This document provides an introduction to the nature and definition of a company. It defines a company as an artificial legal person created by law for the purpose of carrying out business. The key characteristics of a company include separate legal identity, limited liability for members, transferable shares, perpetual succession, and being managed by a board of directors who are separate from the company's owners. The document also discusses the principle of separate legal entity, which establishes that a company is legally distinct from its members and managers. Exceptions when the court may "pierce the corporate veil" and hold individuals liable for a company's debts are also outlined.

1. LESSON 1
INTRODUCTION- NATURE OF A COMPANY
1.1 DEFINITION AND MEANING OF A COMPANY [Sec.2(20)]
a. Statutory definition : As per Sec. 2(20) of the Companies Act, 2013,
‘company’ means a company incorporated
 under this Act; or
 under any previous company law.
b. As defined by Justice Marshall
 A company is an artificial person.
 It has no physical existence. It is invisible and intangible.
 It exists only in contemplation of law.
c. As defined by Justice James : A company is an association of persons
united for a common object.
d. As defined by Professor Haney : A company is an artificial person
created by law, having –
 separate identity
 perpetual succession
 Common seal.
 As defined by Justice Lindley
 A company is an association of persons
 These persons contribute money or money’s worth to a
common stock.
 The common stock so contributed is denoted in money and is
called as capital of company.
 The persons who contribute the capital are called as members of
the company.
 The capital is employed in some trade or business.
 The members share the profits and losses arising from such
business.
 The proportion of capital to which each member is entitled is called
as his share.
 The shares are always transferable although the right to transfer
is often more or less restricted.

2. 1.2 CHARACTERISTICS OR FEATURES OF A COMPANY (Sec. 7)
May 2004, May 2011:‘Explain clearly the concept of ‘Perpetual Succession’
and ‘Common Seal’ in relation to a company incorporated under the
Companies Act.
1. Incorporated association: A company is formed and registered by
complying with the prescribed formalities prescribed under the Act.
2. Artificial person:
 A company is not a natural person. Consequently, a company
cannot fall ill, or die or be declared as insolvent.
 A company is an artificial person.
 But it is not a fictitious person. A company does exist but only
in the eyes of law. In other words, a company exists only in
contemplation of law.
3. Separate legal entity:
 A company is a legal person in the eyes of law distinct from its
members.
 A company is a separate person having its own rights and
obligations.
 Case References - Salomon v Salomon & Co, Ltd., Lee v Lee’s Air
Farming Ltd.
4. Perpetual Succession:
 In case of death of a member, the shares held by him shall vest in
his legal representative (or his nominee, if a valid nomination exists).
Similarly, in case of insolvency of a member, the shares held by him
shall vest in the official assignee or official receiver, as the case may
be. This is called as transmission of shares. Thus, even in case of
death or insolvency of all the members, the existence of the company
is not affected since transmission of shares shall take place in respect
of the shares held by them, and the company will have new
members.
 Death, insolvency, insanity etc. of any member does not affect the
continuity of the company. Thus, the life of the company does not
depend upon the life of its members.
 It is generally said that ‘members may come and go, but the
company goes on forever’. Thus, a company never dies.

3. 5. Limited Liability:
Nature of company Extent of liability of members
Company limited by shares Amount unpaid on the shares held by
every member.
Company limited by guarantee Amount guaranteed by every
member.
Company limited by guarantee and Aggregate of amount unpaid
on the shares held by a
having share capital member and the amount guaranteed
by him.
Unlimited company Every member is liable to contribute
to the assets of the company until all the debts of the
company are paid in full.
6. Common Seal:
 Common seal is the official signature of the company.
 Any document on which common seal is affixed, is deemed to be
signed by the company.
7. Transferability of shares:
 Shares are movable property (Sec. 44 of the Companies Act,
2013).
 Shares are transferable in the manner provided in articles (Sec. 44
of the Companies Act, 2013).
 Private company - the right to transfer the shares is restricted.
 Public company - shares are freely transferable.
8. Separation of ownership from management:
 The members do not participate in day-to-day affairs of the
company.
 The management of the company lies in the hands of elected
representatives of members, commonly called as Board of
directors or directors of simply the Board.
 The directors are appointed as well as removed by the members.
Thus, the Act has ensured the ultimate control of members over
the company.
9. Separate property:
 A company can own and enjoy property in its own name.

