XY Ltd. was incorporated for running passenger and goods services

XY Ltd. was incorporated for running passenger and goods services between

Kashmir and Kanyakumari with a capital of Rs. 1 crore (1,00,000 shares of Rs. 100

each). The entire capital was fully subscribed. The Company later decided to

purchase a large area of land in Rajasthan for carrying on farming. This venture was not a success. Thereupon, the Directors decided that the company be amalgamated with R Ltd. and the shareholders who did not desire to accept the shares of R Ltd. be offered a cash payment of Rs. 25 in respect of each share. An application was made to the Court to carry through the amalgamation under Sec. 391 and the same was duly sanctioned. In pursuance of the scheme, a cash compensation to the extent of Rs. 25 per share was paid in respect of 50,000 shares and in respect of other shares, the shares of R Ltd. were issued-one share of Rs. 25 paid up for each share of the company. XY Limited was wound up voluntarily and its books of account were destroyed after obtaining the approval of the Board. Discuss the following:

(i) Whether the Court had acted correctly in sanctioning the amalgamation, and

(ii) Whether the liquidator of the company was justified in destroying books of the company. [November, 19931

6. What orders can a Court pass in cases of amalgamation and reconstruction?

[May, 19951

7. State briefly the procedure to be complied with for the amalgamation of two companies. [November, 19921

8. In a takeover bid when can a shareholder be called a Dissenting Shareholder?

What procedure shall a transferee company follow to acquire shares of dissenting

shareholders if the take-over bid is approved by the required majority?

[May, 19921

9. When can the Central Government, under the Companies Act, 1956, order for amalgamation of two or more companies in national interest?

[November, 19911

10. Explain the meaning of ‘arrangement’ and ‘compromise’. What are the provisions of the Companies Act for regulating a compromise, when the company is a going concern? State the procedure to be followed by a company to give

effect to a scheme of compromise. [May, 19911

11. DEJY AS Ltd. has made an offer to acquire all the equity shares of ABC Ltd. at certain price. Members of the company who hold 90% of the shares of ABC Ltd. have accepted the offer. The remaining shares are held by 2 NRls who do not agree to the deal. Explaining the procedure to finalise the deal, state the steps to be taken by the offeror company to acquire shares of dissenting shareholders.

Decide also whether DEJY AS Ltd. can acquire all the shares in ABC Ltd.,

under the provisions of the Companies Act, 1956. [November, 19971

Examine the extent to which the legal representatives of a deceased Director

Examine the extent to which the legal representatives of a deceased Director against whom misfeasance proceedings were initiated by the liquidator of the company, under the Companies Act, 1956, can be held liable.

[May, 19981

25. M/ s Sunset Constructions Limited is being wound up by the court. The Official

Liquidator afterrealisation of the assets has an amount of Rs. 28,00,000 at his disposal

towards payment to the creditors of the company. The list of creditors is given below:

Rs.

(i) Dues to secured creditors 20,00,000

(ii) Dues to workers 15,00,000

(iii) Taxes, etc. payable to the government authorities 2,00,000

(iv) Unsecured creditors 40,00,000

Since the available amount is insufficient to meet the claims of all the creditors, explain the precedure to be followed for payment of dues as provided in the Companies Act, 1956. Assuming that the company has created a charge on all the

assets of the company in favour of the secured creditors. [May, 19991

26. The Balance Sheet ofM/s. Hush Hush Ltd. as at 31.3.1999 filed with the Registrar of Companies, Mumbai disclosed that the liabilities amounted to Rs. 2.75 crores as against the Assets of Rs. 1.25 crores. On the basis of the scrutiny of the Balance Sheet, the Registrar filed a winding up petition against the company stating that it is commercially insolvent and that the company is unable to pay its debts on the ground that the value of liabilities far exceeded the value of assets. Examine whether the company has any case to defend against the winding up petition

filed by the Registrar. [November, 19991

27. What is meant by Misfeasance? Under what circumstances can the Official Liquidator initiate misfeasance proceedings against the Auditor of the Company? Is there

any time limit for initiating such proceedings? [November, 19991

28. M/ s. XYZ Limited was wound up with effect from 15.3.2000 by an order of the Court. Mr. A, who ceased to be a member of the company from 1.6.1999, has received a notice from the liquidator that he should deposit a sum of Rs. 5,000 as his contribution towards the liability on the shares previously held by him. In this context explain whether Mr. A can be called a contributory and whether he can be made liable and whether there is any limitation on his liability.

