Notes on Corporate Law Fundamentals (Avtar Singh-Introduction to Company Law)

I. Corporate Personality and Advantages of Incorporation

The core principle of Company Law is the independent corporate existence of a company, which, upon incorporation (S.9), becomes a legal person (juristic person) distinct from its members.

Advantage	Description & Statutory Basis	Key Case Law
Independent Existence	The company is a body corporate. It is institutionalized; no single person owns the company itself. The company is capable of exercising all functions of an incorporated individual.	Salomon v Salomon & Co Ltd: Established that a company, even a “one-man company” controlled by one individual (Salomon), is a real, distinct, and independent corporation fulfilling all legal requirements.
Perpetual Succession	An incorporated company never dies. The continuity remains the same regardless of the death or insolvency of members or total changes in management or membership.	The company’s liability for electricity dues remained the same despite a total change in management.
Limited Liability	Members’ liability for business debts is restricted, usually to the nominal value of shares taken or the amount guaranteed. This encourages the aggregation of small capitals into large undertakings.	N/A
Separate Property	The company is the owner of its capital and assets. Shareholders are neither several nor joint owners of the company’s property.	Macaura v Northern Assurance Co Ltd: A substantial shareholder lacked an insurable interest in the company’s property because the company was the legal owner.
Capacity to Sue	A company can sue and be sued in its own corporate name. It has the right to protect its fair name and sue for defamation likely to damage its business.	A criminal complaint by a company must be represented by a natural person.
Transferable Shares	Shares (S. 44) are movable property and easily transferable, providing liquidity to the investor and stability to the company.	N/A
Finances	The company form is the only medium given the privilege of raising capital by public subscriptions (shares or debentures).	N/A

II. Lifting the Corporate Veil

The doctrine of lifting the corporate veil is an exception to the separate entity principle, allowing courts to ignore the company’s distinct personality and examine the human beings or the “realities” behind it. This is done when the corporate entity is used as a mere cloak or sham.

Grounds for Lifting the Veil

Determination of Character (Enemy): The veil may be lifted to determine the character of the company (e.g., whether it is “enemy”).
- Daimler Co Ltd v Continental Tyre & Rubber Co Ltd: Held that a company, though incorporated in the UK, could assume an enemy character if the persons in de facto control were residents in an enemy country or acting under their control, as this would be monstrous and against public policy.
Benefit of Revenue or Tax Evasion: Courts have the power to disregard the corporate entity if it is used to circumvent tax obligations.
- Dinshaw Maneckjee Petit, re: The veil was lifted because companies were formed purely as a means of avoiding super-tax and did no business, acting only as the assessee himself by receiving dividends and handing them back as “pretended loans”.
- Contrast: Bacha F Guzdar v CIT: The veil was not lifted to allow a shareholder to treat dividend income as tax-exempt agricultural income, reinforcing that shareholders are distinct from the company for revenue purposes.
Fraud or Improper Conduct (Circumvention of Law): The separate existence is refused where the company is formed to defeat or circumvent the law, defraud creditors, or avoid legal obligations.
- Gilford Motor Co Ltd v Horne: The company was restrained because it was a “mere cloak or sham” used by the defendant (Horne) to commit a breach of his restrictive covenant against customer solicitation.
- Workmen v Associated Rubber Industry Ltd: The Supreme Court disregarded the separate existence of a subsidiary created purely to transfer investment holdings and reduce the liability to pay bonus to workers, calling it the court’s duty to get behind the “smokescreen” when ingenuity is expended to avoid welfare legislation.
Agency or Trust (Including Government Companies): The separate entity may be ignored if the company is used as an agent or trustee, although courts require strong evidence.
- Smith, Stone & Knight Ltd v Birmingham Corpn: A subsidiary was held to be an agent/tool of the parent company because the parent held nearly all shares, treated profits as its own, appointed managers, and exercised effectual and constant control.
- Som Prakash Rekhi v Union of India: A Government company formed from acquired assets was deemed an “agent or incarnation of the State” for the purpose of enforcing fundamental rights, based on the reality of State control.
Statutory Provisions: The Companies Act imposes personal liability in certain scenarios: carrying on business for more than six months after membership falls below the statutory minimum (S. 3-A), contracting while misdescribing the company name (S. 12), or operating solely to defraud creditors (S. 339).

III. Memorandum of Association (MOA) and Ultra Vires

The MOA is the foundational document containing the constitution of the company.

A. Clauses of the MOA:

Name Clause: Requires the name to end in “Limited” or “Private Limited” unless exempted (e.g., charitable companies under S.8). Misdescription of the name entails personal liability.
Objects Clause: States the field of activity and purpose of the company.
Liability Clause: States whether liability is limited by shares, limited by guarantee, or unlimited.
Capital Clause: States the registered capital and division into shares.
Registered Office Clause: States the State where the office is situated.

B. Doctrine of Ultra Vires

The Objects Clause restricts the company’s activities. An act outside this clause is ultra vires (beyond the powers of the company).

Consequence: An ultra vires act or contract is absolutely null and void and incapable of ratification by shareholders, even if unanimous.
Ashbury Rly Carriage & Iron Co v Riche: Established that contracts outside the objects clause (even broad terms like “general contractors” must be related to main objects) are unenforceable.
A Lakshmanaswami Mudaliar v LIC: Confirmed that expenditures (donations) must be reasonably incidental to the company’s stated objects; otherwise, they are ultra vires and can lead to personal liability for directors.

IV. Articles of Association (AOA) and Doctrines of Notice

The AOA are the internal regulations and bye-laws governing the company’s management.

A. Relationship and Binding Force

The Articles are subordinate to the Memorandum; in case of inconsistency, the Articles must yield. The Articles, once registered (S. 10), bind members to the company and the company to the members.

The company is generally not bound to outsiders by provisions in its articles. Even a member is considered an “outsider” when suing the company in a non-member capacity (e.g., as a director or solicitor).

B. Constructive Notice

Since the MOA and AOA are registered public documents, every person contracting with the company is presumed to know their contents (constructive notice). If a contract is inconsistent with these documents, the outsider cannot sue the company.

C. Indoor Management (Rule in Royal British Bank v Turquand)

This rule restricts the effect of constructive notice by protecting outsiders against internal irregularities. An outsider dealing with the company:

Must read the public documents (MOA/AOA).
May assume that all internal irregularities (e.g., passing a necessary resolution or appointing a de facto director) have been duly complied with.

Limitations to the Turquand Rule:

Knowledge of Irregularity: The rule does not protect a person who has actual knowledge of the internal irregularity.
Suspicion of Irregularity: Protection is lost if circumstances are suspicious enough to demand inquiry (e.g., an officer exercising power apparently outside their authority).
Forgery: The rule is arguably not applicable to forgery. Ruben v Great Fingall Consolidated held that the rule applies to irregularities affecting a genuine transaction, not forgery.

V. Prospectus and Liabilities for Misstatement

A prospectus (S. 2(70)) is a document inviting offers from the public for subscription or purchase of securities. Only public companies can generally issue a prospectus to the public.

A. Types of Prospectus

Abridged Prospectus (S. 2(1)): A memorandum containing salient features of a prospectus, which must accompany application forms.
Shelf Prospectus (S. 31): Valid for a period (not exceeding one year) for subsequent offers of securities, requiring no further prospectus. It must be accompanied by an Information Memorandum detailing changes in financial position prior to subsequent issues.
Red Herring Prospectus (S. 32): Issued prior to a full prospectus, omitting complete particulars of the quantum or price of securities. It must be filed with the Registrar at least three days before the offer opens.

B. Civil Liability for Misstatements

Compensation under Section 35 (Statutory Liability): This liability falls jointly and severally on directors, promoters, experts (S. 26(5)), and those authorizing the issue. They are liable to compensate the investor for loss sustained due to an untrue or misleading statement.
- Basis of Liability: Following the public dissatisfaction after Derry v Peek (where directors were not liable because they honestly believed the false statement was true), S. 35 requires that the defence of honest belief must be based upon reasonable grounds.
- Defences: Includes withdrawing consent before issue, issuing without knowledge and giving public notice, or proving that the misleading statement was immaterial.
Damages for Deceit (Fraudulent Statement): Directors issuing a prospectus with fraudulent statements (statements known to be false, not believed to be true, or made recklessly) are liable for damages.
Rescission for Misrepresentation: A shareholder can sue the company to revoke the contract and receive a refund.
- Right is lost if: The allottee affirms the contract with knowledge of misrepresentation, there is unreasonable delay (e.g., five months was held too late), or the company commences winding up proceedings.

C. Omissions and Criminal Liability

Untrue Statement: A statement is untrue if it is false in the form and context in which it is included. Omissions calculated to mislead also render the prospectus false.
R v Lord Kylsant: The prospectus was held misleading because the omission of company losses made the technically true statements about dividend payments deceptive.
Criminal Liability (S. 34): Any person authorizing the issue of a prospectus containing untrue or misleading statements is liable under Section 447 (fraudulent conduct).

VI. Kinds of Companies and Promoters

A. Company Types (Overview)

Private Company (S. 2(68)): Restricts share transfer, limits membership to 200, and prohibits public subscription invitation. Requires a minimum of two persons.
Public Company (S. 2(71)): A company that is not a private company. A subsidiary of a public company is deemed a public company even if its articles maintain private company restrictions.
One Person Company (OPC) (S. 2(62)): A private company with only one member. Requires the MOA to state a nominee who becomes a member upon the subscriber’s death or incapacity.
Government Company (S. 2(45)): Not less than 51% of paid-up share capital held by the government.
Dormant Company (S. 455): Formed for a future project or holding assets, or is an inactive company (no significant accounting transaction/no filings for two consecutive financial years).
Illegal Association: A business association exceeding 50 members (as prescribed by rules) must be registered; otherwise, members are personally liable and cannot sue the association.

B. Promoters

A promoter brings about the incorporation and organization of a corporation.

Fiduciary Position: A promoter stands in a fiduciary position to the company.
Duty of Disclosure: Promoters must faithfully disclose all relevant facts, especially concerning property sales, either to an independent Board of Directors or to the shareholders who are invited to subscribe.

C. Pre-incorporation Contracts

Before incorporation, a company is a non-entity.

Liability: The company is generally not bound by pre-incorporation contracts. The promoters/agents who contract on its behalf may incur personal liability. Kelner v Baxter illustrated this, holding promoters liable for purchasing wine on behalf of a projected hotel company.
Specific Relief Act, 1963 (S. 15(h), S. 19): This Act allows a public company to enforce a pre-incorporation contract if it is within its objects, and the other party may enforce it if the contract is adopted by the company after incorporation.