corporate veil formation

8/13/2019 Corporate Veil Formation

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FORMATION AND INCORPORATION


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FORMATION

4 STAGES

1. PROMOTION

2. INCORPARATION / REG.3. SUBSCRIPTION

4. COMMENCEMENT


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I. PROMOTION

DISCOVERY OF BUSSINESS OPPURTUNITIES

PROMOTERINDIVIDUAL, FIRM,

ASSOCIATION OF PERSONSTHE IDEATO START A BUSINESS


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To start

1. a new businessaltogether, or

2. To acquire an alreadyrunning business, if it is available at

considerable attractive terms and conditions. Some time it doeshappen that some people may start a business without having

sufficient knowledge or sufficient experience or sufficient funds and

later on they decide to dispose of that business to avoid huge

losses. In such a case it may be better to acquire a running business

with favorable terms and conditions and it may prove to be a good

decision.

The other important matters be decided before the formation of the

company could be the decision regarding the product to be

produced, the size of the company, the capital involved in the

project, the sources of the capital and whether it shall be a Private

Companyor a Public Company.Any of the above decisions i.e., to start a new business altogether or

to acquire an already running business, along with the other matters

shall have to be taken by some person or persons who are at the

helm of the affairs. They are called PROMOTERS.


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FUNCTIONS

collect the no. of persons for pub. or pvt. to subscribe

& sign MOA, AOA arranges minimum subscription

prepares for prospectus, filing & advt.

arranges for registration to obtain the certificates

negotiation in case of purchase of existing business

Remuneration to the promoterit also must bedisclosed in the prospectus


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DUTIES

MAKE GOOD TO THE COMPANY

NO SECRET PROFITS

IF MADE THEN DISCLOSE


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II. INCORPORATION & REG Promoter must decide types of companyPUB & PVT

Propose nameSec.20corporate identity no. forcompanies registered on or after nov 1. 2000.

Preparation of MOA & AOA

defines area, states the objects, the capital , liability, registeredoffice

AOArules & regulations

vetting of MOA & AOA, the printing, stamping & signing of thesame

by every subsciber or his agent

Preparation of other documents likepower of attorney

particulars of directors

notice of registered address etc


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Filing of documents for registration

Certificate of Incorporation:

Gets scrutinised, registers the company

Can you conclude in the following example that the

company does not exist?

The MOA of a company was signed by two adults and by a

guardian of five members, who were minors. The registrar

registered the company and issued a certificate.

pvt co

commences once registered.

public co must obtain certificate of commencement


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It is assumed that:

There are no 7 subscribersshouldnt have

grantedbut is conclusive for all purposes

cannot say the company does not exist.

Though a company is a person:

Company not a citizen-In State Trading

Corporat ion of Ind ia v. CTO, the SC held

that a company is not a citizen neither

under the provisions of the Constitution

nor under the Citizenship Act.


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EFFECTS OF REGISTRATION

When a company is registered and a Certificate of Incorporation is

issued by the Registrar, it shall have the following effects:

The company shall become Separate Legal Entityfrom the datementioned on the Certificate of Incorporation, which is considered as date ofbirth of the company.

The Company acquires Perpetual Succession. The members may come,members may go, but it goes for ever.

The company becomes the owner of its property and the Promoters ofShareholders have the right to share in the profits of the company.

The company can sue and can be sued in its own name.

Will have a Common Seal

Limited Liability


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Disadvantages of Incorporation

I. Formality and expense-Incorporation is a very expensive affair. Itrequires a number of formalities to be complied with both as to theformation and administration of affairs.

II. Lif t ing o f corp orate vei l (vei l does not exist)-though for allpurposes of law a company is regarded as a separate entity it is

sometimes necessary to look at the persons behind the corporateveil.

a) Determ inat ion of character

b) For benefi t of revenue

c) Fraud or imp roper conduct

d) Agency or Trust or Government companye) Under statutory prov is ions


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CORPORATE VEIL

also known as

"disregarding the corporate entity"


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corporate veil definition

Legal concept that separates the personality of a corporation fromthe personalities of its stockholders (shareholders),

and protects them from being personally liable for the firm's debtsand other obligations.

However

This protection, is not ironclad or impenetrable.

Where a court determines that a firm's business was not conductedin accordance with the provisions of corporate-legislation

(or that it was just a faade/front for illegal activities)

it may hold the stockholders personally liable for the firm's obligationsunder the legal concept of 'lifting (or piercing) the corporate veil.

That means no separate personality for liability


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When can Corpo rate Vei l of a Company

be Li f ted?

The separate entity of the company is

disregarded and the schemes and

intentions of the persons behind areexposed to full view which is known as

lifting or piercing the corporate veil.

This is usually done in the following cases


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1. Determ ination o f charac ter

a company was incorporated in England for the

purpose of selling tyres manufactured in Germany by aGerman company.

The German company held the bulk of the shares in

the English company and all the directors of thecompany were Germans, resident in Germany.

During the First World War the English companycommenced an action to recover a trade debt.

And the question was whether the company hadbecome an enemy company and should therefore bebarred from maintaining the action.


