Assignment No.

- 3

Subject: - Corporate Legal Environment

Made by:

Abhishek Jain

10108

PGDM
 CORPORATE LEGAL ENVIRONMENT

Ques1 (a) Define “Negotiable Instrument” and distinguish between ‘Cheque’ and ‘Bill of
Exchange’.

Answer 1 (a)

Negotiable Instruments: Law relating to promissory notes, bills of exchange, cheques and other
negotiable instruments is codified in India under the Negotiable Instruments Act, 1881. It defines
promissory note, bill of exchange, cheque, foreign instrument and negotiable instrument. As per
the provisions of this Act, in India, every person capable of contracting, according to the law to
which he is subject, may bind himself and be bound by making, drawing, accepting, endorsing,
delivering and negotiating of a promissory note, bill of exchange or cheque and every person
capable of binding himself or of being bound, may so bind himself or be bound by a duly
authorized agent acting in his name. The act provides for the liability of an agent, legal
representative, drawer, drawee, maker and acceptor of a bill, endorser, holder in due course,
suretyship, etc. As per the provisions laid down in the said act, a negotiable instrument means a
promissory note, bill of exchange or cheque payable either to order or to bearer and when a
promissory note, bill of exchange or cheque is transferred to any person so as to constitute the
person, the holder thereof the instrument is to be negotiated. Detailed provisions have been made
in the Act concerning presentment, payment, interest, discharge from liability, notice of
dishonour, noting and protest, reasonable time for payment, acceptance and payment for honour
and reference in case of need, compensation, special rules of evidence, providing for certain
presumptions and estoppels, cross cheques, bills in sets, etc.

CHAPTER XVI comprising of Section 134 to 137 is of an International Law and the said 4
sections read as follows:
"134. Law governing liability of maker, acceptor or endorser of foreign instrument.”

In the absence of a contract to the contrary, the liability of the maker of drawer of a foreign
promissory note, bill of exchange or cheque is regulated in all essential matters by the law of the
place where he made the instrument, and the respective liabilities of the acceptor and endorser by
the law of the place where the instrument is made payable.

Difference between Cheque and Bill of Exchange

Point of Difference Cheque Bill of Exchange

Drawee A cheque is always drawn on
a bank or banker
Acceptance A cheque does not require any
acceptance
Payment A cheque is payable
immediately on demand
without any days of grace
Stamp A cheque does not require any
stamp.
Protection A banker is given statutory
protection with regard to
payment of cheques in certain
circumstances
A bill of exchange can be
drawn on any person including
a banker.
A bill must be accepted before
the drawee can be made liable
upon it.
A bill of exchange is normally
entitled to three days of grace
unless it is payable on
demand.
A bill of exchange must be
stamped.
No such protection is available
to the drawee or acceptor of a
bill of exchange

Ques1 (b) what is crossing of a Cheque? Discuss various modes of crossing of a Cheque.
Answer 1 (b) Crossing” a cheque is a way of making even more certain that the money is paid to
the correct person and not to someone else. By “crossing” the cheque in the ways that follow,
you give the bank extra instructions about how it is to be paid. This is called limiting its
negotiability.

If we draw a line to cross out the words “or bearer”, then we are telling the bank that the money
cannot just be paid out to anyone who happens to present the cheque. It must be paid out to the
person named on the “Pay” line. It is possible to get around this by “endorsing” the cheque. This
means that the person to whom the cheque is made out signs the back thus giving their
permission for it to be presented for payment.

If we cross out “to bearer” and draw two parallel lines across the front of the cheque (usually the
top left corner is sufficient) then we are telling the bank that the money has to be paid into an
account and cannot be cashed (exchanged for cash). This means that the person who eventually
receives the money can be traced because there will be a record of the deposit.

Modes of Crossing the Cheque

There are two modes of Crossing:

1. General Crossing

2. Special Crossing

General Crossing
Sec 123 of the Negotiable Instruments Act 1881 defines general crossing as follows:

“Where a cheque bears across its face, an addition of the words; ‘and company’ or any
abbreviation thereof. Between two parallel transverse lines or of two parallel transverse lines
simply, either with or without the words ‘not negotiable’, that addition shall be deemed to be a
‘crossing, and the cheque shall be deemed to be crossed generally.”

