COMPANY LAW

UNIT-I
INTRODUCTION AND CONCEPT
• ‘COMPANY’
• HISTORICAL DEVELOPMENT, NATURE AND CHARACTERISTICS OF COMPANY
• KINDS OF COMPANY
• CORPORATE PERSONALITY
• LIMITED LIABILITY
• LIFTING UP OF CORPORATE VEIL
• PROMOTERS: DUTIES AND LIABILITIES
 UNIT-II
INCORPORATION
• PROCEDURE OF INCORPORATION
• CERTIFICATE OF INCORPORATION
• MEMORANDUM OF ASSOCIATION
• ARTICLE OF ASSOCIATION
• DOCTRINE OF INDOOR MANAGEMENT
• PROSPECTUS
 UNIT-III
MANAGEMENT AND CONTROL OF COMPANIES
• BOARD OF DIRECTORS: POWERS AND FUNCTIONS
• DISTRIBUTION OF POWERS BETWEEN BOD AND GENERAL MEETING DIRECTORS
• APPOINTMENT, QUALIFICATION AND POSITION OF DIRECTORS
• TYPES OF DIRECTORS
• POWERS AND DUTIES OF DIRECTORS
• REMUNERATION OF DIRECTORS
• REMOVAL OF DIRECTORS
• MEETINGS 0F BOARD AND COMMITTEES: KINDS OF MEETINGS; PROCEDURES RELATED TO
CONVENING AND PROCEEDINGS AT GENERAL AND OTHER MEETINGS
• RESOLUTIONS
• PREVENTION OF OPPRESSION AND MISMANAGEMENT
• CORPORATE SOCIAL RESPONSIBILITY
 UNIT- IV
FINANCIAL STRUCTURE OF COMPANY: SOURCES OF CAPITAL
• SHARES, TYPES, ALLOTMENT, TRANSFER OF SHARES
RIGHTS & PRIVILEGES OF SHAREHOLDERS
DIVIDENDS: DECLARATION AND PAYMENT OF DIVIDENDS; PROHIBITION OF BUY BACK
PRIVATE PLACEMENT
• DEBENTURES: FLOATING CHARGE
• APPOINTMENT OF DEBENTURE TRUSTEE & THEIR DUTIES
• KINDS, REMEDIES OF DEBENTURE HOLDERS
• REDEMPTION
• ACCEPTANCE OF DEPOSIT BY COMPANIES
• CHARGE ON ASSETS
 UNIT-V
RECONSTRUCTION AND AMALGAMATION AND WINDING UP
• CONCEPT, JURISDICTION AND POWERS OF COURTS & NCLT
• VESTING OF RIGHTS AND TRANSFER OF OBLIGATIONS
• TAKEOVER AND ACQUISITION OF MINORITY INTEREST
• WINDING UP: CONCEPT, MODES OF WINDING UP, WHO CAN APPLY, PROCEDURE
UNDER DIFFERENT MODES.
 COMPANY
• ‘COMPANY’: Imply an association of persons for some common object(s): economic and non-
economic objectives
• A voluntary association of persons who have come together for carrying on some business and
sharing the profits therefrom.
• 2 main types of organisations for such associations: PARTNERSHIP under Indian Partnership
Act, 1932 and LLP Act, 2008, and COMPANY under the Companies Act, 2013.
• Exist on the basis of law of agency; each partner becoming an agent of the other(s), a small body
of association having trust and confidence in each other. The same cannot be applied on a large
body of association with fluctuating membership, thus require a more elaborate organisation
which ideally should confer corporate personality on the association as distinct from the
members; to have rights, duties and responsibilities separate from that of its members.
DEFINITION
COMPANIES ACT, 2013 DOES NOT DEFINE A COMPANY BUT MERELY:
Section 2(20) of the act defines a company to mean a company incorporated under this act or under any previous
company law.
LORD JUSTICE LINDLEY: “A company is an association of many persons who contribute money or monies
worth to a common stock and employed in some trade or business and who share the profit and loss arising
therefrom. The common stock so contributed is denoted in money and is the capital of the company. The persons
who contribute to it or whom it pertains, are members. The proportion of capital to which each member is
entitled is his share. The shares are always transferable although the right to transfer is often more or less
restricted.”
CHIEF JUSTICE MARSHALL: “A corporation is an artificial being, invisible, intangible, existing only in
contemplation of the law. Being a mere creation of law, it possesses only the properties which the Charter of its
creation confers upon it, either expressly or as incidental to its very existence.”
