Company Law Answer Paper - 1

Ans 1

It is not correct to state that the Companies Act, 2013 does not provide statutory recognition to the
doctrine of lifting of corporate veil and only judicial interpretation disregard the concept of separate
personality.

The Companies Act, 2013 itself contains some provisions in Sections 7(7), 251(1) and 339 which lift the
corporate veil to reach the real forces of action. Section 7(7) of Companies Act, 2013 deals with
punishment for incorporation of company by furnishing false information; Section 251(1) of Companies
Act, 2013 deals with liability for making fraudulent application for removal of name of company from
the register of companies and Section 339 of Companies Act, 2013 deals with liability for fraudulent
conduct of business during the course of winding up.

Ever since the decision in Salomon v. Salomon & Co. Ltd., normally Courts are reluctant or at least very
cautious to lift the veil of corporate personality to see the real persons behind it. Nevertheless, Courts
have found it necessary to disregard the separate personality of a company in the following situations:

(1) Where the corporate veil has been used for commission of fraud or improper conduct. In such a
situation, Courts have lifted the veil and looked at the realities of the situation.(Case Law :Jones vs.
Lipman)

(2) Where a corporate facade is really only an agency instrumentality.(Case Law: R.G. Films Ltd)

(3) Where the conduct conflicts with public policy, courts lifted the corporate veil for protecting the
public policy. (Case Law: Connors Bros. v. Connors)

(4) 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. (Case Law: Daimler Co. Ltd. v. Continental Tyre & Rubber Co.)

(5) Where it was found that the sole purpose for which the company was formed was to evade taxes the
Court will ignore the concept of separate entity and make the individuals concerned liable to pay the
taxes which they would have paid but for the formation of the company.(Case Law : Sir Dinshaw
Maneckjee Petit, Vodafone case)

(6) Avoidance of welfare legislation is as common as avoidance of taxation and the approach in
considering problems arising out of such avoidance has necessarily to be the same and, therefore,
where it was found that the sole purpose for the formation of the new company was to use it as a
device to reduce the amount to be paid by way of bonus to workmen, the Supreme Court upheld the
piercing of the veil to look at the real transaction.(Case Law: The Workmen Employed in Associated
Rubber Industries Limited, Bhavnagar v. The Associated Rubber Industries Ltd., Bhavnagar and another)
(7) Another instance of corporate veil arrived at by the Court arose in Kapila Hingorani v. State of Bihar.

(8) Where it is found that a company has abused its corporate personality for an unjust and inequitable
purpose, the court would not hesitate to lift the corporate veil. Further, the corporate veil could be
lifted when acts of a corporation are allegedly opposed to justice, convenience and interests of revenue
or workmen or are against public interest.

Ans 2

A company is composed of, members, though it has its own separate legal entity. The members of the
company are the persons who, constitute the company as a corporate entity.

In the case of a company limited by shares, the shareholders are the members. The terms “members”
and “shareholders” are usually used interchangeably being synonymous, as there can be no
membership except through the medium of shareholding. Thus, generally speaking every shareholder is
a member and every member is a shareholder. However, there may be exceptions to this statement,
e.g., a person may be a holder of share(s) by transfer but will not become its member until the transfer
is registered in the books of the company in his favor and his name is entered in the register of
members. Similarly, a member who has transferred his shares, though he does not hold any shares yet
he continues to be member of the company until the transfer is registered and his name is removed
from the register of members maintained by the company under Section 88 of the Companies Act, 2013.
A member is a person who has subscribed to the memorandum of association of the company. A
shareholder is a person who owns the shares of the company. The bearer of a share warrant is not a
member, but the bearer of a share warrant can be a shareholder.

Ans 3

“The privilege of limited liability for business debts is one of the principal advantages of doing business
under the corporate form of organisation.” The company, being a separate person, is the owner of its
assets and bound by its liabilities. The liability of a member as shareholder, extends to the contribution
to the capital of the company up to the nominal value of the shares held and not paid by him. Members,
even as a whole, are neither the owners of the company’s undertakings, nor liable for its debts. In other
words, a shareholder is liable to pay the balance, if any, due on the shares held by him, when called
upon to pay and nothing more, even if the liabilities of the company far exceed its assets. This means
that the liability of a member is limited.

For example, if A holds shares of the total nominal value of 1,000 and has already paid Rs.500/- (or 50%
of the value) as part payment at the time of allotment, he cannot be called upon to pay more than Rs.
500/-, the amount remaining unpaid on his shares. If he holds fully-paid shares, he has no further
liability to pay even if the company is declared insolvent. In the case of a company limited by guarantee,
the liability of members is limited to a specified amount of the guarantee mentioned in the
memorandum.
Buckley, J. in Re. London and Globe Finance Corporation, (1903) 1 Ch.D. 728 at 731, has observed: ‘The
statutes relating to limited liability have probably done more than any legislation of the last fifty years to
further the commercial prosperity of the country.

They have, to the advantage of the investor as well as of the public, allowed and encouraged
aggregation of small sums into large capitals which have been employed in undertakings of “great public
utility largely increasing the wealth of the country”.

Ans 4

According to section 3A of Companies Act, 2013, if at any time the number of members of a company is
reduced, in the case of a private company, below two, and the company carries on business for more
than six months while the number of members is so reduced, every person who is a member of the
company during the time that it so carries on business after those six months and is cognisant of the fact
that it is carrying on business with less than two members, shall be severally liable for the payment of
the whole debts of the company contracted during that time, and may be severally sued therefor.

Hence in the given case of CSCARTINDIA Pvt. Ltd., out of the two shareholders X and Y, X sold all his
shares to Y and the company carried on its business activities thereafter, pursuant to the referred
section where the company carries its business for more than six months, Mr. Y shall be severally liable
for the payment of the whole debts of the company contracted after those six months, and may be
severally sued therefor.

Ans 5

The company, though a legal person, is not a citizen under the Citizenship Act, 1955 or the Constitution
of India. In State Trading Corporation of India Ltd. v. C.T.O., A.I.R. 1963 S.C. 1811, the Supreme Court
held that the State Trading Corporation though a legal person, was not a citizen and can act only
through natural persons. Nevertheless, it is to be noted that certain fundamental rights enshrined in the
Constitution for protection of “person”, e.g., right to equality (Article 14) etc. are also available to
company. Section 2(f) of Citizenship Act, 1955 expressly excludes a company or association or body of
individuals from citizenship.