4.  Members are not owners or co-owners of the company’s property.
 Members have no insurable interest in the property of the
company.
Macaura v Northern Assurance Co. Ltd.
 M virtually owned all the shares in a company.
 The timber belonging to the company was insured in the name of M.
 The timber was destroyed by fire.
 The insurance claim was rejected since M had no insurable interest.
10. Capacity to sue and be sued:
 A company can sue others and be sued in its own name.
1.3 PRINCIPLE OF SEPARATE LEGAL ENTITY
Meaning
 A company is a legal entity separate from its members.
 It is known by its own name, has rights and liabilities of its
own.
 Salomon v Salomon & Co. Ltd.
 Transfer of sole proprietorship business to company. Mr.
Salomon was carrying on the business of boot manufacturing as a
sole proprietor. He incorporated a company named Salomon & Co.
Ltd. for the purpose of taking over this business.
 Transfer of sole proprietorship business to company. Mr.
Salomon was carrying on the business of boot manufacturing as a
sole proprietor. He incorporated a company named Salomon & Co.
Ltd. for the purpose of taking over this business.
 Payment of purchase consideration by the company.
(a) Total consideration
£39,000
(b) Cash Paid £
9,000
(c)Fully paid shares of £ 1 each issued to Salomon
£ 20,000
(d) Secured debentures issued to Salomon
£10,000

5.  Constitution of Salomon & Co. Ltd. The 6 members of the
family of Mr. Salomon were issued one share each. Salomon was
the managing director of Salomon & Co. Ltd. Salomon & Co. Ltd.
is commonly called as “one man company’.
 Inability to pay debts by the company in liquidation. In the
course of business, the company borrowed from creditors to the
extent of £ 7,000. Due to trade depression, the company ran into
financial difficulties and eventually went into liquidation. The
assets realised only £ 6,000.
 Contention of unsecured creditors - one man cannot owe
money to himself. The unsecured creditors contended that
Salomon was carrying on business in the name of Salomon & Co.
Ltd. Thus, Salomon and Co. Ltd. was a mere agent for S.
 Decision of the Court. It was held that Salomon & Co. was a real
company fulfilling all legal requirements. It had an identity
different from its members, and therefore, the secured debentures
were to be paid in priority to unsecured creditors.
 Lee v Lee’s Air Farming Ltd.
 Lee was a qualified pilot.
 He virtually owned all the shares and he was the sole governing
director.
 He was also receiving salary from the company for being a chief
pilot under the company.
 He was killed in an air accident while working for the company.
 It was held that Lee’s widow was entitled to compensation.
 Bacha F. Guzdar v Commissioner of Income Tax
 A company was carrying on agricultural business. The income
from agriculture business was exempt from tax.
 A shareholder contended that dividend received by her was also
exempt from tax.
 The Court held that dividend received by a shareholder is not
agricultural income, and so dividend income is liable to be taxed.
 Implications of the Rule of ‘separate legal entity’
 There can be a transfer of property from a member to the
company and vice versa.

6.  A person can be a member, director, employee and creditor of the
company at the same time.
 A company has the rights and duties of its own.
 A company is not an agent of members or directors.
1.4 LIFTING OR PIERCING OF CORPORATE VEIL
Nov. 2004 Some of the creditors of M/s Get (Rich Quick Ltd. have complained
that the company was formed by the promoters only to defraud the creditors
and circumvent the compliance of legal provisions of the Companies Act. In
this content they seek your advice as to the meaning of corporate veil and
when the promoters can be made personally liable for the debts of the
company.
 Meaning of corporate veil : By fiction of law a company is seen as
a distinct entity, yet in reality it is an association of persons who are
in fact the beneficial owners of all the corporate property. This fiction is
created by a fictional veil, i.e., the corporate veil.
 Effect of corporate veil : Only a company is liable for the acts (and
defaults) done in the name of the company, even though members,
directors, or any officer or employee of the company had acted on behalf
of the company.
 Meaning of lifting or Piercing the corporate veil
 Lifting of corporate veil means ignoring the separate identity of
a company.
 Lifting of corporate veil means disregarding the corporate
personality and looking behind the real persons who are in the
control of the company.
 Lifting is permissible only in exceptional cases
 Lifting of corporate veil is permissible only if –
o it is permitted by the Statute, or
o there is a clear evidence of abuse of the device of
incorporation.
 The Court has the discretion whether or not to lift the corporate
veil.
 It is not possible to lay down a specific set of circumstances in
which corporate veil may be lifted.

