Meaning, Definition, Features, Advantages & Disadvantages of Company; Lifting of Corporate Veil.

1. SUBJECT: COMPANY LAW
TOPIC: Company : An Introduction
By Dr. Seema Pandey
Assistant Professor of
Commerce, GCG,
Kurukshetra

2. Meaning of Company
The word company is derived from the Latin word ‘Com’ which means ‘with or together’ and
‘panis’ which means ‘bread’, and it is originally referred to an association of persons who tool
their meals together. (क
ं पनी का आशय ऐसे व्यक्तिय ं क
े समूह से था ज अपना खाना साथ-साथ खाते
थे। प्राचीन समय में व्यापारी वर्ग क
े ल र् सावगजननक भ जन आनि क
े समय पर अपनी व्यवसानयक
समस्याओं क
े बारे में नवचार नवमशग करना उनचत समझते थे।) Thus, in popular parlance, a company
denotes an association of likeminded persons formed for the purpose of carrying on some
business or undertaking. A company is a corporate body and a legal person having status and
personality distinct and separate from the members constituting it.

3. Definition of a Company
 According to Prof. Haney:
“A company is an incorporated association which is created by law, having a separate entity
with a perpetual succession and a common seal.”
क
ं पनी से अनभप्राय नवधान द्वारा नननमगत ऐसे क
ृ निम व्यक्ति से है नजसका पृथक अक्तित्व ह ता है एवं
नजसे अनवक्तिन्नअनधकार प्राप्त हैं तथा नजसकी सावग मुद्रा ह ती है।
 According to Lord Justice Lindley:
“An association of many persons who contribute money or money’s worth to a common
stock and employ it in some trade or business and who share the profit and loss arising there
from.”
क
ं पनी से अनभप्राय व्यक्तिय ं क
े ऐसे समूह से हैं, ज मुद्रा या मुद्रा क
े बराबर की अन्य संपनि सामान्य
स्टॉक में जमा करते हैं तथा एकनित धन रानश का प्रय र् नकसी सामान्य उद्देश्य क
े नलए करते हैं।

4. Features or Characteristics of a Company
Incorporated Association: A company must be registered under the prevalent
Companies Act. If the number of members in association exceeds 50 and the
association is formed for carrying on a business with profit motive, it must be
registered under the Companies Act or any other Indian Law . For forming a public
company, at least seven persons and for forming a private company, at least two
persons are required.
Artificial Legal Person: A company is an artificial legal person. It is artificial because
it is created by a process other than the natural birth. It comes into existence through
the operation of law. It is a legal person because it exists in the eyes of the law.
Separate Legal Entity: A company is a legal person and is different from its members.
The property of the company belongs to the company alone and the members cannot
claim individually or jointly ownership rights in the assets of the company during its
existence or in its winding up. The concept of separate legal entity was recognized in
the famous case of Solomon Vs. Solomon & Co. Ltd.

5. •case of Soloman vs Soloman & Co. ltd.
Facts
Soloman was a boot maker ( initially owner
of sole proprietorship business)
He formed a company Soloman & Company
Ltd with 7 members of his family ( Mr &
Mrs Soloman, 1 Daughter, 3 Sons)
Transfers/ sold his business to the company in considerations of 20,000 shares
of 1 pond each and Debentures of10,000 Ponds which were secured against
assets of the company . Mr Soloman became the director of the company and
had full control with him.
After one year due to financial crisis, company came at the situation of winding
up

6. Financial position of
the company
Liability Assets
Debentures 10000 ponds Total assets 6000 ponds
Unsecured Creditors 7000 ponds Short fall of assets to meet
liabilities 11000 ponds
Court Verdict: The company was duly incorporated, it is an
independent person with its rights and liabilities appropriate to itself
and with Separate legal Entity concept company and its members are
different from each other. Therefore, it was absolutely appropriate
for Soloman to get his payment first being secured debenture holder.
Soloman claimed that firstly he would take his claim regarding Debentures
of 10000 ponds which were secured against company’s assets but
unsecured creditors demanded their money first. Dispute aroused…

