultra viresthe company, is no contract at all. Bell Houses Ltd. v City Wall Properties Ltd. (1966) 36 Comp Cas 87 (QB). A contract which, is ultra viresthe company is void and can be so pleaded even by defendant sued by the company on it Madras Native Permanent Fund Ltd., In re (1931) 1 Comp Cas 256 (Mad) The ultra viresborrowings do not create the relationship of debtor and creditor
Alteration of Memorandum • Where a new object does not come within the purview of the Memorandum, • the company can, in the circumstances mentioned in section 17 of the Act, • first get the approval of the shareholders by a special resolution in a general meeting • subject to the condition that such objects will enable the company to achieve any of the purposes specified in sub-section (1) of section 17 and • get certificate for amendment in the Object Clause from the Registrar of Companies.
Alteration of MOA - Purpose A company may, by special resolution, alter the provisions of its Memorandum so far as may be required to enable it:- (a) to carry on its business more economically or more efficiently; (b) to attain its main purpose by new or improved means; (c) to enlarge or change the local area of its operations; (d) to carry on some business which under existing circumstances may conveniently and advantageously be combined with the business of the company; (e) to restrict or abandon any of the objects specified in the Memorandum; (f) to sell or dispose of the whole, or any part of the undertaking, or of any of the undertakings of the company; or (g) to amalgamate with any other company or body of persons. - S.17(1)
Articles of Association. • Contains the rules, regulations and bye-laws for internal management of the company. • It need to be registered along with the memorandum. • It is a contract between the shareholders and the company; and between the members interse • AOA is subordinate to the MOA and must not conflict with MOA or the provisions of the Act or any other law. • The companies which must have AOA (S.26) • Unlimited companies • Companies limited by guarantee • Private company limited by shares • Not mandatory for public companies