What is a Company?- Definition, Characteristics and Latest Case Laws

Table of Contents

1. What is a company?
2. Definition of a company
3. Characteristic features of a company
4. Lifting the corporate veil

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1. What is a company?

The word ‘company’ has no strictly technical or legal meaning (Stanley, Re [1906] 1 Ch. 131). It may be described to imply an association of persons for some common object or objects. The purposes for which people may associate themselves are multifarious and include economic as well as non-economic objectives. But, in common parlance, the word ‘company’ is normally reserved for those associated for economic purposes, i.e., to carry on a business for gain.

Used in the aforesaid sense, the word ‘company’, in simple terms, may be described to mean a voluntary association of persons who have come together for carrying on some business and sharing the profits therefrom.

Indian Law provides two main types of organisations for such associations:

• • ‘partnership’ and
  • ‘company’.

Although the word ‘company’ is colloquially applied to both, the statute regards companies and company law as distinct from partnerships and partnership law. Partnership Law in India is codified in the Partnership Act, 1932 and Limited Liability Partnership Act, 2008. Both these legislations are based on the law of agency, each partner becoming an agent of the other(s), and it, therefore, affords a suitable framework for an association of a small body of persons having trust and confidence in each other.

A more complicated form of association, with a large and fluctuating membership, requires a more elaborate organisation which ideally should confer corporate personality on the association, that is, should recognise that it constitutes a distinct legal person, subject to legal duties and entitled to legal rights separate from those of its members. This can be obtained easily and cheaply by registering an association as a company under the Act.

It should be noted that the Act even allows a company to be formed and registered for the promotion of commerce, art, science, sports, religion or charity, etc., for purposes other than profit making.

In this article, we shall limit our scope of study only to companies registered under the Companies Act, 2013 or under any of the earlier Companies Acts.

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2. Definition of a company

The Act does not define a company in terms of its features.

Section 2(20) of the Companies Act, 2013 defines a company to mean a company incorporated under this Act or under any previous company law.

This definition does not clearly point out the meaning of a company. In order to understand the meaning of a company, let us see the definitions as given by some authorities.

Some popular definitions of a company

Lord Justice Lindley – “A company is an association of many persons who contribute money or monies worth to a common stock and employed in some trade or business and who share the profit and loss arising therefrom. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute to it or to whom it pertains 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.”

Chief Justice Marshall – “A corporation is 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.”

Prof. Haney – “A company is an artificial person created by law, having separate entity, with a perpetual succession and common seal.”

The above definitions clearly bring out the meaning of a company in terms of its features. A company to which the Companies Act applies comes into existence only when it is registered under the Act. On registration, a company becomes a body corporate i.e., it acquires a legal personality of its own, separate and distinct from its members. A registered company is, therefore, created by law and law alone can regulate, modify or dissolve it.

In G.V. Pratap Reddy Through G.P.A. TSR Research (P.) Ltd. v. K.V.V.S.N. Associates [2016] 70 taxmann.com 34 (SC), the Supreme Court of India held that where notice inviting tender (NIT) by State of Telangana required that bidder must be an individual/company, word company in NIT could only mean a company as understood under Companies Act and cannot be read to include a firm and, therefore, bid of respondent which was neither an individual nor a company but a firm was rightly rejected by State.

3. Characteristic features of a company

The most important characteristic features of a company are ‘separate legal entity’ of the company and in most cases ‘limited liability’ of its members. These and other characteristic features of a company are discussed below:—

3.1 Incorporated association

A company must be incorporated or registered under the Companies Act. Minimum number of members required for this purpose is seven in the case of a ‘public company’ and two in the case of a ‘private company’.

However, Section 3 of the Companies Act, 2013 allows formation of ‘One Person Company’ also.

3.2 Legal entity distinct from its members

Unlike partnership*, the company is distinct from the persons who constitute it. Hence, it is capable of enjoying rights and of being subjected to duties which are not the same as those enjoyed or borne by its members.

As Lord Macnaughten puts it, “the company is at law a different person altogether from the subscribers. . . . ; and though it may 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 proceeds, the company is not in law, the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act.” [Salomon’s case]

Case Law: Kondoli Tea Co. Ltd., Re ILR [1886]

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The first case on the subject (even before the famous Salomon’s case) was that of Kondoli Tea Co. Ltd., Re ILR [1886].

