Nature of Company, Incorporation, and Corporate Veil notes — Unit 1

A company is a voluntary association of persons formed for the purpose of doing business, having a distinct legal entity entirely separate from its members.

⇒Definition under Companies Act, 2013

Section 2(20) defines a company simply as: 'A company incorporated under this Act or under any previous company law.' (This definition is procedural; the true nature is found in common law principles).

⇒Characteristics of a Company

• Separate Legal Entity: The company is a 'person' in the eyes of law. It can own property, sue, and be sued in its own name.
• Limited Liability: The liability of members is limited to the unpaid amount on the shares held by them. If the company goes bankrupt, the members' personal assets (house, car) cannot be seized.
• Perpetual Succession: 'Members may come and members may go, but the company goes on forever.' The death or insolvency of all shareholders does not kill the company.
• Common Seal: The official signature of the company (though the 2015 amendment made having a common seal optional).
• Transferability of Shares: Shares in a public company are freely transferable.

The 'Corporate Veil' is a legal fiction that separates the personality of a corporation from the personalities of its shareholders. It acts as a shield, protecting the shareholders from the company's liabilities.

⇒The Absolute Benchmark: Salomon v. Salomon & Co. Ltd (1897)

• The Facts: Aron Salomon was a prosperous leather merchant. He formed a limited company (Salomon & Co. Ltd). The company had 7 shareholders: Salomon, his wife, his daughter, and his 4 sons.
• Salomon sold his leather business to the company for £39,000. In return, he took 20,000 shares and £10,000 in debentures (giving him a secured charge over the company's assets).
• The company went into liquidation shortly after. Its total assets were £6,000. It owed £10,000 to Salomon (secured) and £8,000 to unsecured trade creditors.
• The creditors argued that Salomon and the company were essentially the same person, so Salomon shouldn't get paid first.
• The House of Lords Judgment: The Court established the principle of Separate Legal Entity. They held that once incorporated, the company is at law a different person altogether from the subscribers. Salomon (the secured creditor) was a distinct legal entity from Salomon & Co. Ltd., and was legally entitled to be paid before the unsecured creditors.

While Salomon protects shareholders, people often abuse this protection to commit fraud. When this happens, courts 'lift the veil'—they ignore the separate legal entity and directly penalize the humans hiding behind it.

⇒Statutory Grounds (Under the Act)

• Fraudulent Trading (Sec 339): If business is carried on with intent to defraud creditors during winding up, directors/members can be held personally liable.
• Failure to refund application money (Sec 39): If the minimum subscription isn't received, directors are personally liable to refund the money.
• Misdescription of Name (Sec 12): If an officer signs a cheque/contract without clearly stating the company's name, they are personally liable.

⇒Judicial Grounds (Created by Courts)

• Protection of Revenue/Tax Evasion: (Sir Dinshaw Maneckjee Petit Case) If a company is formed solely as a sham to evade tax.
• Prevention of Fraud/Improper Conduct: (Gilford Motor Co v. Horne) Horne signed a non-compete clause, then created a fake company to bypass it. The court lifted the veil.
• Determining Enemy Character: (Daimler Co Ltd v. Continental Tyre Co) During WWI, an English company was controlled entirely by German residents. The court lifted the veil and declared it an 'enemy company'.

Companies can be classified based on liability, members, and control.

⇒1. Based on Liability

• Company Limited by Shares: Liability is limited to the unpaid amount on shares.
• Company Limited by Guarantee: Members guarantee to contribute a fixed amount ONLY in the event of winding up (common for NGOs/Clubs).
• Unlimited Company: Members have unlimited liability if the company goes bankrupt.

⇒2. Based on Number of Members

• Private Company (Sec 2(68)): Restricts transfer of shares, limits members to 200, and prohibits inviting the public to subscribe to securities.
• Public Company (Sec 2(71)): A company which is not a private company. No limit on maximum members.
• One Person Company (OPC) (Sec 2(62)): Introduced in 2013, allows a single individual to form a company with limited liability.

The procedural steps to bring a company into existence.

⇒Role of Promoters

A promoter is a person who conceives the idea of forming a company and takes all necessary steps to incorporate it. They stand in a fiduciary relationship (position of trust) with the company and cannot make secret profits.

⇒Steps for Incorporation

• 1. Name Approval: Applying to the Registrar of Companies (ROC) via the RUN (Reserve Unique Name) or SPICe+ web service.
• 2. Drafting MoA & AoA: Preparing the Memorandum and Articles of Association.
• 3. Filing Documents: Filing MoA, AoA, declarations by professionals (CA/CS/Advocate), and affidavits from subscribers with the ROC.
• 4. Certificate of Incorporation: If the ROC is satisfied, they issue the Certificate of Incorporation containing the Corporate Identity Number (CIN). This certificate is conclusive evidence that all legal requirements for incorporation have been met.

⇒Pre-Incorporation Contracts

Contracts entered into by promoters before the company is incorporated. A company is NOT bound by these contracts because it didn't exist when they were made. However, the company can choose to adopt them after incorporation.

⇒Summary of Master Concepts

• Corporate Personality: A company is distinct from its members (Salomon v. Salomon).
• Lifting the Veil: Courts ignore the corporate entity to punish actual humans for fraud, tax evasion, or establishing enemy character.
• Types of Companies: Private (max 200, no public invite), Public (unlimited members), OPC (single member).
• Promoters: Fiduciary duty, cannot make secret profits.
• Incorporation: The Certificate is conclusive proof of birth.

⇒University Exam Tips for this Unit (Premium Advice)

• Salomon is Mandatory: You cannot write an answer on 'Separate Legal Entity' or 'Corporate Veil' without discussing the exact facts of Salomon v. Salomon. It is the bedrock of global company law.
• Structuring Veil Answers: If asked 'When can the veil be lifted?', ALWAYS divide your answer into two clear headings: 1. Statutory Grounds (under the Act) and 2. Judicial Grounds (created by courts).
• Private vs Public: Memorize the three restrictions in Sec 2(68) for a Private Company (Transfer restrict, 200 member limit, public invite prohibited). This is a guaranteed short note.