Page 132 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Unit 7: Companies Act, 1956

S diverted the amount of the loan to three public limited companies floated by him and his Notes
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.
7. 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).
8. 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 fi ne upto ` 50,000 or imprisonment upto 2 years or both.
9. 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)].
10. 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:

(a) 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;
(b) The Central Government, where it feels desirable, may direct the holding and
subsidiary companies to synchronize their fi nancial years;
(c) 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.

11. Investigation into related companies. Section 239 provides that if it is necessary for the
satisfactory completion of the investigation into the affairs of a company, the Inspector
appointed to investigate may look into the affairs of another related company in the same
management or group.
12. For investigation of ownership of a company. The separate legal entity may be disregarded
under s.247. This Section authorises the Central Government to 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 or materially influence its policy.

13. Where in the course 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
persons, or for any fraudulent purpose, the court on the application of the Liquidator, or any
creditor or contributory of the company, may, if it thinks proper, declare that any persons
who are knowingly parties to the carrying on of the business in the manner aforesaid shall
be personally responsible, without any limitation of liability, for all or any of the debts or
other liabilities of the company as the court may direct (s.542).

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