Facts of the Case:

In this case certain persons transferred a tea estate to a company and claimed exemption from ad valorem duty on the ground that they themselves were the shareholders in the company and, therefore, it was nothing but a transfer from them in one to themselves under another name.

Decision:

Rejecting this, the Calcutta High Court observed: “The Company was a separate person; a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property, as if the shareholders had been totally different persons.”

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The separate legal personality of the company is the bedrock of the Company Law …… – S.A.E. (India) Ltd. v. E.I.D. Parry (India) Ltd. [1998] 18 SCL 481 (Mad.).

Thus, a company can own property and deal with it the way it pleases. No member can either individually or jointly claim any ownership rights in the assets of the company during its existence or on its winding-up – B.F. Guzdar v. CIT, Bombay [1955] 25 Comp. Cas. 1 (SC).

In Rajendra Nath Dutta v. Shibendra Nath Mukherjee [1982] 52 Comp. Cas. 293 (Cal.) it was held that for any wrong done, the company must sue or be sued in its own name.

Even where a single shareholder virtually holds the entire share capital, a company is to be differentiated from such a shareholder.

Case Law: Salomon v. Salomon & Co. Ltd. [1895-99] All ER 33 (HL)

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Facts of the Case:

In the well known case of Salomon v. Salomon & Co. Ltd. [1895-99] All ER 33 (HL), Salomon was a prosperous leather merchant. He converted his business into a Limited Company— Salomon & Co. Ltd. The company so formed consisted of Salomon, his wife and five of his children as members. The company purchased the business of Salomon for £39,000, the purchase consideration was paid in terms of £10,000 debenture conferring a charge over the company’s assets, £20,000 in fully paid £1 share each and the balance in cash. The company in less than one year ran into difficulties and liquidation proceedings commenced. The assets of the company were not even sufficient to discharge the debentures (held entirely by Salomon himself). And nothing was left for the unsecured creditors.

Decision:

The House of Lords unanimously held that the company had been validly constituted, since the Act only required seven members holding at least one share each. It said nothing about their being independent, or that there should be anything like a balance of power in the constitution of the company. Hence, the business belonged to the company and not to Salomon. Salomon was its agent. The company was not the agent of Salomon.

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Case Law: Lee v. Lee’s Air Farming Ltd. [1960] 3 All ER 420 (PC)

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Facts of the Case:

‘L’ formed a company with a share capital of three thousand pounds, of which 2999 pounds were held by ‘L’. He was also the sole governing director. In his capacity as the controlling shareholder, ‘L’ exercised full and unrestricted control over the affairs of the company. ‘L’ was a qualified pilot also and was appointed as the chief pilot of the company under the articles and drew a salary for the same. While piloting the company’s plane he was killed in an accident. As the workers of the company were insured, workers were entitled for compensation on death or injury. The question was while holding the position of sole governing director, could ‘L’ also be an employee/worker of the company.

Decision:

Held that the mere fact that someone was the director of the company was no impediment to his entering into a contract to serve the company. If the company was a legal entity, there was no reason to change the validity of any contractual obligations which were created between the company and the deceased. The contract could not be avoided merely because ‘L’ was the agent of the company in its negotiations. Accordingly, ‘L’ was an employee of the company and, therefore, entitled to compensation claim.

Where a decree has been issued by the Court in respect of sums due against a company, the same cannot be enforced against its managing director – In H.S. Sidana v. Rajesh Enterprises [1993] 77 Comp. Cas. 251 (P&H).

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Case Law: Bacha F. Guzdar v. The Commissioner of Income-Tax, Bombay (1955)

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Facts of the Case:

Mrs. Guzdar received certain amounts as dividend in respect of shares held by her in a tea company. Under the Income-Tax Act, agricultural income is exempt from payment of income-tax. As income of a tea company is partly agricultural, only 40% of the company’s income is treated as income from manufacture and sale and, therefore, liable to tax. Mrs. Guzdar claimed that the dividend income in her hands should be treated as agricultural income up to 60%, as in the case of a tea company, on the ground that the dividends received by shareholders represented the income of the company.

Decision:

The Supreme Court held that though the income in the hands of the company was partly agricultural yet the same income when received by Mrs. Guzdar as dividend could not be regarded as agricultural income.

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In Chamundeeswari v. CTO, Vellore Rural (2007), Madras High Court held that a company being a legal entity by itself, any dues from company have to be recovered from company and not from its directors.