A company to which the Companies Act applies comes into existence only when it is registered under the Act.
Upon registration, a company becomes a body corporate, ie., it acquires a legal personality of its own, separate
and distinct from its members.
PROF. HANEY: “A company is and ariificial person created by law, having separate entity, with a perpetual
succession and common seal.”
• G V PRATAP REDDY THROUGH TSR RESEARCH (P) LTD VS. KVVSN ASSOCIATES
NIT By Telangana required bidders to be either individual/company; it would mean a company as under
companies act, thus not inclusive of a firm; thus rejected (SC)
CHARACTERISTICS OF A COMPANY
• Incorporated Association
• Legal Entity distinct from its members
• Artificial Person
• Limited Liability
• Separate Property
• Transferability of Shares
• Perpetual Succession
• Common Seal
• INCORPORATED ASSOCIATION
A Company to be incorporated or registered under the Act.
Section 3: FORMATION OF COMPANY
(1) A Company must be formed for any lawful purpose by-
(a) 7 or more persons, where the company to be formed is a public company;
(b) 2 or more persons, where the company to be formed is a private company; or
(c) one person, where the company to be formed is a One Person Company, that is to say, a
private company,
by subscribing their names or his name to a memorandum and complying with the requirements of
this Act in respect of registration.
• LEGAL ENTITY DISTINCT FROM ITS MEMBERS
Company is capable of enjoying rights and of being subject to duties which are not as same as those
enjoyed by its members.
The company is not the agent of subscribers or trustee for the members in law. Nor are the members
liable, in any shape or form, except to the extent provided by the Act.
Kondoli Tea Co. Ltd., Re ILR(1886) : Tea estate transferred to a company; claimed exemptions on
duty as they themselves were the shareholders in the company. Calcutta High Court observed: “The
company was a separate person, a separate body altogether from the shareholders and the transfer was
as much a conveyance, a transfer of the property, as if the shareholders had been totally different
persons.”
Amit Products (India) Ltd. Vs Chief Engineer, (O and M) Circle (2005) 127 Comp. Cas. 443 (SC)
By changing the members of Board of Directors or by changing shareholding pattern, a company does
not become different legal entity.
K S MOTHILAL VS. K S KASIMARIS CERAMIQUE (P) LTD. (2003) 113 COMP. CASE. 562
(MAD.)
A shareholder is an investor and he will be entitled to participate in the profits of the company in
which he holds shares as and when the company declares,…and that apart, the shareholder has got a
further right to participate in the assets of the company, which would be left over after winding up,
but not in the assets as a whole.
B F GULZAR Vs. CIT (1955) 25 Comp. Cas. 1(SC): Thus, a company can own property and deal
with it the way it please. No member can either individually or jointly claim any ownership rights in
the assets of the company during its existence or on its winding up.
Rajendranath Dutta Vs. Shibendranath Mukherjee (1982) 52 Comp. Cas. 293 (Cal), it was held that
for any wrong done, the company must sue or be sued in its own name. It was observed that as the
company distinct from its shareholder and/or directors, the company if aggrieved by some wrong
done to it, must sue or contrarily be sued in the name of the company.
• SOLOMON VS. SOLOMON & CO. LTD. (1897) AC 22
Leather merchant who converted his business into a limited company consisting of himself, his wife
and his 5 children as members. The company purchased the business of Solomon for 39,000 Euros.
Company ran into loss within 1 year and the liquidation process initiated. Assets of the company
insufficient to discharge the debentures (held by himself), leaving nothing for unsecured creditor.
The House of Lords unanimously held that the company had been validly constituted as the Act
required only seven members holding at least one share each. It nothing mentioned about the
independence in the constitution of the company. Thus, the company to be differentiated from the
shareholders; the business belonged to the company and not to Solomon. Solomon was its agent, but
the company was not the agent of Solomon.
LEE VS LEE AIR FARMING LTD. (1960)3 ALL. ER 420 (PC)
‘L’ formed a company with a share capital of 3000 pounds, of which 2999 was held by ‘L’. Sole
governing director. In his capacity as the controlling shareholder, ‘L’ exercised full and unrestricted
control over the affairs of the company. ‘L’ appointed as the chief Pilot of the company and drew
salary for the same. He was killed in an accident while piloting the company’s plane. Workers
entitled for compensation in case of death or injury. Question: Being the sole governing director of
the company, can ‘L’ also be a worker in the company and claim of compensation?
