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Unit 2: Meaning and Nature of a Company

Where a company formed is against public interest or public policy: Where for the purpose Notes
of determining the character of the members, the Court may lift the corporate veil.

Example: C company was floated in London for marketing tyres manufactured in
Germany. The majority of C’s shares were held by the German nationals residing in Germany.
During World War I, C company filed a suit against D company for the recovery of trade debt.
The D company contended that C company was an alien enemy company (Germany being at
war with England at that time) and that the payment of the debt would be a trading with the
enemy. The Court agreed with the contention of the defendants [Daimler Co. Ltd. v. Continental
Tyre and Rubber Co., (1916) 2AC 307].
Where device of incorporation is used for some illegal or improper purpose: [PNB Finance
Ltd. v. Shital Prasad Jain (1983) 54 Comp. Cas 66 (Delhi)]. S, the financial advisor of a
financing public limited company was given a loan of 15 lakhs by the company to
purchase immovable properties in Delhi. A pronote with regard to the same was also
executed by S. S diverted the amount of the loan to three public limited companies floated
by him and his son. These companies, in turn, applied the amount in purchasing immovable
properties at New Delhi. The Delhi High Court refrained the defendants from in any
manner alienating, transferring, disposing of or encumbering the properties in question.
Where the number of members falls below the statutory minimum: (i.e., seven in the case of
a public company and two in the case of a private company) and the company continues to
carry on business for more than six months while the number is so reduced. In such a case,
every person who is a member of the company during the time that it so carries on
business after those six months and has knowledge of that fact, shall be severally liable to
the creditors for the payment of the company’s debts contracted during that period. Such
a member can be sued severally (i.e., directly) by the creditors of the company. Both the
privileges of limited liability and that of the separate legal entity are lost. The creditors
are permitted to look behind the company to the shareholders for the satisfaction of their
claims (s.45).

Where prospectus includes a fraudulent misrepresentation: In case of a prospectus
containing fraudulent misrepresentation as to a material fact, Ss. 62 and 63 make the
promoters, directors, etc., personally liable not only in damages but they may even be
prosecuted in terms of fine up to 50,000 or imprisonment up to 2 years or both.
Where a negotiable instrument is signed by an officer of a company on behalf of the
company without mentioning the name of the company: Thereon, he is personally liable
to the holder of the instrument, unless the company has already made the payment on the
instrument [s.147 (4) (c)].
Holding and Subsidiary Companies: (Ss. 212-213). In the eyes of law, the holding company
and its subsidiaries are separate legal entities. However, in the following cases, a subsidiary
company may lose its separate identity to a certain extent:
Where at the end of its financial year, a company has subsidiaries, it may lay before
its members in general meeting not only its own accounts, but also a set of group
accounts showing the profit or loss earned or suffered by the holding company and
its subsidiaries collectively and their collective state of affairs at the end of the year;
The Central Government, where it feels desirable, may direct the holding and
subsidiary companies to synchronize their financial years;
The Court may, on the facts of a case, treat a subsidiary company as merely a branch
or department of one large undertaking owned by the holding company.

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