module 1-8 Flashcards
Saloman v. Soloman
One Salomon was a boot and shoe manufacturer. His business was
in sound condition and there was a substantial surplus of assets over
liabilities. He incorporated a company named Salomon&Co Ltd for the
purpose of taking over and carrying on his business. The seven sub
scribers to the memorandum were Salomon, his wife, his daughter and
four sons and they remained the only members of the company. Salomon
and two of his sons constituted the Board of directors of the company.
The business was transferred to the company for £ 40,000. In payment,
Salomon took 20,000 shares of £ 1 each and debentures worth £ 10,000.
These debentures certified that the company owed Salomon £ 10,000 and
created a charge on the company’s assets. One share was given to each
remaining member of his family. The company went into liquidation
within a year.^^ On winding up, the state of affairs was broadly some
thing like this: Assets £ 6000; Liabilities—Salomon as debenture holder:^^
£ 10,000 and unsecured creditors: £ 7000. Thus, after paying off the
debenture holder nothing would be left for the unsecured creditors.
The unsecured creditors, therefore, contended that, though incorporated
under the Act, the company never had an independent existence; it was in
fact Salomon under another name; he was the managing director, the other
directors being his sons and under his control.
held that Salomon & Co Ltd was a real company fulfilling all
the legal requirements. It must be treated as a company, as an entity con
sisting of certain corporators, but a distinct and independent corporation.
Lee v Lee’s Air Farming Ltd
[1960] UKPC 33 is a company law case from New Zealand, also important for UK company law and Indian Companies Act 2013, concerning the corporate veil and separate legal personality.
FACTS: LEE held 90% of shares, was the sole director and chief pilot- after his’ death in a plane crash wife claimed compensation as he ded during work so now? Can he be a “worker” when he is also the employer
There appears to be no great difficulty in holding that a man acting in one capacity can make a contract with himself in another capacity. The company and the deceased were separate legal entities.- SO WIFE entitled to compensation
LIC v ESCORTS
This case dealt with a non-resident portfolio investment scheme, which existed under the erstwhile Foreign Exchange Regulation Act, 1973 (FERA). The scheme allowed non-resident companies, which were owned by or in which the beneficial interest vested in non-resident individuals of Indian nationality / origin was at least 60%, to invest in the shares of Indian companies. Investment was allowed to the extent of 1% of the paid-up equity capital of such Indian companies, and could not exceed a ceiling of 5%. Under the scheme, 13 companies, all owned by Caparo Group Limited, invested in Escorts Limited – an Indian company. Importantly, 60% of the shares of Caparo Group Limited were held by a trust, whose beneficiaries were Swraj Paul and members of his family (all non-resident individuals of Indian origin).
The investment by the 13 Caparo Group companies was challenged on the ground that it was an attempt at circumventing the prescribed ceiling of investment of 1% under the Scheme, and that, “One had only to pierce the corporate veil to discover Mr. Swraj Paul lurking behind.”
the Supreme Court ruled that in the facts of this case, and only for the purposes of ascertaining the ownership in the investment, lifting of the veil would be necessary to a limited extent, i.e. to ascertain the nationality or origin of the shareholders. It was not necessary to ascertain the individual identity of each of them. Merely because more than 60% of the shares of the foreign investor companies were held by a trust of which Mr. Swraj Paul and the members of his family were beneficiaries, could not deny the companies the facility of the scheme on the basis that the permission granted was illegal.
New Horizons Ltd. v. Union of India
,[7] the court observed that the corporate veil may be lifted and the independence of the corporate entity disregarded, in cases where the principle of corporate personality is flagrantly opposed to justice, convenience, or in the interest of revenue.
State of Rajasthan v. Gotan Lime Stone Khanji Udhyog,[
State of Rajasthan v. Gotan Lime Stone Khanji Udhyog,[8] where a partnership firm attempted to transfer a mining lease allotted to it, by first converting the firm into a private company. The shareholders of the company so formed, subsequently sold their shareholding to a subsidiary of Ultra Tech Cement Company Limited, effectively giving rise to a sale of the mining lease. The relevant governmental authorities were neither informed of this transfer nor was their permission taken. Under the law the lessees were not permitted to profit from the sale of the mining rights. The court held that this transaction was an attempt by the respondents at doing something through the medium of companies, which they were not otherwise allowed to do. The court further recognised that mining rights are vested in the State and are held in public trust. It stated that even ‘public interest’ is a consideration in piercing the corporate veil of an entity. The court noted that in isolation both these transactions were within the bounds of law, but seen together in view of other facts and circumstances were patently illegal and ought to be set aside.
