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Unit 7: Companies Act, 1956

agent or trustee for Salomon. Also the company’s assets must be applied in payment of the Notes
debentures as a secured creditor is entitled to payment out of the assets on which his debt
is secured in priority to unsecured creditors.

Example:
1. In Lee v. Lee Air Farming Limited (1960) 3 All ER 429 PC, a company was formed for

the purpose of manufacturing aerial top-dressing. Lee, a qualified pilot, held all but one
of the shares in the company and by the articles was appointed governing director of
the company and chief pilot. Lee was killed while piloting the company’s aircraft and
his widow claimed compensation for his death under the Workmen Compensation Act.
The company opposed the claim on the ground that Lee was not a ‘worker’ as the same
person could not be employer and the employee.
Held: There was a valid contract of service between Lee and the company and Lee was,
therefore, a worker. Mrs Lee’s contention was upheld.
2. In Bacha F. Guzdar v. The Commissioner of Income-tax, Bombay [AIR (1955) SC 74], the
facts of the case were as follows:
The plaintiff (Mrs Guzdar) received certain amounts as dividend in respect of shares
held by her in a tea company. Under the Indian Income-tax Act, agricultural income is
exempted from payment of income-tax. As income of a tea company is partly agricultural,
only 40 per cent of the company’s income is treated as income from manufacture and
sale and, therefore, liable to tax. The plaintiff claimed that the dividend income in her
hands should be treated as agricultural income up to 60 per cent, as in the case of a
tea company, on the ground that dividends received by shareholders represented the
income of the company.
Held: By the Supreme Court, 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.
4. Limited liability: The company being a separate person, its members are not as such liable
for its debts. Hence, in the case of a company limited by shares, the liability of members
is limited to the nominal value of shares held by them. Thus, if the shares are fully paid
up, their liability will be nil. 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 the shares held by them. In
case of unlimited liability companies, members shall continue to be liable till each paise
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 upto the
amount guaranteed by him.
Unlimited liability of a member of a limited liability company. In the following cases, a
shareholder or member shall lose the privilege of limited liability:
(a) Where members of the company are reduced below the statutory minimum, viz., 7 in
case of a public company and 2 in case of a private company and the company carries
on the business for more than 6 months while the members are so reduced, every
person who is a member during the time that it so carries on business after those
6 months and is aware of the fact that it is operating with fewer than the requisite
number shall be personally liable for the whole of the debts contracted during that
time (s.45).

(b) Where in the course of winding up, it appears that any business of the company has
been carried on with intent to defraud creditors, the Court may declare the persons
who were knowingly parties to the transaction personally liable without limitation
of liability for all or any of the debts or other liabilities of the company (s.542).

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