7. (A) Lifting of corporate veil under statutory provisions
1. Reduction in membership below statutory minimum (Sec. 45)
:
If - the number of members falls below statutory minimum;
- the company continues to carry on business for more than 6
months
Then - the remaining members who are aware of such fact
- shall be personally liable for debts contracted after 6 months.
2. Misdescription of name (Sec. 147)
If - any officer of a company
- signs on behalf of the company any contract or any negotiable
instrument
- but fails to correctly mention the name of the company
Then - he shall be personally liable for the same.
3. Group accounts (Sec. 212) Sec. 212 requires a holding company to
furnish the annual accounts etc. of the subsidiary along with the annual
accounts of the holding company. As a consequence of Sec. 212, a subsidiary
company is seen as an agent of the holding company.
4. Fraudulent trading (Sec. 542).
 If in a winding up
 it appears to the Court
 that the business of the company has been carried on with intent
to defraud its creditors or any other person,
 the Court may declare
 that any of the directors or officers who are parties to the fraud
 shall be personally liable.
5. Arrears of tax (Sec. 179 of the Income Tax Act, 1961)
 In case a private company
 is being wound up, but
 any tax payable by the company cannot be recovered,
 then, every person who was a director at any time during the
relevant previous year
 shall be jointly and severally liable for the payment of tax.

8. 6. Ultra Vires Acts : The directors of a company shall be personally liable for
all the ultra vires acts done by them on behalf of the company.
(B) Lifting of corporate veil under judicial decisions
1. Protection of revenue : Re, Sir Dinshaw Maneckjee Pettit
 An assessee was receiving huge dividend and interest income on
certain investments.
 He formed four private companies. The whole of the investments
were transferred to these private companies.
 The interest and dividend received by these companies were
within the exempted limits under the Income Tax Act of that time.
 These companies did not have any business or asset except these
investments.
 The income received on investments by these companies was
diverted to the assessee in the form of pretended loans, which
were never paid back by him.
 The Court held that the only purpose of incorporating these private
companies was to evade taxes. Each of these companies was a
sham. Therefore, income earned by all these private companies
was treated as the income of the assessee.
2. Prevention of fraud or improper conduct : Gilford Motor Co.
Ltd. v Horne
 An employee entered into a contract with his employer that he will
not solicit the customers of the employer after leaving the
employment.
 After leaving the employment, the employee incorporated a
company. He, his wife and one other person were the only
members of this company.
 The company started soliciting the customers of the employer.
 The Court held that the purpose of formation of the company was
to avoid a legal obligation arising from a contract, which was not
permissible.
 Therefore the company was restrained from soliciting the
customers of the employer.

9. 3. Determining the character of the company - whether an enemy
company : Daimler Co. Ltd. v Continental Tyre & Rubber Co. Ltd.
 A company was formed in England for the purpose of selling tyres
made by a German company. The German company virtually held
the entire share capita! of the English company. All the directors
were German residents.
 During the First World War, the English company commenced an
action to recover a trade debt from another English company.
 It was held that the corporate personality of the company be
ignored and the persons in the ultimate control of the company
shall be considered. Since the persons controlling the company
were enemies, the suit was not maintainable.
4. Check avoidance of welfare legislation : Workmen employed in
Associated Rubber Industries Ltd. v Associated Rubber Industries Ltd.
 As per Bonus Act, 1965, the basis of payment of bonus is the
profits earned.
 A company was earning huge profits. The company incorporated
a subsidiary company and transferred some valuable investments
to it.
 The subsidiary company did no business, and had no assets except
the investments transferred to it.
 Looking at the purpose of formation of the subsidiary, the Court
lifted the corporate veil. It was held that the subsidiary was
formed merely for the purpose of reducing the liability of bonus
payable under the Bonus Act. Therefore the profits earned by the
subsidiary company were held to be the profits of the holding
company.
May 2008 Whether the existence of a company comes to an end where
all the members die (Sec. 34)
CL-1 ABC Pvt. Ltd., Company is a Private Company having five
members only. All the members of the company were going by
car to Mumbai in relation to some business. An accident took
place and all of them died. Answer with reasons, under the
Companies Act, whether existence of the company has also
come to the end?