3.3 Artificial person

The company, though a juristic person, does not possess the body of a natural being. It exists only in contemplation of law. Being an artificial person, it has to depend upon natural persons, namely, the directors, officers, shareholders etc., for getting its various works done. However, these individuals only represent the company and accordingly whatever they do within the scope of the authority conferred upon them and in the name and on behalf of the company, they bind the company and not themselves.

3.4 Limited liability

One of the principal advantages of trading through the medium of a limited company is that the members of the company are only liable to contribute towards payment of its debts to a limited extent.

If the company is limited by shares, the shareholder’s liability to contribute is measured by the nominal value of the shares he holds, so that once he or someone who held the shares previously has paid that nominal value plus any premium agreed on when the shares were issued, he is no longer liable to contribute anything further. However, companies may be formed with unlimited liability of members or members may guarantee a particular amount. In such cases, liability of the members shall not be limited to the nominal or face value of their shares and the premium, if any, unpaid thereon.

In the case of unlimited liability companies, members shall continue to be liable till each paisa has been paid off.

In case of companies limited by guarantee, the liability of each member shall be determined by the guarantee amount, i.e., he shall be liable to contribute up to the amount guaranteed by him.

If the guarantee company also has share capital, the liability of each member shall be determined in terms of not only the amount guaranteed but also the amount remaining unpaid on the shares held by a member.

Unlimited Liability of a member of a Limited Liability company

Section 3A, inserted by the Companies (Amendment) Act, 2017, provides that if at any time the number of members of a company is reduced, in the case of a public company, below seven and in the case of a private company, below two, and the company carries on business for more than six months while the number of members is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is aware of the fact that it is carrying on business with less than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debt.

3.5 Separate property

Shareholders are not, in the eyes of the law, part owners of the undertaking. In India, this principle of separate property was best laid down by the Supreme Court in Bacha F. Guzdar v. CIT, Bombay (supra). The Supreme Court held that a shareholder is not the part owner of the company or its property, he is only given certain rights by law, for example, to vote or attend meetings, or to receive dividends.

Case Law: Macaura v. Northern Assurance Company Ltd. [1925] AC 619

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Facts of the Case:

In this case, Macaura held all except one share of a timber company. He had also advanced substantial amount to the company. He insured the company’s timber in his own name. On timber being destroyed by fire, his claim was rejected for want of insurable interest.

Decision:

The court observed “No shareholder has any right to any item of property owned by the company for he has no legal or equitable interest therein”.

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“. . . the property of the company is not the property of the shareholders; it is the property of the company” – Gramophone & Typewriter Ltd. v. Stanley (supra).

3.6 Transferability of shares

One particular reason for the popularity of joint stock companies has been that their shares are capable of being easily transferred. The Act in section 44 echoes this feature by declaring:

“the shares, debentures or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company”.

A shareholder can transfer his shares to any person without the consent of other members. Articles of association, even of a public company can put certain restrictions on the transfer of shares but it cannot altogether stop it.

The Companies Act, 2013 even upholds shareholders’ agreements providing for ‘Right of first offer’ and ‘Right of first refusal’ as valid even in case of a public company. What it means is that Articles of a company, whether public or private, may contain a clause that in case a member wishes to sell his shares, he will have to first offer the same to existing members. Only if they refuse to buy within the stipulated period that they can be sold to the outsiders.

However, a private company is required to put certain restrictions on the transferability of its shares but the right to transfer is not taken away absolutely even in case of a private company.

3.7 Perpetual succession

Company being an artificial person cannot be incapacitated by illness and it does not have an allotted span of life. Being distinct from the members, the death, insolvency or retirement of its members leaves the company unaffected. Members may come and go but the company can go for ever. It continues even if all its human members are dead. Even where during the war all the members of a private company, while in general meeting were killed by a bomb, the company survived. Not even a hydrogen bomb could have destroyed it. [K/9 Meat Suppliers (Guildford) Ltd., Re [1966] 1 W.L.R. 1112]. “King is dead, long live the King” very aptly applies to the company form of organisation. [Here, the first ‘King’ is used to refer to the individual monarch and the second ‘King’ refers to the office of king, i.e., the institution of monarchy.] In the above circumstances, the legal heirs of the deceased shareholders will become the members.

3.8 Common seal*

A company being an artificial person is not bestowed with a body of a natural being. Therefore, it does not have a mind or limbs of human being. It has to work through the agency of human beings, namely, the directors and other officers and employees of the company.

As per section 22, as amended by the Companies (Amendment) Act, 2015, a company may, under its common seal, if any, through general or special power of attorney empower any person to execute deeds on its behalf in any place either in or outside India. It further provides that a deed signed by such an attorney on behalf of the company and under his seal where sealing is required, shall bind the company.

In case a company does not have a common seal, the authorization shall be made by two directors or by a director and the company secretary, wherever the company has appointed a company secretary.

Again, except where expressly otherwise provided in this Act, a document or proceeding requiring authentication by a company may be signed by any key managerial personnel or an officer or employee of the company duly authorized by the Board in this behalf, and need not be under its common seal [Section 21]

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4. Lifting the corporate veil

The chief advantage of incorporation from which all others follow is, of course, the separate legal entity of the company. However, it may happen that the corporate personality of the company is used to commit frauds or improper or illegal acts. Since an artificial person is not capable of doing anything illegal or fraudulent, the facade of corporate personality might have to be removed to identify the persons who are really guilty. This is known as ‘lifting the corporate veil’. Although, in general, the courts do not interfere and essentially go by the principle of separate entity as laid down in the Salomon’s case and endorsed in many others, it may be in the interest of the members in general or in public interest to identify and punish the persons who misuse the medium of corporate personality.

In Cotton Corporation of India Ltd. v. G.C. Odusumathd [1999] 22 SCL 228 (Kar.), the Karnataka High Court has held that the lifting of the corporate veil of a company as a rule is not permissible in law unless otherwise provided by clear words of the Statute or by very compelling reasons such as where fraud is needed to be prevented or trading with enemy company is sought to be defeated.

As to when the corporate veil shall be lifted, the observations of the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp. Cas. 548 (SC) is worth noting.

“While it is firmly established ever since in Salomon v. Salomon & Co. Ltd. [1897] AC 22 that a company is an independent and legal personality distinct from the individuals who are its members, it has since been held that the corporate veil may be lifted, the corporate personality may be ignored and the individual members recognised for who they are in certain exceptional circumstances. Generally, and broadly speaking the corporate veil may be lifted where the statute itself contemplates lifting the veil or fraud or improper conduct is intended to be prevented, or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern.”

It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of public interest, the effect on parties who may be affected, etc.

Again, in State of U.P. v. Renusagar Power Co. [1991] 70 Comp. Cas. 127, the Supreme Court observed :

“The concept of lifting the corporate veil is a changing concept. The veil of corporate personality, even though not lifted sometimes, is becoming more and more transparent in modern jurisprudence. It is high time to reiterate that, in the expanding horizon of modern jurisprudence, lifting of the corporate veil is permissible, its frontiers are unlimited. But it must depend primarily on the realities of the situation.”

The circumstances under which the courts may lift the corporate veil may broadly be grouped under the following two heads:—

(A) Under statutory provisions

(B) Under judicial interpretations

4.1 Under statutory provisions

The veil of corporate personality may be lifted in certain cases or pierced as per express provisions of the Act. In other words, the advantage of ‘distinct entity’ and ‘limited liability’ may not be allowed to be enjoyed in certain circumstances. Such cases are :

The Companies Act, 2013 itself provides for certain cases in which the directors or members of the company may be held personally liable. In such cases, while the separate entity of the company is maintained, the directors or members are held personally liable along with the company. These cases are as follows:

4.1(A) Mis-statements in prospectus [Sections 34 & 35] – In case of misrepresentation in a prospectus, the company and every director, promoter, expert and every other person, who authorised such issue of prospectus shall be liable to compensate the loss or damage to every person who subscribed for shares on the faith of untrue statement (Sec. 35).

Besides, these persons may be punished with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud (Section 34 and Section 447 read together). However, a person may escape the aforesaid conviction if he proves that such statement or omission was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or the inclusion or omission was necessary.

4.1(B) Failure to return application money [Sec. 39] – In case of issue of shares by a company to the public, if minimum subscription, as stated in the prospectus has not been received within 30 days of the issue of prospectus or such other period as may be specified by the SEBI, then as per Rule 11 of Companies (Prospectus and Allotment of Securities) Rules, 2014, the application money shall be repaid within a period of fifteen days from the closure of the issue and if any such money is not so repaid within such period, the directors of the company who are officers in default shall jointly and severally be liable to repay that money with interest at the rate of fifteen percent per annum.

In case of default, the company and its officer who is in default shall be liable to a penalty of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less.

4.1(C) Misdescription of Name [Sec. 12] – As per section 12, a company shall have its name printed on hundies, promissory notes, bills of exchange and such other documents as may be prescribed. Thus, where an officer of a company signs on behalf of the company any contract, bill of exchange, hundi, promissory note, cheque or order for money, such person shall be personally liable to the holder if the name of the company is either not mentioned, or is not properly mentioned.

Case Law: Hendon v. Adelman (1973)

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Facts of the Case:

On a cheque, the name of a company was stated as ‘LR agencies limited’ whereas the real name of the company was ‘L&R Agencies Ltd.’

Decision:

The Court held the signatory directors personally liable.

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Besides, the company and its officer who is in default shall be liable to a penalty of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less.

4.1(D) Punishment for contravention of section 73 or section 76 [Section 76A] – Where a company accepts or invites or allows or causes any other person to accept or invite on its behalf any deposit in contravention of the manner or the conditions prescribed under section 73 or section 76 or rules made thereunder or if a company fails to repay the deposit or part thereof or any interest due thereon within the time specified under section 73 or section 76 or rules made thereunder or such further time as may be allowed by the Tribunal under section 73, besides the company that shall be punishable with fine which shall not be less than one crore rupees but which may extend to ten crore rupees; every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with fine which shall not be less than twenty-five lakh rupees but which may extend to two crore rupees, or with both. Moreover, if it is proved that the officer of the company who is in default, has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or depositors or creditors or tax authorities, he shall also be liable for action under section 447.

4.1(E) For facilitating the task of an inspector appointed under section 210 or 212 or 213 to investigate the affairs of the company [Sec. 219] – Section 219 provides that if an inspector appointed under section 210 or section 212 or section 213 to investigate into the affairs of a company considers it necessary for the purposes of the investigation, to investigate also the affairs of—

(a) any other body corporate which is, or has at any relevant time been the company’s subsidiary company or holding company, or a subsidiary company of its holding company;

(b) any other body corporate which is, or has at any relevant time been managed by any person as managing director or as manager, who is, or was, at the relevant time, the managing director or the manager of the company;

(c) any other body corporate whose Board of Directors comprises nominees of the company or is accustomed to act in accordance with the directions or instructions of the company or any of its directors; or

(d) any person who is or has at any relevant time been the company’s managing director or manager or employee,

he shall, subject to the prior approval of the Central Government, investigate into and report on the affairs of the other body corporate or of the managing director or manager, in so far as he considers that the results of his investigation are relevant to the investigation of the affairs of the company for which he is appointed.

4.1(F) For investigation of ownership of company [Sec. 216] – Under section 216, the Central Government may appoint one or more inspectors to investigate and report on the membership of any company for the purpose of determining the true persons who are financially interested in the company and who control its policy or materially influence it.

4.1(G) Fraudulent conduct [Sec. 3391] – Where in the case of winding-up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other person, or for any fraudulent purpose, those who are knowingly parties to such conduct of business may, if the Tribunal thinks it proper so to do, be made personally liable without any limitation as to liability for all or any debts or other liabilities of the company. Liability under this section2 may be imposed only if it is proved that the business of the company has been carried on with a view to defraud the creditors – Re. Augustus Barnett & Sons Ltd. [1986] B CLC 170 Ch. D.

4.1(H) Liability for ultra vires Acts – Directors and other officers of a company will be personally liable for all those acts which they have done on behalf of a company if the same are ultra vires the company.

Case Law: Weeks v. Propert [1873] L.R 8 C.P. 427

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Facts of the Case:

The directors of a railway company which had fully exhausted its borrowing powers advertised for money to be lent on the security of debentures, ‘W’ lent £500 upon the faith of advertisement and received a debenture.

Decision:

Held, the debenture was void but ‘W’ could sue the directors for breach of warranty of authority (since they had by advertisement warranted that they had the power to borrow which in fact they did not have).

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4.1(I) Liability under other statutes – Besides the Act, directors and other officers of the company may be held personally liable under the provisions of other statutes. For example, under the Income-tax Act, where any private company is wound-up and if tax arrears of the company in respect of any income of any previous year cannot be recovered, every person who was director of that company at any time during the relevant previous year shall be jointly and severally liable for payment of tax. Similarly, under Foreign Exchange Management Act, 1999, the directors and other officers may be proceeded individually or jointly for violations of the Act.

4.2 Under Judicial Interpretations

It is difficult to deal with all the cases in which courts have lifted or might lift the corporate veil. Some of the cases where the veil of incorporation was lifted by judicial decisions may be discussed to form an idea as to the kind of circumstances under which the facade of corporate personality will be removed or the persons behind the corporate entity identified and penalised, if necessary.

