The Companies Act, 1956 The Indian Companies Act, 1913 was repealed by the present Companies Act,

(of 1956) which came into force on 1st April, 1956. The present Companies Act is based largely on the recommendations of the Company Law Committee (Baba Committee) which submitted its report in March, 1952. This Act is the largest piece of legislation ever passed by our Parliament. It consists of 658 sections and 15 schedules. Moving the Bill in 1955 in the Parliament, Mr. C.D. Deshmukh, the Finance Minister at that time said the following about the Bill: It is that the joint stock companies must move with the times and advance in times with prevailing ideas. The country is tolerant of the concentration of economic power and disparity of wealth. We can ignore these trends only at our own peril. The main features of the Companies Act, 1956 are: i. Full and fair disclosure of various matters in prospectus. ii. Detailed information of the financial affairs of a company to be disclosed in its accounts. iii. Provision for intervention and investigations by the Government into the affairs of a company. iv. Restrictions on the powers of managing agents and other managerial Personnel. v. Enforcement of proper performance of their duties by company Management. vi. Protection of minority shareholders.

Definition of a Company A company can be defined as a group of persons associated together for the purpose of attaining a common objective, social or economic. According to Lord Justice Lindley a company is an association of many persons who contribute money or moneys worth to a common stock and employs it in

some trade or business and who share the profit and loss there from. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs 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. Justice Marshall defines a company as 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. According to Haney a company is an incorporated association which is an artificial person created by law, having separate entity, with a perpetual succession and a common seal. Section 2 (1) of the company Act (cap 486) provides that a company means a company formed and registered under this Act or an existing company. Existing company only means a company formed and registered under any of the repealed ordinances. For the purposes of companies Act, the companies includes: a) A registered company under this Act. b) An existing company. c) An unregistered company covered under section 357-364. d) A produce company covered under section 388. e) A foreign company covered under section 365-381. Characteristics of a company The Certificate of Incorporation issued by the Registrar of the Companies brings the company in to existence as a legal person. There are several advantages by the Incorporation. At the same time, there are also some disadvantages too. Advantages of Incorporation 1. INDEPENDENT CORPORATE EXISTENCE

The company is a juristic person. It has separate legal entity. The company is an association of persons formed for the purpose of some business or undertaking carried on in the name of association. But at the same time it has its own independent corporate existence which is called Corporate Personality. It is also known as Rule of Salomon vs. Salomon. It is formed with the members and at the same time it is independent of its members. It is corporate aggregate. It functions like a corporate sole. The company is at law a different person altogether from its members. This is also called as The Veil of Corporation. The theory of corporate entity is indeed, the basic principle on which the whole law of corporation is based. The theory which explains about the Corporate Personality is known as Organic Theory. In England legal personality of a company was recognized in 1867 in Oakes vs Turquand. Importance or separate entity was firmly established by Salomon vs. Salomon (1897) AC 22. SALMON vs. SALMON & Co. LTD (1897 AC 22) It is the leading case showing independent corporate existence Brief facts: Salmon was a boot and shoe manufacturer and had a good reputation and profitability too. He formed Salmon &Co. Ltd. With the share capital of 30,000/- pounds. His wife, one daughter and four sons and himself, totally 7 members, were the subscribers to the company. Each share was @ 1 pound. Salmon paid his share amount. He also paid 10,000/- pounds towards debentures in the company. After some years the company was in a loss, and was wound up. At the time of winding up, the company had left property worth 6,000/- pounds, and the liabilities were 17,000/- pounds (10,000/- pounds towards debentures of Salmon and 7,000/pounds towards due to unsecured creditors= totally 17,000/- pounds). Unsecured creditors claimed their importance over the property of 6,000/- pounds. Salmon also claimed that he had charge over the company and he was secured creditor, being he was the holder of debentures worth of 10,000/- pounds, which created a charge over the company. The unsecured creditors contended that the company created by Salmon and his family members and in fact Salomon and the company were one and the same person and that the company was a mere agent for Salomon, and therefore they should be paid in priority than salmon.