10. Ans.
The existence of the company does not come to an end
 since the existence of the company does not depend upon the life
of any or all the members of the company;
 since the existence of the company can come to an end only in
accordance with the provisions of law, viz. dissolution of the
company;
 since one of the characteristics of the company is ‘perpetual
succession’.
CL-2 Nov. 2008 Consequences where out of seven members of a
public company, shares of one member are purchased by
another member (Sec. 45)
A public limited company has only seven shareholders, all the shares being
fully paid-up. All the shares of one such shareholder are sold by the court in
an auction and purchased by another shareholder. The company continues to
carry on business thereafter. Discuss the liabilities of the shareholders of the
company under the Companies Act.
Ans.
The remaining 6 members are personally liable for debts of the
company
 since the number of members has reduced below statutory
minimum, viz. 7;
 provided the company continues to carry on business for more
than 6 months.
 However, only such of the remaining 6 members shall be liable
who were cognisant of the fact of reduction in number of
members;
 The members shall be liable only for such of the debts as have
been incurred by the company after a period of 6 months.
CL-3 June 2009 Whether the corporate personality of a company can
be ignored where the company is formed for the purpose of
avoiding tax liability?
F, an assessee, was a wealthy man earning huge income by way of dividend
and interest. He formed three Private Companies and agreed with each to

11. hold a bloc of investment as an agent for it. The dividend and interest income
received by the company was handed back to F as a pretended loan. This way
F divided his income into three parts in a bid to reduce his tax liability.
Decide, for what purpose three companies were established? Whether the
legal personality of all the three companies may be disregarded?
Ans.
The three companies were established : for the purpose of avoiding tax
liability, and not for any legitimate purpose.
The legal personality of all the three companies shall be disregarded
: since, on similar facts, it was held in Re, Sir bins haw Maneckjee Pettit that
each of these three companies was a sham, and therefore, income earned by
all the three companies was to be treated as the income of the assessee.
CL-4 May 2010 Whether the members of the company are liable for
loan taken by the company? (Sec. 45)
UMC Limited has only 7 shareholders having fully paid-up shares. On 30th
April, 2009, all the shares of X (a shareholder of the company) are sold to y
(another shareholder of the Company) in an auction by the order of the court.
Z, (a shareholder of the company) was in USA for a business trip from January
and thus he was not aware of the developments. The company continues to
carry on its business thereafter. In December, 2009, the company borrowed
a sum of Rs. 5 Lac from the Unique Bank. Later, the company was wound up
and the Assets of the company were not sufficient for the payment of its
Liabilities. The Bank filed a suit against y and Z for recovery of the said loan
from them. Decide the Liabilities of y and Z under the provisions of Companies
Act. Would your answer be the same, if the said loan was taken in the month
of March, 2009?
Ans.
Y is personally liable for loan taken from Unique Bank
 since the number of members has reduced below statutory
minimum, viz. 7;
 since the company continues to carry on business for more than
6 months.
 since Y is cognisant of the fact of reduction in number of members;

12.  since loan from Unique Bank was taken by the company after 6
months of the date the number of members was reduced below 7.
Z is not personally liable for loan taken from Unique Bank : since Z
was not cognisant of the fact of reduction in number of members, as he was
not in India.
Limitation on liability of y and Z : Y shall be liable only for such of the
debts as have been incurred by the company after a period of 6 months, viz.
after 31.10.2009.
Y shall not be personally liable :
 if the loan was obtained by the company in March, 2009,
 since the personal liability u/s 45 arises only for such of the debts
as are incurred by the company after a period of 6 months from
the date of reduction in number of members below statutory
minimum.
1.5 IS COMPANY A CITIZEN?
 A company is not a citizen : Citizenship under the Citizenship Act is
available only to an individual. Therefore, no company can be a citizen
of India.
 No rights of citizens : The Constitution of India grants certain
fundamental rights to citizens. Since a company is not a citizen, the
fundamental rights which are available only to a citizen, are not
available to a company.
 A company has other fundamental rights : The Constitution of India
grants certain fundamental rights to every person, whether a citizen or
not. Thus, a company registered in India can enjoy all the fundamental
rights which are available to all persons.
1.6 MANDATORY USE OF ‘LIMITED’ OR ‘PRIVATE LIMITED’ (Sec. 4)
Mandatory use of ‘limited’ or ‘private limited : Every company shall use,
at the end of its name,
 the words ‘private limited’ - if it is a private limited company
 the word ‘limited’ - if it is a public limited company

13. 1.7 PUNISHMENT FOR IMPROPER USE OF ‘LIMITED’ OR
‘PRIVATE LIMITED’ (Sec. 453)
Conditions for using the word ‘limited’ or ‘private limited’ : No person
shall use the word ‘limited’ or ‘private limited’ as the last word(s) of the name
or title under which he carries on business unless the following conditions are
satisfied:
(a) The association is a company as defined u/s 2(20) of the Companies
Act, 2013.
(b) Such company is a limited company.
Fine for contravention: For every day of contravention: Minimum Rs. 500
and Maximum Rs. 2,000.
Corresponding Section of the Companies Act, 1956: Sec. 631 of the
Companies Act, 1956 contained the provisions relating to punishment for
improper use of ‘limited’ or ‘private limited’. Sec. 631 stands repealed (Not
Applicable for Exams).
1.8 ILLEGAL ASSOCIATION
 In order to prevent the mischief arising from large trading undertakings
being carried on by large fluctuating bodies so that persons dealing with
them did not know with whom they were contracting, the law has put a
ceiling on the number of persons constituting an association or
partnership. An unincorporated company, association or partnership
consisting of large number of persons has been declared illegal. Rule 10
of Companies (Miscellaneous) Rules, 2014 prescribes 50 persons in this
regard.
 By virtue of section 464 of the Companies Act, 2013, no association or
partnership consisting of more than such number of persons as may be
prescribed shall be formed for the purpose of carrying on any business
that has for its object the acquisition of gain by the association or
partnership or by the individual members thereof, unless it is registered
as a company under this Act or is formed under any other law for the
time being in force. The number of persons which may be prescribed
under this section shall not exceed 100.

14.  Section 464 of the Act does not apply to the case of a Hindu undivided
family carrying on any business whatever may be the number of its
members. However, this section is also not applicable to an association
or partnership, if it is formed by professionals who are governed by
special Acts. Since, the law does not recognize it, an illegal association:
(i) cannot enter into any contract;
(ii) cannot sue any member, or outsider, not even if the
company is subsequently registered;
(iii) cannot be sued by a member, or an outsider for recovery of
any debts;
(iv) cannot be wound up by an order of the Court. In fact, the
Court cannot entertain a petition for its winding up as an
unregistered company, for if it did, it would be indirectly
according recognition to the illegal association (Raghubar
Dayal v. Sarafa Chamber A.I.R. 1954 All. 555).
 However, an illegal association is liable to be taxed [Kumara Swamy
Chattiar v. Income Tax Officer (1957) I.T.R. 457].
 The members of an illegal association are individually liable in respect
of all acts or contracts made on behalf of the association; they cannot
either individually or collectively, bring an action to enforce any contract
so made, or to recover any debt due to the association [Wilkinson v.
Levison (1925) 42 T.L.R. 97].
 Under sub-section (3) of section 464, every member of an illegal
association shall be punishable with fine which may extend to one lakh
rupees and shall also be personally liable for all liabilities incurred in
such business.
 Applicability of Section 464 to LLPs
This section will not be applicable to LLPs as they are incorporated as
bodies corporate under LLP Act.