Forms of General Crossing

1. And Company

2. & Co.,

3. Not Negotiable

4. Payee’s A/C

5. Under Rupees Fifty

Significance of General Crossing

1. The effect of general crossing is that it gives a direction to the paying banker.

2. The direction is that the paying banker should not pay the cheque at the counter.

3. If a crossed cheque is paid at the counter in contravention of the crossing:

• He has no right to debit his customers account, since , it will constitute a breach of
his customer’s mandate,

• He will be liable to the drawer for any loss, which he may suffer,

• He will be liable to the true owner of the cheque who may be the third party.

4. The main intention of crossing a cheque is to give protection to it.

Special Crossing
Sec 124 of the Negotiable Instruments Act of 1881 defines:

“Where a cheque bears across its face, an addition of the name of a banker, with or without the
words ‘Not Negotiable’, that addition shall be deemed a crossing, and the cheque shall be
deemed to be crossed specially, and to be crossed to that banker”

Forms of Special Crossing

1. ICICI Bank ltd

2. With the parallel line

3. ICICI Bank ltd Not Negotiable

4. With Payee’s A/c

5. With Not Negotiable a/c payee.

Significance of Special Crossing

1. It is a direction to the paying banker.

2. A special crossing gives more protection the cheque than a general crossing.

Ques2 Discuss various provisions of dishonor of cheques due to insufficiency of funds as

contained in section 138 to 142 of N.I. Act, 1881. Also co-relate the same through any judgment
of Supreme Court.

Answer 2:

Cheque Dealing has become vital and important not only for banking purpose but for general
commerce and trade industry and also for the economy of the country. The Negotiable
Instruments (Amendment and Miscellaneous Provisions) Act, 2002 brought out effective legal
provisions to restrain people from issuing cheques without having sufficient funds in their
account.
Negotiable Instrument: - Negotiable” means transferable and “Instrument” means a written
document by which a right is created in favour of some person. A negotiable instrument means a
written document by way of which a transferable right is created in favour of a person. As per
the Act, `negotiable instrument’ refers to a promissory note, bill of exchange or cheque.

The Act defines Cheque as follows: A “cheque” is a bill of exchange drawn on a specified
banker and not expressed to be payable otherwise than on demand and it includes the electronic
image of a truncated cheque and a cheque in the electronic form.

A bank dishonours cheques on various grounds namely on account of Insufficient Funds, Stop
Payment Instructions by drawer, Post dated or Ante dated cheques, Cheque being ambiguous,
Signature of drawer not tallying, Signature of all joint holders being missing, Cheque is
mutilated or materially altered, Funds available but not applicable to the payment of cheque,
Death of drawer or insanity of drawer, Drawer becoming insolvent, Amount in words and figures
on tallying, Date on cheque missing and on Closure of Account. However an offence under
Section 138 of the Act is not committed on happening of all of the above mentioned events. A
statutory offence under Section 138 is said to be committed only when the cheque is dishonoured
on the following grounds:-

a) Insufficiency of funds

b) Stopped Payment instructions

c) Closure of account
An Offence under Section 138 is said to be committed on the happening of the following
conditions:-

1) A cheque drawn by a person should be on an account maintained by him in existence with the
banker. Such a cheque should have been drawn for discharge in full or in part of any debt or any
other liability of the drawee

2) The Cheque should have been presented by the drawee to the bank within six months from the
date of its issue or within the period of its validity

3) The Cheque should be returned by the bank for the reasons unpaid due to insufficiency of
funds or payment stopped by the drawer of cheque. Even if the cheque is returned by bank with
an endorsement of "account closed" then section 138 of negotiable instrument act is attracted

4) Production of bank’s slip or memo having thereon the official mark denoting that the cheque
has been dishonoured shall be prima facie evidence of dishonour of cheque.

5) On dishonour of cheque the drawee of the cheque has to give a notice in writing to the drawer,
making a demand for payment of the said amount of money. Such notice must be given within
30 days from the date of information by the bank regarding the dishonour of cheque. Such notice
shall state that if payment within a period of fifteen days is not made then action under Sec 138
of Negotiable Instrument Act will be initiated by the drawee against the drawer.

6) A period of fifteen days is allocated to the drawer of the cheque to make payment to the
drawee. If the drawer of the cheque fails to pay the requisite amount with the stipulated time
frame then cause of action for initiating proceedings against him under this Act shall arise. A
criminal complaint can filed within a period of thirty days from the date on which the cause of
action arose.
Filing of a Complaint :-

a) Complaint should be filed within the period of one month as mentioned above

b) Complaint should be in writing before an appropriate forum

c) Appropriate Forum means complaint to be filed before Metropolitan Magistrate or Judicial

Magistrate of First Class.

d) Complaint can be filed by Company, Power of Attorney holder and/or Representative of a

power of attorney holder

e) Pre-filing of complaint is not valid

f) Delay in filing complaint can be condoned in certain circumstances

Legal Jurisdiction: Prosecution can be initiated against the drawer at any of the following
places:-

a) Place where cheque is drawn

b) Place where payment of cheque is made

c) Place where the cheque is presented for payment

d) Place of dishonour of cheque

e) Place of notice to Drawer

Penal Provisions:- a) Imprisonment for a term extending upto 2 years b) Fine of an amount
extending upto twice the amount of the cheque bounced or both the provisions.

Action under both laws civil and criminal can be initiated at the same time: -
Civil and criminal proceedings are co- extensive and not co-exclusive. If the elements of the
offence under section 138 of the Negotiable Instruments Act are made out on the face of the
complaint petition itself, then there is nothing in law to prevent the criminal courts from taking
cognizance of the offence and vice-versa.

In M. M. Malik v. Prem Kumar Goyal the Punjab and Haryana High Court has analyzed the
aforesaid sections and held that the cause of action will arise only when the drawer of cheque
fails to make payment within 15 days of the receipt of the notice. After expiry of such fifteen
days an offence under this Act shall be deemed to have been committed.

Ques3 (a) what is “Company”? Discuss its characteristics along with the principles laid down by
House of Lords in the case of “Salomon Vs Salomon & Co. Ltd”.

Answer 3 (a)

Company

The word 'Company' is an amalgamation of the Latin word 'Com' meaning "with or together" and
'Pains' meaning "bread". Originally, it referred to a group of persons who took their meals
together. A company is nothing but a group of persons who have come together or who have
contributed money for some common person and who have incorporated themselves into a
distinct legal entity in the form of a company for that purpose. Under Halsbury’s Laws of
England, the term "company" has been defined as a collection of many individuals united into
one body under special domination, having perpetual succession under an artificial form and
vested by the policies of law with the capacity of acting in several respect as an individual,
particularly for taking and granting of property, for contracting obligation and for suing and
being sued, for enjoying privileges and immunities in common and exercising a variety of
political rights, more or less extensive, according to the design of its institution or the powers
upon it, either at the time of its creation or at any subsequent period of its existence. However,
the Supreme Court of India has held in the case of State Trading Corporation of India v/s CTO
that a company cannot have the status of a citizen under the Constitution of India.
A company as an entity has several distinct features which together make it a unique
organization. The following are the defining characteristics of a company :-

Separate Legal Entity :

On incorporation under law, a company becomes a separate legal entity as compared to its
members. The company is different and distinct from its members in law. It has its own name
and its own seal, its assets and liabilities are separate and distinct from those of its members. It is
capable of owning property, incurring debt, borrowing money, having a bank account,
employing people, entering into contracts and suing and being sued separately.

Limited Liability :

The liability of the members of the company is limited to contribution to the assets of the
company upto the face value of shares held by him. A member is liable to pay only the uncalled
money due on shares held by him when called upon to pay and nothing more, even if liabilities
of the company far exceeds its assets. On the other hand, partners of a partnership firm have
unlimited liability i.e. if the assets of the firm are not adequate to pay the liabilities of the firm,
the creditors can force the partners to make good the deficit from their personal assets. This
cannot be done in case of a company once the members have paid all their dues towards the
shares held by them in the company.

Perpetual Succession:

A company does not die or cease to exist unless it is specifically wound up or the task for which
it was formed has been completed. Membership of a company may keep on changing from time
to time but that does not affect life of the company. Death or insolvency of member does not
affect the existence of the company.
Separate Property:

A company is a distinct legal entity. The company’s property is its own. A member cannot claim
to be owner of the company's property during the existence of the company.

Transferability of Shares:

Shares in a company are freely transferable, subject to certain conditions, such that no share-
holder is permanently or necessarily wedded to a company. When a member transfers his shares
to another person, the transferee steps into the shoes of the transferor and acquires all the rights
of the transferor in respect of those shares.

Common Seal:

A company is a artificial person and does not have a physical presence. Therefore, it acts through
its Board of Directors for carrying out its activities and entering into various agreements. Such
contracts must be under the seal of the company. The common seal is the official signature of the
company. The name of the company must be engraved on the common seal. Any document not
bearing the seal of the company may not be accepted as authentic and may not have any legal
force.

Capacity to sue and being sued:

A company can sue or be sued in its own name as distinct from its members.

Separate Management:

A company is administered and managed by its managerial personnel i.e. the Board of Directors.
The shareholders are simply the holders of the shares in the company and need not be necessarily
the managers of the company.
One Share-One Vote:

The principle of voting in a company is one share-one vote. I.e. if a person has 10 shares, he has
10 votes in the company. This is in direct contrast to the voting principle of a co-operative
society where the "One Member - One Vote" principle applies i.e. irrespective of the number of
shares held, one member has only one vote.

SALOMON VS. SALOMON CO. LTD (1897)

Mr. Salomon had his own business of boot manufacturing, etc. Since his children wanted to
be a part of the business as owners, Mr. Salomon sold his business to the New Company (the
company, he was planning to form) for a certain amount of money (40000 pounds). He was
selling his business to the new company as he knew that the COMPANY IS SEPARATE
LEGAL ENTITY. He needed 7 members (shareholders) to form that company.

Fortunately or unfortunately, he had 5 children. 7 members were found: 5 children, 1 wife,

and Mr. Salomon himself. So, he gave himself 20000 shares (1 pound each), 1 share to each
child (total 5 shares for 5 children) and 1 share to his wife. He elected his two children together
with him to be the Directors of the company. Therefore Mr. Salomon became a
SHAREHOLDER.

But since the company still owes Mr. Salomon 20000 pounds, the company gives him
debentures of 10000 pounds and rest 10000 pounds were paid in cash, etc. Therefore he is a
SHAREHOLDER in the company, and now, a DEBENTURE HOLDER too. But he was a
DIRECTOR also. So, He was SHAREHOLDER, DIRECTOR & DEBENTURE HOLDER.

He was an ORDINARY SHAREHOLDER who would be paid after all the creditors are paid
IF THERE IS LIQUIDATION OF THE COMPANY.
 After 1 year, the company went into Liquidation (because the liabilities were more than assets
by certain amount) and the creditors needed to pay. The LIQUIDATOR asked Mr. Salomon to
pay all the creditors since Mr. Salomon was the OWNER of the company. Salomon did not agree
with that. Because He (Salomon) was supposed to paid for his DEBENTURES. But the
Liquidator asked him to pay to Other Creditors!!!!!

TRIAL JUDGE VAUGHAN WILLIAMS agreed with Liquidator and asked SALOMON to
pay on behalf of the company since Salomon was the owner, but Salomon didn't agree. He
appealed to COURT OF APPEAL so that he (Salomon) didn't have to pay the debts owed to
creditors by the company. COURT OF APPEAL said that Salomon just found 6 people (his 5
children & wife) to form the company. Those 6 people are mere nominees of Mr. Salomon.
COURT OF APPEAL also asked Mr. Salomon to pay.

This time Salomon appealed to the highest court "HOUSE OF LORDS".

HOUSE OF LORDS rejected all the judgments made by TRIAL JUDGE VAUGHAN
WILLIAMS, COURT OF APPEAL.HOUSE OF LORDS said that there is neither fraud in the
manner which Mr. Salomon formed the company, nor did Mr. Salomon form the company for
fraudulent purpose. So, Mr. Salomon did not have to pay to the COMPANY'S Creditors since
Mr. Salomon and The Company are two Separate (Legal) Entities. The company is separate from
its members....

In this case it was established that the actions of a company, are that of the company and not of
the shareholders themselves. This is written into the Companies Act 1993 which states that “a
company is a legal entity in its own right separate from its shareholders” (Legislative Extracts,
School of Accountancy, 2001). This law separates the company as another individual
person/entity which will be held responsible for the fortunes of the company and separates all
blame from the directors/shareholders of the company except under situations where the veil is
lifted. This will however lead to situations where justice can not be carried out as people will
commit various injustices and hide behind the shield that the doctrine, in the case of Salomon V
Salomon and Co Ltd created.
Ques 3 (b) Write short notes on:-

(i) Holding and Subsidiary Company:

Section 4 of the Companies Act, 1956 (the Act) prescribes dual test and
conceptually defines the Holding-Subsidiary company relationship. This is a
special provision extending the provisions of the Act to intra-company
relationships. Two significant factors which determine the relationships are
control and ownership. The business conduct of such companies are regulated in
certain respects and the effect of such regulations will result in treating another
company as a Subsidiary of the Holding company. With the result, the provisions
of the Act applicable to a public company will also apply to the subsidiary private
company. However, the character of private remains unchanged.

Board Control - The most common form of control in the case of bodies corporate
is controlling the composition of the Board without being a member of the
company. This may happen by direct control of the Board or through one or more
Subsidiaries. Be that as it may, the Board occupies a pre-eminent position in the
corporate hierarchy from the point of the view of enormous power it exercises and
control it secures over the management of another company. It is not merely an
economic unit but a power house. Considering these and other factors, the Act
rightly recognizes the structure of the Board as a manifestation of its inherent
strength and standing in the corporate structure.

Composition of Board - The composition of Board of a company is deemed to

have been controlled, by another company if, but only if, that other company,
without the consent or concurrence of any other person, can appoint or remove the
holders of all or majority of the directors by virtue of exercise of some power
 exercisable by it, at its discretion. Further, the other company shall be deemed to
have such a power of appointment

Holding & Subsidiary Company Relationship - The manner of securing Board

control is not envisaged as it is a matter relating to business practice. However,
this is possible if the Articles of Subsidiary company specifically provide for a
power to the other company to nominate all or majority of directors on the board
of first mentioned company. The moot question is, can the Articles provide for
such a provision if the other company does not hold all or majority of shares.
However, there can be an arrangement between the lender and borrower
companies as part of financing under which the lender may nominate all or
majority of directors with or without a specific provision in the Articles for the
purpose of ensuring proper utilization of funds. This is possibly one of the reasons
why section 4 provides for Board control as a means of creating Holding &
Subsidiary company relationship. The immediate effect of such an arrangement is
that lending company becomes a Holding company by virtue of section 4 of the
Act.

(ii) Foreign Company:

India has made many great improvements over the last decade in achieving
economic growth and poverty reduction. The most significant advancement came
in 1991 when India removed governmental obstacles and allowed its doors to
open to foreign investment. Foreign Direct Investment (FDI) has emerged as an
eminent source of economic development and employment generation for
developing countries (including India) as it contributes in creating a more
competitive business environment, enhances enterprise development, human
capital formation and international trade integration.

1. Setting up as an Indian or a Foreign Company

A foreign company planning to set up business operations in India has the option
of either setting up as an Indian company or as a foreign company

1) As an Indian Company

A foreign company can commence operations in India by incorporating a

company under the Companies Act, 1956 through Joint Ventures (JV) or Wholly
Owned Subsidiaries.

A) Joint Ventures -Foreign Companies can set up their operations in India

by incorporating a JV Company with an Indian partner and/or with the general
public and operating either as a listed company or as an unlisted company.

B) Wholly Owned Subsidiaries -Foreign companies can also set up wholly

owned subsidiary in sectors where 100% foreign direct investment is permitted
under the FDI policy. For registration and incorporation of the company, an
application has to be filed with Registrar of Companies (ROC) as well as RBI.
Once a company has been duly registered and incorporated as an Indian company,
it is subject to Indian laws and regulations as applicable to other domestic Indian
companies. Foreign equity in such Indian companies can be up to 100%
depending on the requirements of the investor, subject to equity caps in respect of
the area of activities under the FDI policy.

2) As a Foreign Company

Foreign Companies can set up their operations in India through

A) Liaison Office/Representative Office: It acts as a channel of communication

between the principal place of business or head office and entities in India. It can
not undertake any commercial activity directly or indirectly and can not,
therefore, earn any income in India. Its role is limited to collect information about
possible market opportunities and providing information about the company and
its products to prospective Indian customers. It can promote export/import from/to
India and also facilitate technical/financial collaboration between parent company
and companies in India.

Approval for establishing a liaison office in India is granted by Reserve Bank of

India (RBI).

B) Project Office: Foreign Companies planning to execute specific projects in

India can set up temporary project/site offices in India. RBI has now granted
general permission to foreign entities to establish Project Offices subject to
specified conditions. Such offices can not undertake or carry on any activity other
than the activity relating and incidental to execution of the project. Project Offices
may remit outside India the surplus of the project on its completion, general
permission for which has been granted by the RBI.

C) Branch Office: Foreign companies engaged in manufacturing and trading

activities abroad are allowed to set up Branch Offices in India for the purposes of
export/import of goods, rendering professional or consultancy services, carrying
out research work in which the parent company is engaged, promoting technical
or financial collaborations between Indian companies and parent or overseas
group company, representing the parent company in India and acting as
buying/selling agents in India, rendering services in Information Technology and
development of software in India, rendering technical support to the products
supplied by the parent/ group companies, foreign airline/shipping company.

A branch office is not allowed to carry out manufacturing activities on its own but
is permitted to subcontract these to an Indian manufacturer. Branch Offices
established with the approval of RBI, may remit outside India, profit of the
branch, net of applicable Indian taxes and subject to RBI guidelines

D) Branch Office on Stand Alone Basis: Such Branch Offices would be isolated
and restricted to the Special Economic zone (SEZ) alone and no business
activity/transaction will be allowed outside the SEZs in India, which include
branches/subsidiaries of its parent office in India.

The above mentioned offices can undertake any permitted activities. Companies
have to register themselves with Registrar of Companies (ROC) within 30 days of
setting up a place of business in India.
 No approval shall be necessary from RBI for a company to establish a branch
/unit in SEZs to undertake manufacturing and service activities subject to the
following conditions:

a. Such units are functioning in those sectors where 100% FDI is permitted.

b. Such units comply with part XI of the Companies Act(section 592 to 602)

c. Such units function on a stand alone basis,

d. In the event of winding up of business and for remittance of winding-up

proceeds, the branch shall approach an authorized dealer in foreign exchange with
the document required as per FEMA.

Such offices can undertake activities permitted under the Foreign Exchange
Management (Establishment in India of Branch or Office or other place of
business) Regulations, 2000.

(iii) Government Company:

A Government company, means any company in which not less than fifty one per
cent of the paid-up share capital is held by the Central Government, or by any
State Government or Governments, or partly by the Central Government and
partly by one or more State Governments, and includes a company which is a
subsidiary of a Government company as thus defined.

1 Substituted by Act No. 65 of 1960, for the words and figures "sections 618, 619
and 620"
 2 Substituted by Act No. 65 of 1960, for the words "share capital".

3 Inserted by Act No. 65 of 1960.

(iv) Lifting of Corporate Veil:

From the juristic point of view, a company is a legal person distinct from its
members. This principle may be referred to as “the veil of incorporation”. The
courts in general consider themselves bound by this principle. The effect of this
principle is that there is a fictional veil (and not a wall) between the company and
its members. That is, the company has a corporate personality which is distinct
from its members.

The human ingenuity, however, started using this veil of corporate personality
blatantly as a cloak for fraud or improper conduct. Thus it became necessary for
the courts to break through or lift the corporate veil or crack the shell of corporate
personality and look at the persons behind the company who are the real
beneficiaries of the corporate fiction.

And while by fiction of law a corporation is a distinct entity, yet in reality it is an

association of persons who are in fact the beneficial owners of all the corporate
properly.

“The doctrine laid down in Salomon v. Salomon & co. ltd has to be watched very
carefully. It has often been supposed to cast a veil over the personality of a limited
company through which the courts cannot see. But that is not true. The courts can
and often do draw aside the veil. They can, and often do, pull off the mask. They
look to see what really lies behind.”

Judicial Exceptions:

1. Protection of Revenue: The courts may ignore the corporate entity of a

company where it is used for tax evasion. Tax planning may be legitimate
provided it is within the framework of law

2. Prevention of Fraud or Improper conduct: The legal personality of a company

may also be disregarded in the interest of justice where the machinery of
incorporation has been used to some fraudulent purpose like defrauding
creditors or defeating or circumventing law. Prof. Grower observes in this
regard that the veil of a corporate body will be lifted where the “corporate
personality is being blatantly used as a cloak for fraud or improper conduct.”
Thus in the following case where a company was incorporated as a device to
conceal the identity of the perpetrator of the fraud, the court disregarded the
corporate personality.

3. Determination of character of a company whether it is enemy: A company

may assume character when persons in de facto control of its affairs are
residents in an enemy country. In such a case, the court may examine the
character of persons in real control of the company, and declare the company
to be a enemy company.

4. Where the company is a sham: The courts also lift the veil where a company
is a mere cloak or sham (hoax).

5. Company avoiding legal obligations: Where the use of an incorporated

company is being made to avoid legal obligations, the court may disregard the
legal personality of the company and proceed on the assumption as if no
company existed.
 6. Company acting as agent or trustee of the shareholders: Where a company is
acting as a agent for its shareholders, the shareholders will be liable for the
acts of the company. It is a question of fact in each case whether the company
is acting as agent for its shareholders. There may be an express agreement to
this effect or an agreement may be implied from the circumstances of each
particular case.

7. Avoidance of welfare legislation: Avoidance of welfare legislation is as

common as avoidance of taxation and approach of the courts in considering
problems arising out of such avoidance is generally the same as avoidance of
taxation. It is the duty of the courts in every case where ingenuity is expended
to avoid welfare legislation to get behind the smoke screen and discover the
true state of affair.

8. Protecting Public Policy: The courts invariable lift the corporate veil to protect
the public policy and prevent transaction contrary to public policy. Thus
where there is a conflict with public policy, the courts ignore the form and
take into account the substance.

Statutory Exceptions

1. Number of members below statutory minimum (sec 45)

2. Failure to refund application money (sec. 69(5))

3. Misdescription of company’s name (sec 147(4))

4. Fraudulent trading (sec. 542)

5. Holding and Subsidiary companies

Ques4 (a) what are the qualifications and disqualifications of a Director in a Company?

Answer 4 (a)
A Company

1. The company carries on its business through individuals called directors.

2. Collectively they are called Board of Directors

3. No body corporate, association or firm can be appointed as a director of a company, and

only an individual can be appointed

Constitution

 Every Public Company must have at least 3 directors

 A Public Company having A paid up capital of Rs. 5 crore or more and One thousand or
more shareholders Can elect a director by small shareholders.

 A private company must have at least 2 directors

 Subscribers of the memorandum who are individuals, are deemed to be the directors of
the company, until the directors are duly appointed in accordance with the Act.

 Directors are appointed in general meeting, in board meeting, by central government, by

proportional representation or a person can stand for directorship, if eligible.

 A company can have a maximum number of 12 directors and to increase this number,
the approval of Central Government is required.

 The board of directors can appoint Additional Directors, by passing a resolution, if such
a power exists in the articles.

 If any vacancy arises in office of any director then subject to the articles, the board of
directors can fill the vacancy at a meeting of the board.

 One single resolution can appoint one director only and two or more.
  A company, at a general meeting may, by ordinary resolution, increase or reduce the
number of its directors within the limits fixed in that behalf by its articles.

APPOINTMENT OF DIRECTOR

Any Person Can Be Eligible For Appointment To The Office Of Director At Any Annual
General Meeting, If:

 He himself or some member intending to propose that person as a director.

 Gives a sign notice in writing to company.

 Signifying that persons for the office of director

 Along with a deposit of Rs. 500/- which is refundable subject to

appointment as a director.

DISQUALIFICATION OF DIRECTORS

A person shall not be capable of being appointed director of a company, if,

 he has been found to be of unsound mind by a Court of competent jurisdiction and the
finding is in force

 he is an undercharged insolvent

 he has applied to be adjudicated as an insolvent and his application is pending

 he has been convicted by a Court of any offence involving moral turpitude and sentenced
in respect thereof to imprisonment for not less than six months, and a period of five years
has not elapsed from the date of expiry of the sentence

Ques4 (b) discuss the different modes of appointment of directors in the Companies?
Answer 4 (b)

Sec255 - Appointment of directors and proportion of those who are to retire by rotation.

(1) Unless the articles provide for the retirement of all directors at every annual
general meeting, not less than two-thirds of the total number of directors of a
public company, or of a private company which is a subsidiary of a public
company, shall

(a) be persons whose period of office is liable to determination by retirement of

directors by rotation; and

(b) save as otherwise expressly provided in this Act, be appointed by the company
in general meeting.

(2) The remaining directors in the case of any such company, and the directors
generally in the case of a private company which is not a subsidiary of a public
company, shall, in default of and subject to any regulations in the articles of the
company, also be appointed by the company in general meeting.