Judgment: The House of Lords gave the judgment in favor of Salmon, treating his debentures being secured debt, created a charge on the property of the company, and also declared that the company was in the eyes of the law, a separate person independent from Salmon. Salmon was not the agent or trustee of the company. In the case Lord Machagater observed the company is at law quite different person altogether from the subscribers of the memorandum and though it might be that after incorporation the business is precisely the same as it was before and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee liable in any shape or form except to the extent and in the manner provided by the Act. Other case laws in support of separate legal personality are the Lee vs Lee Air Farming Ltd and the Maccaura vs. Northern Assurance Company Limited 1952 Act 6119. 2. LIMITED LIABILITY It means the liability of the member is limited to the extent of his share only. In a partnership firm, the partner is liable to the complete extent, even personal liability also. In a partnership firm, A and B partners invest `. 1, 00,000 towards the capital of the firm, each @ `.50, 000/-. The firm brings `.1, 00,000/- loan and becomes insolvent. B also becomes insolvent. A is solvent. The creditors sue A for the recovery of one lakh rupees. A is liable to pay entire amount, being the partner of the firm. He is personally also liable. In the partnership firms, the principle of principal and agency is applied. A partnership firm does not contain separate legal existence. It is not a juristic person. But a company incorporated protects the members of it in way of limited liability. In a company, the principle of principal and agency does not apply. The share holder is liable to the extent of his share amount only, not exceeding that. This is the main distinction between partnership firm and company. 3. PERPETUAL SUCCESSION A man dies. But an incorporated company never dies. It is an entity with perpetual succession. Blackstone explains: Perpetual succession, therefore, means that the membership of a company may keep changing from time to time, but that does not affect the

companys continuity, in the like manner as the river Thames is still the same river, though the parts which compose it are changing every instant. 4. SEPARATE PROPERTY The company is a juristic person. It has its own legal entity. It has its own property. It is liable for its own debts. It is independent to the members. The members liability is limited to the extent of their shares only. 5. TRANSFRRABLE SHARES The shares of a public company can easily be transferrable. The transferee and transferor shall have to sign on Form No. 7-c and other necessary forms under Sec.108 and shall submit them along with the original share certificate to the Registrar of Companies and register the name of the transferee. The name of the transferee shall also be entered in the Register of Members of the concerned company, and the name of the transferor shall be struck out. 6. CAPACITY TO SUE AND BE SUED The company comes into existence from the date on which the Certificate of Incorporation is granted. This Certificate brings the company into existence as a legal person. It can sue be sued in its own name. 7. ACCUMULATION OF LARGE CAPITAL A large capital can be accumulated by way of incorporation. Such large amount cannot be procured by a proprietorship or partnership firm. All multi- national companies have accumulated huge capital. The budget of some of the multinational corporation exceeds several folds than Indias annual budget. The budget of Microsoft, a multi- national corporation of Bill Gate of America is several times greater than our countrys budget.

Lifting the Corporate Veil Since a company is a legal person distinct from its members there is assumed to be a curtain, a veil or a shield between the company and its members. The principle of separate legal entity was established in the case of Salomon vs Salomon and

Company Ltd. Thus once a company is formed there is a veil between the company and its members. Based on this principle it is not easy to go behind the curtain and see who are the real persons composing the company. There are however cases when the corporate veil has to be lifted to look at the individual members who are in fact the real beneficial owners of all corporate property. Thus lifting corporate veil means identification of a company with its members and when the corporate veil is lifted the individual members may be held liable for its acts or entitled to its property. Some of the instances when the corporate veil may be lifted include where it is for the benefit of revenue, where it is essential to secure justice and where it is in public interests. The corporate veil may be lifted by: a) The courts b) The statute a) Lifting by the courts 1. Determination of the character of the company. A company may be declared an enemy character when its directors are residents of an enemy country. Therefore courts may lift the veil to ascertain the nationality of persons controlling the company. In Daimler Company Ltd vs. Continental Tyres and Rubber Company Ltd (1916 AC 307) Daimler company was sued by continental tyre company for recovery of a debt of Tyres supplied. Continental tyres was incorporated in England for purpose of selling in England tyres made in Germany. The shareholders of continental tyres were Germany except one and all directors were from Germany. During the First World War continental tyres commenced an action to recover a debt from Daimler. Daimler contested arguing that a continental tyre was an enemy company. It was held that a continental tyre was an alien company and the payment of debt would amount to trading with an enemy.

2. Prevention of fraud or improper conduct. The veil may also be lifted if a company is formed for a fraudulent purpose or to avoid legal obligations. Professor Leower says that the veil of a corporate body will be lifted where the corporate personality is being blatantly used as a clock for fraud or improper conduct. 3. Where a company is a Sham. This refers to a situation where a company is formed and used for some illegal or improper purpose. 4. Where the company is acting as the agent of the shareholders. When a company is acting as an agent of its shareholders or of another company, it will be liable for its acts. There may be express agreement to the effect or an agreement (of agency) may be implied from the circumstances of each particular case. Case law relating to this is the F.G Film Ltd in Re (1953) I ALL E.R 615. An American company financed the production of a film in India in the name of a British company. The president of the British company, the board of trade of Great Britain refused to register the film as a British film. The decision was held as a valid in view of the fact that British company acted merely as the agent or nominee of the American company. 5. Protection of Revenue. This is especially the case when a company is formed to assist shareholders evade taxes. In such case the shareholders may be held liable to pay income tax. 6. Protecting public policy. Courts lift the corporate veil to protect the public policy and prevent transactions contrary to public policy. Where there is a conflict between the separate entity