4.2(A) Protection of revenue – The separate entity of a company may be disregarded where revenue of the State is at stake.

Case Law: Sir Dinshaw Maneckjee Petit, Re AIR 1927 Bom. 371

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Facts of the case:

The assessee, in this case was a millionaire earning huge income by way of dividend and interest. He formed four private companies and transferred his investments to each of these companies in exchange of their shares. The dividends and interest income received by the company was handed back to Sir Dinshaw as a pretended loan.

Decision:

It was held that the company was formed by the assessee purely and simply as a means of avoiding tax and company was nothing more than assessee himself. It did no business, but was created simply as a legal entity to ostensibly receive the dividends and interest and to hand them over to the assessee as pretended loans.

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Similarly in CIT v. Sri Meenakshi Mills Ltd. AIR 1967 SC 819, where the veil had been used for evasion of taxes and duties, the court upheld the piercing of the veil to look at the real transaction.

4.2(B) Prevention of fraud or improper conduct – Where the medium of a company has been used for committing fraud or improper conduct, courts have lifted the veil and looked at the realities of the situation.

Case Law: Gilford Motor Company v. Horne [1933] 1 CH 935

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Facts of the Case:

‘Horne’ had been employed by the company under an agreement that he shall not solicit the customers of the company or compete with it for a certain period of time after leaving its employment. After ceasing to be employed by the plaintiff, Horne formed a Company which carried on a competing business and caused the whole of its shares to be allotted to his wife and an employee of the company, who were appointed to be its directors.

Decision:

It was held that since the defendant (Horne) in fact controlled the company, its formation was a mere ‘cloak or sham’ to enable him to break his agreement with the plaintiff. Accordingly, an injunction was issued against him and against the company he had formed restraining them from soliciting the plaintiff’s customers.

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Case law: Jones v. Lipman [1962] 1 All ER 442

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Facts of the Case:

Seller of a piece of land sought to evade specific performance of a contract for the sale of the land by conveying the land to a company which he formed for the purpose. Initially the company was formed by third parties, and the vendor purchased the whole of its shares from them, had the shares registered in the name of himself and a nominee, and had himself and the nominee appointed directors.

Decision:

It was held that specific performance of the contract cannot be resisted by the vendor by conveyancing of the land to the company which was a mere ‘facade’ for avoidance of the contract of sale and specific performance of the contract was therefore ordered against the vendor and the company.

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4.2(C) Determination of the enemy character of a company – Company being an artificial person cannot be an enemy or friend. However, during war, it may become necessary to lift the corporate veil and see the persons behind as to whether they are enemies or friends. It is because, though a company enjoys a distinct entity, its affairs are essentially run by individuals.

Case Law: Daimler Company Ltd. v. Continental Tyre & Rubber Co. (Great Britain) Ltd. [1916] 2 AC 307

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Facts of the Case:

A company was incorporated in London by a German company for the purpose of selling tyres manufactured in Germany. Its majority shareholders and all the directors were Germans. War between England and Germany was declared in 1914.

Decision:

It was held that since both the decision-making bodies, the Board of directors and the general body of shareholders were controlled by Germans, the company was a German company and hence an enemy company. Accordingly, the suit filed by the company to recover a trade debt was dismissed on the ground that such payment would amount to trading with enemy.

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4.2(D) Formation of subsidiaries to act as an agent –

Case Law: Merchandise Transport Limited v. British Transport Commission [1982] 2 QB 173

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Facts of the Case:

A transport company wanted to obtain licences for its vehicles, but it could not do so if it made the application in its own name. It, therefore, formed a subsidiary company and the application for licences was made in the name of the subsidiary. The vehicles were to be transferred to the subsidiary.

Decision:

Held, the parent and the subsidiary company were one commercial unit and the application for licences was rejected.

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Similarly, in the State of U.P. v. Renusagar Power Co. [1991] 70 Comp. Cas. 127, the Supreme Court held that where the holding company holds 100% shares in a subsidiary company and the latter is created only for the purpose of the holding company, corporate veil can be lifted.

The mere fact that the holding company has a subsidiary company does not imply that whenever claims are made against the subsidiary company, the corporate veil is to be pierced in order to make the holding company liable for the debts incurred by the subsidiary company. The normal rule is that independent legal personality of the company

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