7. Continue …
Perpetual Succession: An incorporated company never dies, except when it is wound
up as per law. A company being a separate legal person is unaffected by death or
departure. Its existence is not affected by the death, lunacy or bankruptcy of its
members. Members may come, members may go but a company continues for long
time.
Limited Liability: The Company, being a separate person, is the owner of its assets
and bound by its liabilities. Liability of the members of the company is limited to the
value of the shares subscribed by each of them.
Transferability of Shares: The capital of the company is divided into parts, called
shares. The shares of the company are freely transferable in the case of public
companies whereas they are not so in case of private companies. A member may sell
his shares in the open market and realize the money invested by him.

8. Common Seal: Since the company has no physical existence, it must act through its
agents must be under the seal of the company. The common seal acts as the official
signature Every company has its own common seal which is affixed on all the important
documents of the company. The common seal with the name of the company engraved
on it, is used as a substitute of its signature.
Separate property: A company being a legal person is capable of owning, enjoying and
disposing of property in its own name. It is entirely distinct from its members. The
property of the company is to be used for the company’s business and not for the
personal benefit of its members.
Continue …

9. Lifting a Corporate Veil
The separate personality of a company is a statutory privilege and it must be used for
legitimate business purposes only. Where a fraudulent and dishonest use is made of
the legal entity, the individuals concerned will not be allowed to take shelter behind
the corporate personality. The Court will break through the corporate shell and apply
the principle/doctrine of what is called as “lifting of or piercing the corporate veil”
(समामेलन का पिाग उठाना अथवा समामेलन क
े आवरण क हटाना). The Court will look behind
the corporate entity and take action as though no entity separate from the members
existed and make the members or the controlling persons liable for debts and
obligations of the company.
Lifting of the corporate veil means disregarding the corporate personality and looking
behind the real person who are in the control of the company.

10. Continue …
• When can be the Veil Lifted?
The provisions for lifting of corporate veil are divided in two categories:
• Statutory Provisions
• Judicial Provisions
These are explained as follow:
1. Statutory Provisions: The Companies Act 2013 has provided for the various
provisions which point out the person who’s liable for any such improper/illegal
activity. These persons are more often referred as “officer who is in default” under
section 2 (60) of the Act, which includes people such as directors or key managerial
personnel. Few instances of this type are explained as follow:

11.  Reduction of number of members
 Miss statement in prospectus
 For investigation of ownership of company
 Fraudulent conduct
 Inducing persons to invest money in company
 Furnishing false statements
 Holding and subsidiary companies
 For not returning the Application Money
Continue …

12. 2. Judicial Provisions: Though the legislature has attempted to insert numerous
provisions in the Act to make sure guilty person is pointed out as veil is pierced,
there are instances where judiciary has played it’s part better and kept a check that
no guilty person, due to a mere technicality, walks free. Following are few such
scenarios where Court may without any doubt lift the corporate veil:
 Tax evasion: [Case: Re sir Dinshaw Maneckjee Petit]
 Prevention of fraud: [ Case :Jones Vs Lipman]
 determination of enemy character: [Case: Daimler Co. Ltd. Vs Continental
Tyre & Rubber Co.]
 liability for ultra virus act
 public interest
 company intentionally avoiding legal obligations negligent activities
Continue …

13. Adequate source of capital
Limited liability
Perpetual existence
Transferability of shares
Diffusion of risk
Incentive to large scale production
Appointment of able and experienced experts
Public confidence
Stimulus to small saving
Growth and Expansion
Advantages of a Company

14. Difficulty in Formation
Possibility of fraud by promoters
Encouragement to monopoly
Conflict of interests
Excessive legal interference
Lack of secrecy
Delay in decision making
Evils of large scale production
Exploitation of shareholders
Disadvantages of a Company

15. Conclusion
“Thus we conclude that considering the advantages and disadvantages
of joint stock companies we can say that advantages overshadow the
disadvantages. In fact, in the case of malpractices the fault is not the
systems, it is the individuals who are concerned more with promoting
their interests than those of the company and the nation. Joint stock
companies are performing well and will continue to perform vital role
in the economic development of the country.”