principled and public policy the courts ignore form and take into account the substance. Lifting by statute. 1. When members fall below statutory minimum, as per section 33 of the Act, a business is not allowed to carry on business for more than six months if membership falls below seven in case of a public company and below two in case of a private company. Anyone aware of the fall of membership and continues to carry on business will be held liable for all debts of the company contracted after six months. 2. Misdescription of the company. Sec 109 of the Act states that the name of the company must be fully and properly mentioned on all documents issued by it. Where an officer of a company signs, on behalf of the company, a bill of exchange, promissory note, Cheque, order for money or goods in which the companys name is not mentioned the officer is personally liable to the holder of the bill of exchange. 3. Holding and subsidiary companies. Although both holding and subsidiary companies are separate entities there are instances where a subsidiary may loose its separate identity to a certain extent. a) Where at the end of the financial year a company has subsidiaries, it may lay before the members in a general meeting not only its own account but also a set of group accounts showing the profits and loss earned by the company and its subsidiaries and their collective state of affairs at the sixth schedules.
b) Section 167 empowers the inspector appointed by the court to regard the

subsidiary and the holding company as one entity for the purpose of investigation.

4. Investigation of company membership. Section 173 (s) empowers the Registrar to appoint one or more competent inspectors to investigate and report on the membership of any company for the purpose of determing the true persons who are or have been financially interested in the success or failure of the company or able to control or to influence the policy of the company, to investigate whether the corporate veil is lifted, or to ascertain the real persons controlling it. 5. Take over Bids. Section 210 provides that where scheme or contract inviting the transfer of shares or class of shares in the company to another company has been approved by the holders of not less than nine tenths in the value of shares whose transfer is involved the transferee company may at any time within two months after the making of the offer by the transferor company, give notice in the prescribed manner to any dissenting shareholder that it deserves to acquire his shares. 6. Fraudulent conduct of Business. Section 323 of companys Act in the course of winding up of a company it appears that any business of the company has been carried on with intention to defraud creditors, the court may declare that any person who were knowingly, parties to the carrying on such business are to be personally liable for the debts and other liabilities of the company. 7. Prosecution of delinquent officers and members of company. Section 325 of Act, if in the course of winding up of a company it appears that any past or present officer or any member of the company has been guilty of any offence in relation to the company then the court may declare such a person liable for his offence. Advantages of Incorporation. 1. Limited liability.

Limited companies are off springs of preview necessity, that is, men should be entitled to engage in a commercial pursuit without involving the whole of their fortune in that particular pursuit in which they are engaged. 2. Transferability of shares. Shares in a company can be transferred (subject to restrictions in the articles of associations) from one person to another without the consent of other members. 3. Separate Legal entity. A company is not affected by the death, insanity or bankruptcy of a member. 4. Control Control can be gained by acquisition of majority shares, which carry voting power. 5. Permanent existence. A companys life is permanent. 6. Separation of ownership and management. Shareholders are owners of the company. Shareholders elect their representatives to the board of directors, which manages the affairs of the company. 7. Expert management. Companies run large-scale business and have adequate financial resources and as such can afford the services of specialists. Thus companies are run professionally. 8. Public confidence. Formation and running of a company is regulated by the provisions of the companies Act and various other acts. Provisions regarding the appointment and remuneration of directors, compulsory audit and publication of accounts protection of minority shareholders have created greater public confidence. 9. Social Advantages A company helps to gather savings from the public and invests them in sound industrial and commercial ventures. Companies provide employment opportunity

to many and since they operate in large scale they ensure economic use of national resources and provisions of goods and services to the public at lower prices.

Disadvantages of incorporation 1. Formation of companies is a complicated procedure and is costly. Documents required like the memorandum of Association, the articles, the prospectus or statement in lieu of prospectus are usually drawn by legal experts who charge high fees for their preparation. 2. There is no secrecy regarding the affairs of a company. Wide publicity of the company affairs may lead to economic sabotage by its rivals. 3. It is very expensive to administer a company. This relates to requirements pertaining the holding of general and statutory meetings and returns of annual accounts. The accounts and audit reports require expenses. 4. Doctrine of ultra vires. A company can only trade on the business specified in its object clause of the memorandum of association. 5. Taxation. A company must pay taxes as a legal person while this is not a requirement for partnerships. 6. There are many formalities before a business starts trading. 7. The winding up of a company is widely published thus exposing the property of the company to an insecure position.