CH 1 Nature of Company Flashcards
1
Q
Define a company
A
voluntary association of people formed for a common purpose that
- Is registered under the Companies Act 1956 or 2013 in India
- has capital divisible into parts i.e. shares
- is an artificial person created by a process of law
- has perpetual succession
- has a common seal
2
Q
Main types of companies registered under Companies Act 1956
A
3
Q
Lindley’s definition
A
4
Q
Characteristics of a company
A
- separate legal identity, leading to founder having no insurable interest in company; perpetual succession; nationality of company doesn’t depend on founder’s - Salomon v Salomon
- limited liability - limited to unpaid value of shared. If limited by guarantee, limited to amount undertaken to contribute to assets upon winding up
- perpetual succession - created by process of law and is ended by such; not affected by insolvency, death or retirement of members
- common seal - no physical existence means agents must use this official signature of company to enter into contracts
- transferability of shares - no shareholder is permanently welded to company
- separate property - distinct identity from owners allows it to own and dispose property in its own name. shareholders contribute to but are not owners of property.
- capacity to sue and be sued
5
Q
Cases in which ‘corporate veil’ is lifted
A
- use of company for tax evasion - Dinshaw
- fraud and improper conduct e.g. defrauding creditors or circumventing law - Jones v Lipman
- company assumes enemy character - Daimler v Continental Tyre and Rubber
- company is a sham/hoax - Gilford Motors v Horne
- use of company to avoid legal obligations
- company acts as agent of shareholders - shareholders will be personally liable because company is vehicle for their personal dealings
- avoidance of welfare legislation e.g. tax avoidance
- protect against transactions contrary to public policy e.g. obstruction of justice, bribery in public offices
6
Q
statutory exceptions to limited liability
A
- fewer members than statutory minimum (7 PU, 2 PR) for more than 6 months, every person who knows this fact and is a member at that time is severally liable for company debt contracted after the 6 months and continuing members:
a) can be sued and not those who have withdrawn
b) shall be liable only if aware of the fact that number is below stat. minimum
- failure to refund application money with interest of applicants who have not been allotted shares within 130 days of issue of prospectus
- misdescription of company name + address of registered office makes office personally liable. Same if bill of exchange is signed by officer without mentioning that they sign on behalf of company, unless company has already paid amount
- discovery of fraudulent trading during winding up - all parties with knowledge of this are personally liable without limitation for all or any of company’s debt. Court may declare this on the application of the official liquidator, or liquidator/any creditor/contributory of the company.
- H and S companies - although separate entities, S may lose this distinction to a certain extent when:
a) at end of its financial year, H presents its own accounts AND group accounts.
b) on the facts of a case sees subsidiary as just an extension of the holding company rather than a true separate entity
5 - subsidiary lacks genuine independence and is, in reality, just a tool of the holding company.
7
Q
difference between company and partnership
A
- Regulating act: Companies Act 56 VS Indian Partnership Act 32
- Registration - not necessary for partnership to register under Companies Act to come into existence
- Distinct legal personality - not personally liable; property and rights vested in partners and must be transferred when ownership changes; property of company belongs to it and not shareholders
- Liability - partners are jointly and severally liable and private property of any partner can be seized by creditors in the event of default
- Management - directors in a company, partners in a firm unless agreed otherwise, but even then third parties can hold the partnership liable if a partner enters into a contract or business arrangement with them
- Transfer of shares - partner cannot transfer their share like members of a company can (unless articles provides otherwise) w/o all others consent. Can only assign it to entitle someone to the fiancnial benefits.
- Authority of members - each partner is an agent of the partnership but shareholders are not of the company and cannot bind company by their acts
- Powers of company - company is limited by powers allowed by objects clause in MoA; partners can do anything partners agree on
- Restrictions on powers - don’t avail against outsiders in a partnership, but will for a company because they are contained in the AoA which is a public doc
- Insolvency - winding up of insolvent company doesn’t make members insolvent like it does for a firm
- Debt - members of a company can claim payment out of assets when wound up, but partner owned money by firm cannot do this in competition with other creditors
- Dissolution - partnership can be dissolved at any time unless fixed period and will be dissolved by death or insolvency; company has perpetual succession and wound up only by law
- Min and max members - 2 and 20 (10 if banking); 2 and 200 (private co); 7 and unlimited (public co)
- Bookkeeping - company must legally maintain accounts and have them audited
7
Q
Salomon v Salomon
separate legal identity
A
- Salomon sold his boots business to a newly formed company to take advantage of limited liability
- Salomon took 23k shares worth £1 each and £10k of debentures in the company, while 6 family members took one share each
- sold his boot-making business to the new company for £39,000, which was paid through shares, cash, and debentures
- debentures gave Salomon priority as a creditor if the company went into liquidation.
- When the company became insolvent and wound up, the unsecured creditors were unhappy because Salomon, as a secured creditor through the debentures, had priority in being repaid from the company’s assets.
- argued that Salomon should be personally liable for the company’s debts because he controlled the company and it wasn’t really separate from him.
8
Q
Dinshaw
tax evasion
A
- dinshaw earned substantial income from dividends, interest, and other sources.
- To reduce his personal income tax liability, Dinshaw incorporated four private companies and transferred his investments and income-generating assets to these companies.
- These companies had no real business or commercial activity. Their only purpose was to hold his investments and income so that the money would not appear as his personal income, thereby reducing his personal tax burden.
- The companies did not function as independent entities, simply as conduits to pass income back to Dinshaw in the form of loans or dividends without incurring the same level of tax
9
Q
jones v lipman
fraud or improper conduct
A
- Mr. Lipman had entered into a contract to sell a piece of land to Mr. Jones.
- Before the sale was completed, Lipman changed his mind and wanted to back out of the contract.
- To avoid being forced to sell the land, Lipman created a company and transferred the land to this company. Lipman was the sole owner and controller of the company.
- Lipman argued that since the land was now owned by a separate legal entity (the company), he could no longer be forced to sell it to Jones.
- The court held that Lipman’s use of the company was a sham and a device to avoid the specific performance of the contract and ruled that the land had to be transferred to Jones as agreed.
10
Q
daimler v continental tyre and rubber
enemy character of company
A
- Continental Tyre and Rubber Co Ltd was a UK-registered company but was controlled by German nationals, who owned all shares but one
- During World War I, the company sued Daimler Co Ltd for the payment of debts owed
- Daimler argued, and the court ruled, that paying the debt would amount to trading with the enemy, which was illegal under wartime regulations
11
Q
gilford motor v horne
company is a sham
A
- Horne was a former employee of Gilford Motor Co.
- When he left the company, he was bound by a non-compete clause in his contract, which prevented him from soliciting the company’s clients.
- To get around this restriction, Horne set up a new company in his wife’s name and used it to solicit business from Gilford’s clients.
- court ruled that the company was merely a sham or front set up by Horne to circumvent his contractual obligations and Horne and the company were both liable for the breach of the non-compete clause.