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The House of Lords held that though thecompany was registered in England it is

not a natural person with a mind or

conscience. It is neither loyal nor disloyal;neither friend nor enemy. But it would

assume an enemy character if the persons

in de facto control of the company are

residents of an enemy country.


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2. Fo r benefit of revenue

The separate existence of a company may bedisregarded when the only purpose for which itappears to have been formed is the evasion oftaxes.

In Bacha F Guzdar v. CIT, Bombay, amember of a tea company, who claimed thatthe dividend held by her in respect of her

shares should be treated as agriculturalincome(as it was exempted from tax) and notincome from manufacture and sale of tea.Suggestions?


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3. Fraud or improper conduct

In Gilford Motor Co v. Horne,

Horne was appointed as the MD of the company

on the condition that he shall not solicit for

anything at any point of time the customers ofthe company.

He formed a new company which undertook

solicitation of plaintiffs customers.

The company was restrained (bringing to a control)by the Court.


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4. Agency or Trust or Government

company

The separate existence of a companymay be ignored when it is being used as

an agent or trustee.

In State o f UP v. Renusagar Power Co,

it was held that a power generating unit

created by a company for its exclusivesupply was not regarded as a separate

entity for the purpose of excise.


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5. To avo id welfare legis lat ion

where the sole purpose of formation of

new company was to use it as a device

to reduce the amount to be paid by way

of bonus to workmen, the SC pierced itscorporate veil.

The Workmen Employed in

Assoc iated Rubber Indus tr ies L td. v.

The Assoc iated Rubber Indus tr ies L td


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6. Under statutory p rov is ions-

The Act sometimes imposes personal liability onpersons behind the veil in some instances like,

where

1. business is carried on beyond six months

after the knowledge that the membership of

company has gone below statutory minimum

2. when contract is made by mis describing the

name of the company - HENDON vs. ADIEMAN


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III. CAPITAL SUBSCRIPTION/FLOATATION

Go ahead with raising sufficient capitalPvt co has to approach friends relatives and arrange

privately

Pub co:

- issue prospectus if public is to be invited to raise

cap. the very 1sttime to subscribe to its capital.

- deliver a statement in lieu of prospectus

- the min. subscription as mentioned in prospectus

is not received (90% of entire issue according to

SEBI) then refund to the applicants


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IV. COMMENCEMENT OF BUSSINESS

PRIVATE CONO SHARE CAPITAL MAYCOMMENCE BUSSINESS.

PUBLIC COHAVING SHARE CAPITALMUST

OBTAIN CERTIFICATE TO COMMENCE BUSINESS


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RESTRICTION ON COMMENCEMENT OF

BUSINESS

CO HAS ISSUED PROSPECTUS

SEC.149 (1) APPLICABLE

CANNOT COMMENCE UNLESS

SHARES UPTO THE AMT OF MIN. SUBSCRIPTION

HAVE BEEN ALLOTTED BY CO

FILE WITH REGISTRAR DULY VERIFIED

DECLARATION BY ONE OF THE DIRECTORS OR THE

SECRETARY OR, WHERE THE COMPANY HAS NOT

APPOINTED A SECRETARY AS WHOLETIME

PRACTICE


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HAVING SHARE CAPITAL & HAS NOTISSUED PROSPECTUS

- THEN 149 (2) APPLIES- CANNOT COMMENCE UNLESS

FILE A STATEMENT IN LIEU OF PROSPECTUS

FILE WITH REGISTRAR DULY VERIFIEDDECLARATION BY ONE OF THE DIRECTORSOR THE SECRETARY,

OR WHERE THE COMPANY HAS NOTAPPOINTED A SECRETARY AS WHOLETIMEPRACTICE


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PENALTY

PUBLIC CO IF COMMENCESRS.5000/- FINED EVERY DAY OF

DEFAULT

PUBLIC CO PVT CO


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PUBLIC CO PVT CO SEC. 3(1)(iv)A CO.

WHICH IS NOT PVT.

HAS A MIN. PAID UPCAPITAL OF 5 LKS.

NO MAX. LIMIT FOR

MEMBERS

MIN. LIMIT IS 7

NO RESTRICTION ON

TRANSFER OF SHARES

CAN INVITE PUBLIC FOR

SUBSCRIPTION OF ITSSHARES & DEB.

SEC 3(1)(iii)BY ITS

ARTICLES

- MIN. CAP. 1 LKH.

- MAX LIMIT IS 50

- MIN IS 2

- NO FREE TRANSFER OF

SHARES. 1ST

PREFERENCE TO ITS

MEM.

- JOINT SHARES

CONSIDERED AS ONE.

- PVT LTD LAST WORDS


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CANNOT INVITE PUB TOSUBSCRIBE FOR ITSSHARES OR DEB.

ONCE A YEAR MUST FILEWITH THE REGISTRAR

ANNUAL RETURN & ASTATEMENT WITH FACTS

---. CERTIFICATE SAYING NOINVI. TO PUBLIC

. NOT MORE THAN 50 MEM.

. CORPORATESHAREHOLDING LESSTHAN 25% SHARE CAP.

corporate veil formation

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