B.A. LL.B. (Five Years) Sem 6 Company Law 2013 Jun Question Paper with Solutions

For full marks, cover: what the statement means and where it comes from (section 9 of the Companies Act 2013; section 34 of the 1956 Act; Salomon); the difference shown in six relationships: as persons (Salomon), as owners (Macaura, Bacha F. Guzdar), as debtors (limited liability; a member's creditors), as parties to contracts and suits (Lee v. Lee's Air Farming, Foss v. Harbottle), in duration (perpetual succession; Gower's illustration), in legal status (Tata Engineering); why "totally" overstates it: where law treats them as one, by statute (sections 3A, 7(7), 339) and by the courts (Gilford Motor, Jones v. Lipman, Dinshaw Maneckjee Petit, Daimler), and the modern test (Balwant Rai Saluja); a table.

What the statement means

When a company is registered, the subscribers and later members become "a body corporate". It has perpetual succession and power to hold property, contract, and sue and be sued in its own name. So says section 9 of the Companies Act 2013, as section 34 of the Companies Act 1956 did. The company is a new legal person. It is not a name for the group of members, nor their agent or trustee.

1. In Macaura v. Northern Assurance Co. Ltd., [1925] AC 619, Macaura sold the timber on his estate to a company in exchange for all its shares. He then insured the timber in his own name, and fire destroyed most of it. The House of Lords held that his insurance claim failed. The timber was the company's, and even a holder of every share owns no part of its property.
2. In Bacha F. Guzdar v. Commissioner of Income-Tax, Bombay, AIR 1955 SC 74, the Supreme Court applied the same idea to income. A shareholder's dividend is not the company's agricultural income passed on. A shareholder has no interest in the company's assets, only a right to share in profits when they are declared.

What the member owns is his share. It is his own movable property, transferable as the articles provide (section 44).

3. Different debtors

The company's debts are its own. In a company limited by shares, a member is liable only for any amount unpaid on his shares (section 2(22)). The company's creditors cannot sue the members for its debts. The rule works the other way too. A member's personal creditors cannot seize the company's assets. They can attach only his shares.

4. Different parties to contracts and lawsuits

6. Different legal status

The company has its own legal status, which may differ from that of its members. In Tata Engineering and Locomotive Co. Ltd. v. State of Bihar, AIR 1965 SC 40, companies claimed fundamental rights under Article 19, joined by their shareholders, who were citizens. The Supreme Court held that a company is not a citizen. Its shareholders' citizenship could not be lent to it by lifting the veil.

Why "totally" overstates it

The difference is the rule, but it is not absolute. The law sets it aside where it would produce fraud or injustice.

By statute.

1. A public company's members may fall below seven, or a private company's below two. If it carries on business so for over six months, members who know of it become severally liable for its debts (section 3A).

2. Tax evasion. In In re Dinshaw Maneckjee Petit, (1927) 29 Bom LR 447, a wealthy man formed four companies only to hold his investments and pass the income back to him as pretended loans. The court treated the companies' income as his own.
3. Enemy character. In Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd., [1916] 2 AC 307, an English company controlled by Germans was treated as an enemy during the war, and its suit could not proceed.

The modern test. In Balwant Rai Saluja v. Air India Ltd., (2014) 9 SCC 407, canteen workers engaged through a wholly owned subsidiary of Air India claimed to be Air India's employees. The Supreme Court refused to lift the veil. Ownership and control alone are not enough. There must be an impropriety, the company being used as a device or facade to evade a liability.