Iridium v Motorolla
How does the court get jurisdiction to lift the corporate veil?
Motorolla controlled iridium and needity raise funds so INSTEAD of going for an IPO they went to institutional investors for a private placement letter. Raised nearly 70 million for the project which was a hella flop and loss. Investors alleged that motorolla had done a misstatement in their brochure- so filed against motorollas under 120 & 420 IPC - initially quashed by HC as there is no corporate criminal liability for a company but SC examined similar issues abroad. S.2(60) of companies act defines the officers in charge, so in order to see who will have liability/mens rea - we have to check who has the managerial degree of control
Directing mind and will test - check who was specifically handling that project.
After recognisisng KMPs - establish evidence against them. This was the establishment of corporate criminal liability for companies.
State Trading Corporation of India Ltd. v. C.T.O., A.I.R
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
private company
- min 2 people to subscribe names to moa
- min 2 directors
- restriction on right to transfer shares not allowed unless in the AOA
- limit members= 200
—> joint holders= single members and does not include employees
/ may issue debentures to anyone but invitation to public to subscribe for debentures or securities NOT Allowed
Public company - s2(71)
public company to mean a company which is not a private company and has a minimum paid-up share capital, as may be prescribed†.
* min number of members- 7 max unlimited - directors= min 3
- transferablitiy of shares is allowed in manner given in AOA
- unlike private comp, public co may issue prospectus and invite public to subscribe for securtieis
govt company
sec2(45) defines a Government company to mean any company in which not less than 51% of the paid-up share capital is held by the central/state govt or both or subsidiary of govt company
Andhra Pradesh State Road Transport Corporation v. ITO AIR- a govt company is not a dept of the government -
One Person company (Private Company)
Such a company is described under section 3(1)(c) as a private company. ‘One Person Company’ is a one shareholder corporate entity, where legal and financial liability is limited to the company only. In India, the J.J. Irani Expert Committee recommended the formation of one-person company
(OPC).
the memorandum of One Person Company shall indicate the name of the other person, with his prior written consent in the prescribed form who shall, in the event of the subscriber’s death or his incapacity to contract become the member of the company and the written consent of such person shall also be filed with the Registrar at the time of incorporation
small company
- paid up share capital below 50 lakh ruppe
- turnover cannot exceed 2 crore per financial year
- small company cannot include a holding or subsidiary company or non profit company
association not for provfit
An “Association not for profit” is an association which is formed not for making profits but for the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object.
Such an association may or may not be registered as a company under the Companies Act.
may become a limited liabilty company through section 8 company
company registered under section 8 which intends to convert itself into a Company of any other kind may do so by passing a special resolution at a general meeting for approving such conversion and also complying with the prescribed procedure [Rule 21 of the Companies (Incorporation) Rules, 2014].
However, an OPC cannot be incorporated or converted into a company under section 8 of the Act.
dormant company
‘Dormant company’ means a company which has been formed and registered under the Companies Act, 2013
(i) for a future project or to hold an asset or intellectual property,
(ii) has no significant accounting transaction, and
(iii) has not filed financial statements or annual returns for two financial years
consecutively.
In the name of the corporation, there are no outstanding payments on public deposits or interest.
A certificate stating that there is no dispute or disagreement among the company’s management and promoters must be enclosed.
There should be no arrears in the payment of the company’s laborers’ dues.
There should be no outstanding loans, secured or unsecured, on the corporation. If the loan is unsecured, the lender’s permission should be included with the form.
In the name of the company, there are no outstanding tax obligations to the federal, local governments, or state government.
The company should not be listed on a Stock Exchange in India or elsewhere.
KELNER V BAXTER
Pre incorporation contract - Personal right and liability of contracting agent.—
The facts were that the plaintiff intended to sell wine to a company
which was to be formed, but under the contract he agreed to sell to the
proposed directors of the company. The proposed directors intended to
buy the wine on behalf of the company, but, as it was not in existence
when the contract was made, they personally took delivery. It was held
that as they had contracted on behalf of a principal who did not exist,
they having received the wine, must pay for it.