[May, 20001

Right to participate in the assets of the company on its winding

, after distribution to creditors. etc. (Sections 475 and 511)These rights are very valuable for keeping the management on the right track, if exercised in

an intelligent manner.

Liabilitv of Members. The liability of the members of a company

depends on tle ‘nature of the company. .:

.1. COml)any with Unlimited Liaility. Each member is liable in full

for all the debts contracted by the company during the period of his membership. The members are liable to meet all losses of the company. They may

have met such losses from their personal estate.

2. Company Limited by Guarantee. Each member is liable to contribute the amount guaranteed by him to be paid in the event of the winding up of the

company.

3. Company Limited by Shares. Every member is liable to pay the full nominal value of the shares held by him. If he has already paid a part of the amount

on the shares, his liability is limited to the unpaid amount on the shares in respect of which he is a member. Once a member has paid the full amount on

shares held by him, he cannot be called upon to contribute anything more.

If at any time the number of members is reduced below 7 (2 in the case of a private company), and the company carries on business for more than 6

months while the number is so reduced, every member who knows that the number is so reduced bt.;comes severally liable for the payment of the whole

of the debts of the company contracted after those 6 months [Section 45).

Place of Keeping tile Register of Members. The Register and Index

of Members cOlumencing from the date of the registration of the company shall be kept at its registered office. However, it may be kept at any other place

also but within the city, town or village in which the registered office of the company is situated, if :

(i) such other place has been approved for this purpose by a special

resolution passed by the general meeting, and (ii) the Registrar has been given in advance a copy of the proposed

special resolution (Section 163).

Presently, the normal practice is to appoint a Share Transfer Agent who maintains all records on computer on behalf ofthe company. The records are

maintained at the place ofthe Share Transfer Agent. The Share Transfer

Agent must be registered with SEB!.

In case of’demat’ securities. register and index of beneficial owners maintained by the depository shall be deemed to be a Register and Member of

Shareholders [Sec. 152A]. Index of Mcmbers (Scction 151). Every company having more than fifty members must keep an index of members along with

the register. The register itself may be kept in such a way as to constitute an index. Anv alteration in the register of members must always be noted in the

inde within 14 days of the alteratIon. The index must in respect of each member. contain a sufficient indication to enable the entries relating to that

member in the register to be readily found. The index must always be kept at the same place as the register of members.

When a company gets Certificate of Incorporation

When a company gets Certificate of Incorporation, the ,.1 step before it is to raise the necessary capital to finance its business activities. The promoters of a public company, may collect the necessary funds for the business privately or may raise the money from the general public. However, the required money is generally raised from the public, as the private money may not be sufficient for the needs of the company. The money from the general public is raised by the company by inviting public deposits or by inviting offers for the subscription of its shares and debentures. Such offers from the public may be invited by issuing a document known as ‘prospectus’. The company informs the general public about the company’s business, its financial position. capital structure, directors etc. through prospectus so as to lure them to invest in its shares and debentures. The prospectus, as issued by the company is assumed to have contained the true information about the company. If any mis-statement is contained therein, there are a large number of statutory provisions aimed at their protection. Whenever, the company needs funds for expansion of the company’s business in future, a prospectus may

also be issued to the public.

director misappropriated the cherub and the plaintiff sued the company

The director misappropriated the cherub and the plaintiff sued the company. Held, the company was not liable as the act was outside the apparent authority of the director, and the company had done nothing to hold out the director having such authority. Knowledge of the provisions giving such authority was essential.Forgery. The protection under the Rule is not available where the outsider is found to have relied upon a document which is a forged one. A document is a forgery when the seal of the company is affixed without authority or the signatures of an authorized official are forged thereon.