Held: No change in the contractual obligations. If the company was a legal entity, there was no
reason to change the validity of any contractual obligations which were created. The contract does
not negate because ‘L’ was an agent of the company, and therefore, entitled to compensation claim.
Chiranjilal Chaudhari Vs. UOI (1951) 21 Comp. Cas. 33 (SC): Supreme Court held that a company
has a fundamental right to own a property and in the event of any infringement of such a right, it is
the company itself which can bring an action and not the shareholders. It was observed that it is
settled law that in order to redress a wrong done to the company, the action should prima facie be
brought by the company itself.
H S SIDANA VS. RAJESH ENTERPRISES (1993) 77 COMP. CAS. 251 (P&H)
When a court has issued a decree in respect of sum due against a company, the same cannot be enforced
against its managing director. It was held that the liability to discharge the decretal amount was that of the
company and not of its managing directors, unless the court concludes that the managing director was
personally liable to discharge the decretal amount.
CHAMUNDEESWARI VS. COMMERCIAL TAX OFFICE, VELLORE RURAL (2007) 78 SCL 151
(MAD.)
It was held that a company being a legal entity by itself, any dues from company have to be recovered only
from company and from its directors.
ARTIFICIAL PERSON
The company, though a juristic person, does not possess the body of a natural being. It exists only in the
contemplation of law. Being an artificial person, it has to depend upon natural persons, namely, the
directors, officers, shareholders, etc., For getting its various works done. However, these individuals only
represent the company and accordingly whatever they do within the scope of the authority conferred upon
them and in the name and on behalf of the company, they bind the company and not themselves.
LIMITED LIABILITY
One of the principal advantages of trading through the medium of a limited company is that the members
of the company are only liable to contribute towards payments of its debts to a limited extent.
If the company is limited by shares, the shareholder’s liability to contribute is measured by the nominal
value of their shares and the premium, if any.
If a company is unable to pay the debts, its creditors may petition the court to wind it up. If a winding-up
order is made, a liquidator is appointed to administer its affairs, and if he realises insufficient amount to
pay its debts by selling its assets, he calls upon its shareholders to make good the deficiency, but their
liability to do so is limited.
Unlimited liability of a member of a limited liability company: 2017 Amendment: section 3a, in case, the
number of members of a company is reduced that the minimum requirement, and the company carries for
more than 6 months from then; shall be severally liable for the payment of the whole debt.
• SEPARATE PROPERTY
BACHA F GUZDAR VS. COMMISSIONER OF INCOME TAX (1955) AIR 740: The Supreme Court
held that a shareholder is not the part owner of the company or its property, he is only given certain rights
by law, for example, to vote or attend meetings, or receive dividends.
Macaura Vs. Northern Assurance Company Ltd (1925) AC 619: Member does not even have an insurable
interest in the property of a company. In this case, Macaura held all except on share of timber company. He
had also insured the company’s timber in his own name. On timber being destroyed by fire, his claim was
rejected for want of insurable interest. The Court observed that: “No shareholder has any right to any item
of property owned by the company for he has no legal or equitable interest therein.”
• TRANSFERABILITY OF SHARES
Section 44 declares that “the shares, debentures or other interest of any member in a company shall be
movable property, transferable in the manner provided by the articles of the company”.
A shareholder can transfer his shares to any person without the consent of other members. Restrictions,
even on public companies can be put, but not altogether stop it. The Act allows ‘Right of First Offer’ and
‘Right of First Refusal’ for both public and private company ie., rights of the existing members to be
offered first.
• PERPETUAL SUCCESSION
Company being an artificial person cannot be incapacitated by illness and it does not have an allotted
span of life. Being distinct from its members, the death, insolvency or retirement of its members does not
affect the company.
• COMMON SEAL
A company being an artificial person is not bestowed with a body of a natural being. It has to work
through the agency of human beings, namely, the directors and other officers and employees of the
company.
The common seal is a seal used by a corporation as the symbol of its incorporation.
As per section 22, a company may, under its common seal, if any, through general or special power of
attorney empower any person to execute deeds on its behalf in any place either in or outside india. It
further provides that the deed signed by such an attorney on behalf of the company and under his seal
where sealing is required, shall bind the company.
 LIFTING OF THE CORPORATE VEIL
• The business of the artificial person is always carried on by, and for the benefit of, some individuals. Thus,
some humans are the real beneficiaries of the corporate advantages. Thus, a corporate entity may be used to
commit frauds or improper or illegal acts. Since an artificial person is not capable of doing anything illegal
or fraudulent, the façade of corporate personality have to be removed to identify the persons who are really
guilty.
Cotton Corporation of India ltd. Vs G C Odusumathd (1999) 22 SSL 228 (Kar.)
HC held that the lifting of the corporate veil of a company as a rule is not permissible in law unless otherwise
provided by clear words of the statute or by very compelling reasons such as where fraud is needed to be
prevented or trading with enemy company is sought to be defeated.
As to when the corporate veil shall be lifted, the SC in Life Insurance Corporation of India Vs. Escorts
Ltd. (1986) 59 Comp. Cas. 548
“While it is firmly established ever since in Solomon Vs. Solomon &Co. Ltd., that a company is an
independent and legal personality distinct from the individuals who are its member, it has since been held
that the corporate veil may be lifted, the corporate personality may be ignored and the individual members
recognised for who they are in certain exceptional circumstances. Generally and broadly speaking, the
corporate veil may be lifted where the statute itself contemplates lifting the veil or fraud or improper
conduct is intended to be prevented, or a taxing statute or a beneficent statute is sought to be evade or
where associated companies are inextricably connected as to be, in reality, part of one concern.
It is neither necessary not desirable to enumerate the classes of cases where lifting the veil is permissible,
since that must necessarily depend on the relevant statutory or other provisions, the object sought to be
achieved, the impugned conduct, the involvement of the element of public interest, the effect on parties
who may be affected, etc.”
STATE OF UP VS. RENUSAGAR POWER CO. (1991) 70 COMP. CAS. 127
SC observed: the concept of lifting of corporate veil is a changing concept. The veil of corporate
personality, even though not lifted sometimes, is becoming more and more transparent in modern
jurisprudence. It is high time to reiterate that, in the expanding horizon of modern jurisprudence, lifting of
corporate veil is permissible, its frontiers are unlimited. But it must depend primarily on the realities of
the situation.
The circumstances under which the court may lift the corporate veil:
a. Under statutory provisions
b. Under judicial interpretations
UNDER STATUTORY PROVISIONS:
The corporate veil may be lifted under the express provisions of the Act. The Companies Act, 2013
provides for certain cases in which the directors or members are held personally liable along with the
company.
a. Mis-statements in prospectus (section 34 & 35)
b. Failure to return application money (section 39)
c. Misdescription of name (section 12)
d. Punishment for contravention of section 73 or 76
e. For facilitating the task of an inspector appointed under section 210 or 212 or 213 to investigate the
affairs of the company (sec 219)
f. For investigation of ownership of company (section 216)
g. Fraudulent conduct (section 339)
h. Liability for ultra vires acts
i. Liability under other statutes
a. Mis-statement in the prospectus
In case of misrepresentation in a prospectus, the company and every director, promoter, expert and every
other person, who authorised such issue of prospectus shall be held liable to compensate the loss or
damage to every person who subscribed for shares on the faith of the untrue statements made. (Section
35)
Persons may also be punished with imprisonment for a term which shall not be less than 6 months but
which may extend to 10 years and shall also be liable to fine which shall not be less than the amount
involved in the fraud (Section 34 r/w 447).
b. Failure to return application money (Section 39)
In case of issue of shares by a company to the public, in case of under subscription from as stated in the
prospectus within 30 days of issue of prospectus, or such period specified by SEBI, as per Rule 11 of
companies (Prospectus and Allotment of Securities) Rules, 2014, the application money shall be repaid
within 15 days from the closure of the issue and in case of non-payment, the directors of the company
who are officers in default shall jointly and severally be liable to repay that money with interest
@15%/annum. Default leads to Rs. 1000/day with such default extended to Rs. 1 lakh.
c. Misdescription of Name (section 12)
As per Section 12, a company shall have its name printed on hundies, promissory notes, bills of
exchange and such other documents as may be prescribed. Thus, where an officer of a company and such
other person shall be personally liable to the holder if the name of the company is either not mentioned,
or is not properly mentioned.
Hendon Vs. Adelman (1973) New Delhi LR 637
Where on a cheque, the name of the company was stated as ‘LR Agencies Limited’ whereas the real
name of the company was ‘L&R Agencies Ltd.’, the signatory directors were held personally liable.
d. Punishment for contravention of section 73 or 76 (section 76A)
Where a company accepts or invites or allows or causes any other person to accept or invite on its behalf
any deposit in contravention of the manner or the conditions prescribed under section 73 or 76 or rules
made thereunder or if a company fails to repay the deposit or part thereof or the interest as specified in
73 and 76, besides the company (liability: 1 crore to 10 crores), every officer who is in default shall be
punishable with imprisonment up to 7 years or with fine not less than 25 laks-2 crore, or both. If done
wilfully, liable for action under section 447.
Section 73: prohibition on acceptance of deposit from public: no company shall invite, accept or renew
deposits under this act from public except in a manner provided under this chapter.
Company may accept deposits by fulfilling the conditions:
a. Issuance of circular showing the financial position, credit rating, total no. Of deposits, amount due
towards deposits and such other particulars.
b. Filing a copy of circular with the registrar within 30 days of the issue of circular
c. Deposit not less than 15% of the amount maturing during the financial year and next following as DRR
d. Certify that the company has not committed any default in the repayments/interests
e. Provide security, if there is any due in repayment of the amount
Section 76: every company accepting secured deposits from the public shall within 30 days of such
acceptance, create a charge on its assets of an amount not less that the amount of deposits accepted in
favour of the deposit holders in accordance with such rules as may be prescribed.
Section 447: Punishment for Fraud: 6 months to 10 years + fine not less than the amount concerned
extendable x3 times.
e. For facilitating the task of an inspector appointed under section 210 or 212 or 213 to investigate the affairs of the
company (sect 219)
Section 219 provides that if an inspector appointed under 210 or 212 or 213 to investigate into the affairs of a
company considers it necessary for the purposes of the investigation, to investigate also the affairs of-
a. Any other body corporate which is placed as a subsidiary company or holding company
b. Any other body corporate which is, or has any relevant time been managed by any person as managing director
or as manager, who is, or was, at the relevant time, the managing director or the manager of the company;
c. Any other body corporate whose body comprises nominees of the company concerned
d. Any person who is or has at any relevant time been the company’s managing director or manager or employee
(210): Investigation into company affairs shall be initiated
a. on the receipt of report of the Registrar or inspector
b. on intimation of special resolution passed by a company that the affairs of the company ought to be
investigated.
c. in public interest
F. For investigation of ownership of company (section 216)
The central government may appoint one or more inspectors to investigate and report on the membership of
any company for the purpose of determining the true persons who are financially interested in the company
and who controls its policy or materially influence it.
G. Fraudulent conduct (section 339)
Where in the case of winding up of a company, it appears that any business of the company has been carried
on with intend to defraud creditors or any other person, those who are knowingly parties to such conduct,
may be made personally liable without limitation of liability.
H. Liability for ultra vires acts:
Directors and other officers of a company will be personally liable for all those acts which they have done on
behalf of a company if the same are ultra vires of the company.
Weeks vs. Propert (1873) LR 8 cp 427
Directors of a railway company which has fully exhausted its borrowing powers advertised for money to be
lent on the security of debentures. W lent €500 against debenture. Held: debenture was void and W could sue
the directors for breach.
I. LIABILITY UNDER OTHER STATUTES:
• Income tax act, 1961
• FEMA, 1999
UNDER JUDICIAL INTERPRETATIONS
It is difficult to deal with all the cases in which courts have lifted or might life the corporate veil. Some of the cases where the
veil of incorporation was lifted by judicial decisions may be discussed to form an idea as to the kind of circumstances under
which the façade of corporate personality will be removed or the persons behind the corporate entity identified and penalized
if necessary.
a. Protection of Revenue
b. Prevention of fraud or improper conduct
c. Determination of the enemy character of a company
d. Formation of subsidiaries to act as an agent
e. Where a company acts as an agent for its shareholders
f. In case of economic offences
g. Where company is used to avoid welfare legislation
h. Where a company is used for some illegal or improper purpose
i. To punish the contempt of court
j. To determine the technical competence of the company
k. Where a company is a mere sham or cloak
l. Fraudulent scheme of arrangement or compromise

1. Protection of Revenue: Sir Dinshaw Maneckjee Petit, Re AIR 1927 Bom. 371, the assessee was a
millionaire earning huge income by way of dividends and interest. He formed 4 private companies and
transferred his investments to each of these companies as its capital. The dividends and interest income
received by the company was handed back to Sir Dinshaw as a pretended loan. It was held that the
company was formed by the assessee purely and simply as a means of avoiding tax and company was not
more than assessee himself. It did no business but was created simply as a legal entity to ostensibly
receive the dividends and interest.
CIT vs, Sri Meenakshi Mills Ltd. AIR 1967 SC 819
Where the veil had been used for evasion of taxes and duties, the court upheld the piercing of the veil to
look at the real transaction.
2. Prevention of Fraud or Improper Conduct: Where the medium of a company has been used for
committing fraud or improper conduct, courts have lifted the veil and looked at the realities of the
situation.
Gilford Motor Company Vs. Horne (1933)1 CH 935
‘Horne’ had been employed by the company under an agreement that he shall not solicit the customers of
the company or compete with it for a certain period of time after leaving its employment. After ceasing
to be employed by the plaintiff, Horne formed a company which carried on a competing business and
caused the whole of its shares to be allotted to his wife and an employee of the company, who were
appointed to be its directors. It was held that since the defendant (Horne) in fact controlled the company,
its formation was a mere ‘cloak or sham’ to enable him to break his agreement with the plaintiff.
Accordingly, an injunction was issued against him and against the company he had formed restraining
them from soliciting the plaintiff’s customers.
 Similarly in Jones Vs. Lipman (1962)1 All. ER 442, seller of a piece of land sought to evade specific
performance of a contract for the sale of the land by conveying the land to a company which he formed for
the purpose. Initially the company was formed by third parties, and the vendor purchased the whole of its
shares from them, had the shares registered in the name of himself and a nominee, and had himself and the
nominee appointed as directors. It was held that specific performance of the contract cannot be resisted by the
vendor by conveyancing of the land to the company which was a mere ‘façade’ for avoidance of the contract
of sale and specific performance of the contract was therefore ordered against the vendor and the company.
3. Determination of the enemy character of a company
Company being an artificial person cannot be an enemy or friend. However, during war, it may become
necessary to lift the corporate veil and see the persons behind as to whether they are enemies or friends.
Daimler Company Ltd. Vs Continental Tyre & Rubber Co. (Great Britain)Ltd. (1916)2 AC 307
Company incorporated in London in for selling tyres manufactured in Germany by a German Company. Its
majority shareholders and all directors were German. 1914: war declared between England and Germany.
Since BOD and the general body of shareholders were both Germans, it was considered as an enemy
company. Accordingly, the suit filed by the company to recover trade debts was dismissed on the ground that
such payment would amount to trading with enemy.
4. Formation of subsidiaries to act as an agent:
State of UP Vs. Renusagar Power Co. (1991) 70 Comp. Cas. 127
SC held that where the holding company holds 100% shares in a subsidiary company and the latter is created only
for the purpose of the holding company, corporate veil can be lifted.

Smith, Stone and Knight Vs. Birmingham Corpn (1939)4 All ER 116 (KB): criteria laid down for determining
whether the business of the subsidiary company is the business of the parent company:
i. Were the profits treated as the profits of the parent company?
ii. Were the persons conducting the business appointed by the parent company?
iii. Was the parent company the head and brain of the trading venture?
iv. Did the parent company govern the adventure, decide what should be done and what capital should be
embarked on the venture?
v. Did the parent company make the profits by its skill and direction?
vi. Was the parent company in effectual and constant control?
SAE (India) Ltd. Vs. EID Parry (India) Ltd. (1988) 18 SCL 481 (Mad.)
The mere fact that the holding company has a subsidiary company does not imply that whenever claims
are made against the subsidiary company, the corporate veil is to be pierced in order to make the holding
company liable for the debts incurred by the subsidiary company. The normal rule is that independent
legal personality of the company is to be respected and preserved. Holding company shall, however, be
liable if it offers guarantee for repayment of the debts borrowed by its subsidiary.
5. Where a company acts as an agent for its shareholders-
Smith, Stone and Knight Ltd Vs. Birmingham Corporation (1939) 4 ER 116 (KB)
SSK occupied some land, as a subsidiary company of Birmingham Waste Co. Ltd (BWC). Birmingham
Corporation issued a compulsory purchase order on this land. Any company which owned the land would
be paid for it, and would reasonably compensate any owner for the business they ran on the land. Since,
the subsidiary company (SSK) of (BWC) did not possess the land, BC claimed that SSK was entitled to no
compensation.
Held: The court held that the subsidiary company was an agent and BC must pay compensation. Thus,
lifted the veil to enable a subsidiary company operating business on land owned by the holding company
to claim compensation on the grounds of agency.
6. In case of economic offences:
In Shantanu Ray Vs. UOI (1989) 65 Comp. Cas. 196 (Delhi): Alleged that the company had violated Section
11(a) of the Central Excises and Salt Act, 1944. Th Court held that the veil of the corporate entity could be
lifted by adjudicating authorities so as to determine as to which of the directors was concerned with the evasion
of the excise duty by reason of fraud, concealment or wilful mis-statement or suppression of facts or
contravention of the provisions of the Act and the rules made thereunder.
7. Where a company is used to avoid welfare legislation
Workmen of Associated Rubber Industry Ltd. Vs. Associated Rubber Industry Ltd. (1986) 59 Comp. Cas. 134
Where it is found that the sole purpose for the formation of the new company was to use it as a device to reduce
the amount paid as bonus to workmen, the SC upheld the piercing of the veil to look at the real transaction.
Held: It was true that in law the two companies were distinct legal entities having separate existence, but that
was not the end of matter. Here the new company was created as wholly owned by the principal company with
no assets of its own except those transferred to it by the principal company and served no purpose whatsoever
except to reduce the gross profits of the principal company. An obvious purpose to reduce the amount to be
paid by way of bonus to workmen. The amount of dividend received by new company was therefore, to be
taken as profit of the principal company.
8. Where company is used for some illegal or improper purpose: PNB Finance Ltd. Vs. Shital Prasad Jain (1983)
54 Comp. Cas. 66 (Delhi)
Upon request from D, financial advisor granted a loan of Rs. 50 lakhs on his representation that he would utilise
the same amount for the purchase of immovable property in Delhi on the condition that the loan would be
secured by deposit of the title deeds of the property. Promissory Note for the same also executed by D. No
principal or interest amount initiated. Instead, diverted the fund to 3 public limited companies floated by him and
son. These companies in turn, diverted the fund for purchasing the immovable property in Delhi. Question:
whether the defendants could be restrained from alienating the properties purchased.
The court granted relief to the plaintiff by restraining the defendants from any alienation, transfer, disposal or
encumbering the properties in question.
9. To punish for the Contempt of Court: Jyoti Ltd. Vs. Kawaljit Kaur Bhasin (1987) 62 Comp. Cas. 626 (Delhi)
A firm of 2 parties agreed to sell two floors to parties but cancelled the agreement. Litigation followed and the
High Court restrained the firm from selling the property. In the meantime, a private company was floated by the
two parties, who being the only two shareholders became the Chairman and the MD and the property was
transferred to the company. In Spite of HC’s restraint order sold off the two floors. Upon Contempt case being
charged, the partners took the plea that the sale was done by company. Held: once the corporate veil was lifted, it
is clear that the orders of the court was disobeyed by the respondents alone.
10. For determination of technical competence of the company:
New Horizons Ltd Vs. UOI (1995)1 Comp. LJ 100(SC)
Dept of Telecommunication, Telecom District, Hyderabad invited tenders of printing, binding and supply
of telephone directories on the condition, tenderer should have had the experience in supplying such
directories with capacity to more than 50,000 lines. Tenders made where Appellant as well as Respondent
4 were also involved. R4 tender accepted. NHL was declined on the grounds of no experience
irrespective of its collaborators in India and Foreign having its expertise in it.
Lifted the veil to establish whether they had the expertise, questioned whether the denial was validly
made on the grounds of non-expertise. Held that: error at the side of Tender Evaluation Committee. Thus,
the experience of the company would include the experience. Held: the committee’s refusal to consider
the tender of NHL and the consequent acceptance of the tender of R4 suffered from the vice of
arbitrariness and irrationality.
11: Where a Company is a mere Sham or Cloak:
DDA Vs. Skipper Construction Company (p) Ltd. (1996)4 SCALE 202
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 if it was
found that these corporate bodies were mere cloaks and that the device of incorporation was really a ploy
adopted for committing illegalities and/or to defraud people.
12. Fraudulent Scheme of Arrangement of Compromise:
In Re, Bedrock Ltd. (1998) 17 SCL 385 (Bom.)
Corporate veil may be lifted while considering a scheme of arrangements or compromise if the Court is
satisfied that the scheme proposed is fraudulent and has a different purpose than the one professed.