Thus, in Ruben Vs. Great Fingall Ltd., the secretary of the company issued a share certificate to the plaintiff by forging the signatures of two directors, as required under the Articles. The company refused to accept him as a shareholder of the company because of the forged share certificate. The plaintiff pleaded that the signature of the directors were genuine or forged was a part of internal management and the company must be stopped from denying the genuineness of the document. It was held that the plaintiff was not a shareholder and the certificate was the nullity.Acts Outside the Usual Authority of the Company's Official. The articles of association ofthe company empowered the directors to determine who should have authority to draw, accept etc., bills on the company's behalf. The company had its branch at Manchester, C. The company's Manchester branch manager, drew seven bills on the company's behalf in favour of Kredit-bank Cassel, who took them. believing C to be authorized to draw them. Actually C
had no such authority.The Court of Appeal held that the company was not liable for the bills because the drawing of bills was not within the authority of the branch manager, and nor the company ha< given him actual authority.

Corporate Veil can be lifted

The circumstances in which the Corporate Veil can be lifted may
broadly be grouped under t\\'O heads:
I. On well established judicial grounds, and
II. Under statutory provisions.
I. Judicial Grounds for Lifting of Corporate Veil. The following
grounds have become well-e;established for lifting the Corporate Veil:
1. For Protection of Revenue. When a company is being used as a means of tax evasion, courts may pierce the corporate veil and ignore the corporate
entity so as to malice the individual shareholders liable as principal.For example, in reo Sir Dinshaw Manekjee Petit, the assesses earning huge dividend
and interest income, formed four private companies. He divided his income into four parts, and assigned each part to one such company. Incomes
received by companies from such assignments were later on paid to him as a pretended loan, and by availing of income exempted from Income Tax four
times (instead of once "available otherwise) he could reduce his at.'{ liability. The court lifted the corporate veil and held that the companies and the
assesses were one and the sale and should be, therefore,
taxed as one. ",
2. Determination of the "Character of Company. The courts also look behind the legal facade of the company to determine its residence for purposes of
taxation, enemy status or jurisdiction. In Daimler Co. Ltd. Vs. Continental Tyree & Rubber Co. Ltd., a company was incorporated in England to sell lyres
manufactured by a German company and all its directors were Germans. During the First World War, the company brought a case to recover a trade debt


but was debarred by the court to do so because it belonged to an alien country, Germany. The corporate veil was lifted. Permitting the company to recover


the trade debt would have meant helping the alien enemies indirectly in the guise of larger profits to the company which ultimately, would have reached the


hands of its members (i.e., Germans) in the form of dividends, etc.
3'. Prevention of Fraud or Improper Conduct. The court shall also lift the corporate veil where it finds that the company has been formed to defraud
creditors or to defeat the provisions of any law or to avoid any legal obligations. In short, the corporate veil will be pierced where the company has been
formed for any fraudulent or unlawful purpose.
This is well illustrated by the case of Gilford Motor CO. VS. Horne. In this case Horne was appointed Managing Director of Gilford
Motor Co. The appointment was made on the condition that he will not entice away the customers of the company so long as he was in the employment of


the company or afterwards. After leaving the services of the company, he started a business in the name of a company which solicited the customers of
the first company. The court issued an injection against
the company and Home to carry on such business as the company was only as cloak used by Horne to defend himself against breach of contract in his
former employment.
4. Company Acting as Agent of Shareholder's. Where-a company is acting as the agent of the shareholders under an express or implied agreement, the
corporate" entity of the company will be disregarded and shareholders will be held liable for the acts of the company. [Re. F.G. Films Ltd. 1953 All E.R.
645; Smith. Stone & Knight Ltd. v.'\'. Birmingham Corp.
(1939) All E.R. 116].
5. Against Public Policy. Where the principle of separate entity
conf1icts with .Public Policy tbe court may lift the corporate veil in. defence of the Public Policy. [Connors Bros Vs. Connors (1940)].
6. For Determination of Technical Competence of a Company [New Horizons Ltd. V. Union of India (1995) Combo 1..1 100 (SC)]. The Supreme Court in
this case held that the experience of the promoters could wetI be considered as the experience of the company in determining its technical competence.
n. Under Statutory Provisions. The Companies Act, 1956, provides the following cases when Corporate Veil can be lifted or pierced: