COMPANY LAW CASE BRIEFS

CORPORATE PERSONALITY AND LIFTING OF CORPORATE VEIL

1. Salomon v. Salomon-
Salomon was the owner of a sole proprietorship company. He decided to incorporate a public
company instead. He made his family members and directors of the company. His newly
incorporated company, Salomon & Co. purchased the sole proprietorship. The consideration
was given to Salomon in the form of equity shares, secured debentures, and cash. The
company started incurring losses and soon went into liquidation. As per the waterfall
mechanism of insolvency, Salomon, being a secured creditor, was supposed to be paid before
the unsecured creditors. The unsecured creditors thought this was unfair as Salomon himself
was the owner of the company and was responsible for the losses. However, the court
explained that Salomon & Co. was a separate legal entity and had a separate identity from its
owner. A company can sue and be sued in its own name. Salomon was related to the
company in 2 capacities- as a creditor as well as an owner. Thus, Salomon was entitled to the
liquidation amount as he was a secured creditor.
2. In Re: Kondoli Tea Co.-
A transfer of an estate owned by certain persons to their company constitutes a valid
conveyance of property. It is not a transfer from them in one name to themselves under
another, as a company is a separate legal entity from its shareholders.
3. Macaura v. Nothern Assurance Co.-
The shareholders of the company have no insurable interest in the property of the company.
Corporate veil cannot be lifted merely because a person is the sole shareholder of the
company and owns all of its shares.
4. In Re: Dinshaw Maneckjee Petit-
A millionaire formed 4 private companies and transferred his investments to each of these
companies in exchange for their shares. The dividends received from the investments were
given back to him as a loan to avoid tax. The court lifted the corporate veil in this case. The
company was nothing more than a means of avoiding tax and it did not do any business.
5. Daimler v. Continental Tyre-
German company incorporated a company in England. Its majority shareholders and all the
directors were German. War broke out b/w Germany and England. The court held that the
Company while incorporated in England, was actually German and doing business with it
would amount to trading with the enemy.
6. State of UP v. Renusagar Power-
Renusagar was a wholly owned subsidiary of Hindalco which had been incorporated for
power generation. While being two different companies, the court held that the power
generated by Renusagar was Hindalco’s ‘own source of generation’. Renusagar was only
created for the purpose of the holding company and had no independent existence, and it was
also 100% owned by it (instrumentality). Thus, corporate veil can be lifted.
7. State of Rajasthan v. Gotan Lime Stone Khanji Udyog-
A lease was first transferred from a partnership firm to a private company. Thereafter, the
entire shareholding of the company was transferred to another company (but the actual
transaction was for the mining lease). However, permission has to be taken before selling a
mining lease. Held- Court, while lifting the corporate veil, can look at the substance and not
the form of the transaction, which in this case was to transfer the mining rights. The corporate
entity was used to conceal the real nature of the transaction.
8. Vodafone v. Union of India-
If it can be shown that a transaction is sham or tax avoidant, the corporate veil may be
pierced. Where an entity has no commercial substance in India but has only been interposed
to avoid tax then also corporate veil may be pierced. Principle is also being applied in cases
of holding company - subsidiary relationship- where in spite of being separate legal
personalities, if the facts reveal that they indulge in dubious methods for tax evasion.
Where the purpose is only tax planning and the directors are not personally benefitting, then
the veil may not be lifted. The substance over form test is used to see that even though the
transaction is legal, its substance is fraudulent. Every strategic foreign investment should be
seen in a holistic manner. The court should keep in mind the following points-
1. Participation in investment
2. Duration of time during which the holding structure exists
3. Period of business operations in India
4. Timing of exit
5. Continuity of business on exit
This shall help establish the substance or the dominant purpose of the transaction.
9. Prest v. Petrodel Resources Ltd.-
This was a case of divorce. The man was very wealthy and owned several properties.
However, such properties were held by companies of the man which he wholly owned and
controlled. The court declined to pierce the corporate veil because there was no impropriety
on part of the husband. His corporate structure was only for wealth protection. The corporate
veil should be the last resort and should only be done in limited circumstances. It is only done
to prevent abuse of the corporate personality, to evade the law or frustrate its enforcement.
10. Sudhir Gopu v. IGNOU [suggested reading]-
In this case Sudhir Gopi acting as manager of UIET entered into a contract with IGNOU.
Disputes arose and arbitral tribunal awarded damages to IGNOU to be paid by UIET and Mr.
Gopi personally.
Here, the court held that an arbitral tribunal has no power to lift the corporate veil. Mere fact
that a party is an alter ego would not warrant lifting of veil. Mere failure of a corporate entity
to meet contractual obligations is no ground for lifting of corporate veil.
Corporate veil can be pierced only in rare cases where the conduct of the shareholder is
abusive and the corporate façade is used for an improper purpose, for perpetuating fraud or
for circumventing a statute. An abuse of corporate form is the bare minimum pre-condition.

INCORPORATION OF A COMPANY AND PRE-INCORPORATION CONTRACTS-

1. Gluckstein v. Barnes-
3 people bought a property for 140,000 and sold it to a company for 180k. They disclosed the
40k profit. However, they actually bought the property at a discount of 20k. They did not
disclose this.
Disclosure of profit by themselves in the capacity of vendors to themselves in the capacity of
directors of the purchasing company was not sufficient. This amounted to a secret profit
made by the promoters and they were bound to return it.
2. Kelner v. Baxter-
Promoters had contracted to buy wine from a supplier. However, they drank all the wine
before the company was incorporated. The suppliers sought to recover from the promoters.
A pre incorporation contract not warranted for the purposes of the company takes effect as a
personal contract with the persons who purport to contract on the company’s behalf.
3. Erlanger v. New Sombrero Phosphate Co.-
Erlanger was the promoter of a company. He bought a lease for an island for 55k and sold it
to the company for 110k. The board, effectively consisting of Erlanger ratified the sale. The
investors of the company found out that Erlanger had made a profit on the island.
Promoters of a company stand in a fiduciary position. They have the power to define how and
when and in what shape and under whose supervision it shall come into existence. A
promoter who breaches any duty to the company by failing to disclose to the company
conflicting interests or secret profits would be liable. The company is able to seek remedies
such as rescission of contract and recovery of profits.
4. Weavers Mills v. Balkis Ammal-
Promotors signed a contract to purchase the property. After incorporation, the company
assumed possession and started constructing structures on it. The company’s title to the
property cannot be set aside despite their being no formal conveyance of property from the
promoters to the company. If the purchase has been made for the benefit of the company and
the company has adopted the benefit of the same, then that is sufficient for passing the
ownership of the property.
Promotor is neither agent nor trustee, but in a fiduciary relationship.
MEMORANDUM OF ASSOCIATION & ARTICLES OF ASSOCIATION-
1. Royal British Bank v. Turquand-
In this case, the directors could issue bonds with prior approval via a resolution in a general
meeting. The bond was issued without such approval. It was held that the company was liable
on the bond, as the person buying it was entitled to assume that the resolution was passed and
the approval taken.
2. Ashbury Rly Carrige v. Riche-
MoA sets out the boundaries beyond which the company cannot traverse
Importance of doctrine of ultra vires-
a. To protect investors so that they may know the object of the company they are putting
their money into.
b. To protect the creditors by ensuring that the company’s funds are not being dissipated
by unauthorized activities.
In this case, a company with the object of ‘general contractors’ and ‘mechanical engineers’
entered into a financing contract. It was contended that the contract in question came well
within the meaning of ‘general contractors’. However, it was explained that ‘general
contractors' would authorize the company to enter into any sort of contract. Thus, the phrase
had to be understood as general contracts connected w the business of mechanical
engineering. Thus, the act was ultra vires the MoA.
3. Lakshmanaswami Mudaliar v. LIC-
The directors of the company were authorized to make a charitable donation of 2L to promote
technical and business knowledge. The question was whether this donation was ultra vires. It
was held that the payment was ultra vires and that the company could not spend on charitable
objects which would not be useful for the attainment of its own objects. The members of the
company responsible for passing the resolution are personally liable to make good the
amount.
The MoA must be read fairly and its import derived from a reasonable interpretation of the
language. Where a particular act has not be provided for, directors cannot take recourse of the
AoA to imply that such business falls within its objects.
MoA may be read w/ AoA where terms are silent,but cannot extend beyond its scope. Act
beyond the MoA is ultra vires and void and is incapable of being ratifies.
4. V.B Rangaraj v. V.B. Gopalakrishnan-
Shareholders cannot, among themselves, enter into an agreement which is contrary to or
inconsistent with the articles of association of the company. Supreme Court took the view
that the provisions of a SHA imposing restrictions even when consistent with the Companies
Act, are to be authorised only when they are incorporated in the Articles of the Company.
The decision of the Supreme Court was based on the seemingly settled position that where
there is a contradiction between the SHA and the Articles of a company, the latter will
prevail.
A restriction on the transfer of shares not mentioned in the AoA cannot be binding.
Note- A contrary position was taken in the Vodafone case where it was held that the SHA is
enforceable as a personal contract and not incorporating it into the AoA does not ipso facto
render it void.
5. World Phone India v. WPI Group-
Even a provision in the SHA which is not contrary to the articles cannot be enforced against
the company if it is not mentioned in the AoA.
Here the BOD passed a resolution approving a rights issue as per the articles, even though it
required an affirmative vote of the appellant as per the SHA. The court held that the provision
of the SHA will not be binding as it has not been incorporated in the AOA.

ISSUE OF CAPITAL
1. Sahara v. SEBI
Sahara was issuing OFCDs through ‘private placement’. SEBI restrained them from doing so
for non-compliance with guidelines.
Whether OFCDs are securities?
- Yes, a combined reading of SCRA and companies act shows that ‘securities’ includes
securities such as OFCDs.
- OFCDs amounted to an issue of securities which made it mandatory for Sahara to get
listed on a stock exchange
Whether SEBI has jurisdiction over the issue?
- Yes, SEBI has jurisdiction over companies which intend to get their securities listed
on a recognized stock exchange in India.
- It can exercise its jurisdiction u/s 11 of SEBI act to protect the interests of investors
Whether the issue amounted to a public offer?
- If offer is to more than 200 people, it would be a public issue even if the securities
were not available to those who did not receive the offer or invitation. It is 200 in a
financial year and not 200 at a time.
- Thus, this cast a legal obligation on the company to get the securities listed on a stock
exchange
2. Peek v. Gurney
The prospectus made no mention of a deed of arrangement under which huge liabilities were
to be transferred to the company. The appellant bought shares in the company. He sought
indemnity on the grounds of misstatements in the prospectus.
The action failed because he had not in fact relied on the prospectus but had purchased the
shares in the market.
A mere silence cannot be a sufficient foundation for setting aside the allotment of shares. The
withholding of facts should be such that if not stated makes that which is stated absolutely
false. “There must, in my opinion, be some active misstatement of fact, or, at all events, such
a partial and fragmentary statement of fact, as that the withholding of that which is not
stated makes that which is stated absolutely false.”
A prospectus may contain statements, which are perhaps literally true, yet really false in the
sense in which the promoters should know, they would be understood by the public
3. Derry v. Peek
The company was authorized to use animal power to operate carriages and steam power only
with the consent of the board. The prospectus issued stated that the company had the right to
use steam power instead of horses- whether this amounts to a misstatement in prospectus?
A false statement, made through carelessness and without reasonable ground for believing it
to be true, may be evidence of fraud but does not necessarily amount to fraud. Such a
statement, if made in the honest belief that it is true, is not fraudulent and does not render the
person making it liable to an action of deceit. It must be made knowingly, w/o belief in its
truth and recklessly or carelessly whether it be false or true. Such a material misstatement
may be a ground for recession of contract though.
If there is substantial representation of truth, the action of fraud shall fail.
The misstatement complained of really meant that the company had obtained the necessary
statutory authority to use steam power, without which no consents could have given
authority, because by the Tramways Act 1870 steam power is prohibited except where the
special Act authorizes steam power In the prospectus, reference is made to the special Act, so
that any one who consulted the Act could see for himself what the authority was.
4. Sundaram Finance Service v. Grandtrust Finance
A company required finance and approached a person to subscribe for shares. He was told
that the company would be going public and the shares would be sold for over 25 Rs. The
person believing the representation to be true, subscribed to shares at a price of 16 Rs. Clause
15 of the Divestment Agreement dated 1.9.95, namely, the Sponsor shall arrange to offer the
equity shares for sale to the public not later than 30.04.96, stood unaltered. Later even the
date was alter and the public offer would now be on a date decided on the sole discretion of
the sponsor. The complainant only on such representation made by the accused and further it
is only on the basis of these Terms and Conditions in the Sponsorship Agreement and
Divestment Agreement, believed the same to be true and had purchased the shares to the tune
of Rs.8,00,000/-. However, company never went public. Petitioner argued that the deception
was to be determined on the date on which the earliest representation was made, on the basis
of which the petitioner acted. Therefore, the supplementary agreement could not be taken into
account.
The intention of the accused depends upon the inducement, which may be judged by his
subsequent conduct also. The facts of this case reveals that there are chain of events taking
place from the year 19 95 to April 1996 and consequently, I find there is sufficient ground for
the Magistrate to take cognizance of the offence as against the accused.
 5. Shiromani Sugar Mills v. Debi Prasad
It was stated in the prospectus that "our shareholders will be highly and satisfactorily
benefited by way of dividend”. There is also the evidence of a Director to the effect that
shareholders were told that the company would start its work of producing sugar very soon.
These are not representations of fact. The misrepresentation must be of a material fact, the
share-holder must have been induced by it and he must plead and prove so. Some amount of
puffing must be allowed in a prospectus; it must not amount to a misrepresentation of fact.
The statements in question do not imply the existence of facts which were really nonexistent
and there is no evidence that they formed a material term in the contract.
It was not asserted that the Managing Agents, etc. had subscribed to shares worth Rs.
6,00,000. When it was said that they had only promised, it meant that they had not carried out
their promise, otherwise the statement would have been that they had already subscribed to
shares worth Rs. 6,00,000. Nobody should have been misled by this statement and nobody
should have understood it to mean that shares worth Rs. 6,00,000/- had already been-
subscribed to. If the opposite parties misunderstood this statement to mean that the shares had
already been subscribed to and applied for shares under that misapprehension, they are to
blame themselves and not the promoters of the company
Not that it does not state the truth as far as it goes, but that it conceals most material facts
with which the public ought to have been made acquainted, the very concealment of which
gives to the truth which is told the character of falsehood.”
If it can be proven that a prospectus omits material information and the shareholder comes
forward in a timely manner, his name may be struck from the document and the list of
shareholders. However, right of recession is lost at the time of winding up.
6. SEBI v. Opee Stock-Link
The Apex Court observed that shares in the IPO had been allotted below market price before
being listed through demat accounts with same registered addresses and bearing several
inconsistent signatures, thereby denying small investors of their quota of shares, resulting in
unjust enrichment. Thus, order of SAT was set aside, and the order of the Whole Time
Member and the Adjudicating Officer of the SEBI was upheld. The Court also observed that
the Securities Contracts (Regulation) Act, 1956 (“SCRA”) which governs the offering of IPO
is a special law to regulate the functioning of recognized stock exchanges, and to prevent
undesirable transactions in securities, and that therefore, they shall prevail over general
provisions contained in Contracts Act, 1872 and Sale of Goods Act, 1930, in matters which
are specifically dealt with by SCRA.
7. DLF v. SEBI
The issue arose because someone filed an FIR against DLF’s sister company and this fact
was not disclosed in the prospectus.
The fact that once a policy decision had been taken by DLF to divest all of its subsidiaries,
followed by the actual divestment of its interest in about 281 companies, there was no
occasion for DLF to mention the three companies as subsidiaries or associates as that would
have been patently false statement on part of DLF.
SAT viewed that the DIP regulations primarily require disclosure of outstanding litigations,
default, etc., pertaining to matters which are likely to affect the operation and finances of the
issuer company. Sebi passed the order based on the assumption that the DLF had the
knowledge of FIR as the director of the Sudipti was a close relative of the Chairman of DLF.
SAT stated regarding this, "we are not living in the Vedic ages, when the bonds between
relatives were genuinely strong so that the knowledge of one could tantamount to the
knowledge of another". SAT noted that the FIR in any case does not amount to litigation in
law, because in the case of criminal proceeding, a case can said to be initiated only when a
competent court takes cognizance of the offence alleged in the charge sheet and not mere
filing of an FIR.
The second argument related to non-disclosure was the relationship of DLF with Shalika,
Sudipti and Felicite due to alleged control exercised by the DLF as a result of the transfer
being in the nature of Related Party Transactions is material information and that it should
have found a place in the Offer Documents. SAT held that the relationship of
holding/subsidiary had come to an end in the year 2006 on 29th/30th November itself. There
was no reason therefore to give a wrong picture in the Offer Documents. SAT also stated
SEBI misconceived in terming these transactions as 'sham transactions'. 'Sham' means a
deliberate and "intentional act" of misguiding certain people or even the court by
camouflaging the parties' legal rights and obligations and giving them a misleading
appearance.
8. Needle Industries v. Needle Industries (Newey) Holding
There was an Indian subsidiary of a UK holding company. It did a rights issue for a price
much lower than the market price and appointed a director without approval from the holding
company. As a result, the holding company became a minority shareholder. They alleged
these acts as ‘oppressive’.
The term “Oppressive” manner indicates acts that are “burdensome, harsh and wrongful”. An
isolated act, which is against the law, cannot be said to be “oppressive” unless it has a mala
fide intention behind it or if that act was “harsh, burdensome and wrongful”. However, if
there is a sequence of illegal acts, it can be concluded that all those acts were a part of the
same action, the motive of which was to oppress the ones against whom such acts had been
directed.
The person alleging oppression against the other party has to show how the oppression led
him to compromise on his decision and surrender to an act that lacks in integrity, an act that
is on the face of it unfair and had affected his proprietary rights. Thus, the allegations of
oppression against the Holding Company were rejected and it was held that Devagnanam and
his colleagues took a decision in a manner that a partner in a business venture is expected to
do.
The power to issues shares can be given for many reasons, one of them being to bring in
adequate number of shareholders for the proper functioning of the business. In the process of
issuing shares, if the Directors are being indirectly benefited by it, then the decision cannot be
stuck down. Just because by deciding for the best interest of the company, the directors have
incidentally been benefited, they cannot be assumed to have a mala fide intention. However,
if such issuing of shares is done for any improper motive of the directors, then it would
be irrelevant that such a decision was taken in the best interest of the company.
1. Pvt. company may put restriction on transfer of share in AoA.
2. Members of company must not fall below 7.
3. Directors are in a fiduciary position. If their powers are used for their personal
aggrandisement to the detriment of the company, the court will interfere and prevent
them from doing so.

TRANSFER OF SHARES
1. Messer Holdings v. Shyam Madanmohan Ruia
Pre-emptive rights are not a bar on the free transferability of shares in case of a public
company. It is not necessary to amend the AoA to include the SHA, but the latter can instead
be enforced as a contract between the parties.
2. Bajaj Auto v. Western Maharashtra Development
Bajaj and WMDCL has stake in a public company. An agreement between them had a right
to pre-emption. WMDCL wanted to sell their shares to Bajaj but the latter did not find the
price to be acceptable. The clause about right to pre-emption was in question, and whether
such a clause impinged on the free transferability of shares of a public company.
Shares are movable property and a pre-emption clause is an exercise of property rights.
Therefore, the clause cannot be said to affect the free transferability of shares of a public
company.

SHAREHOLDER’S MEETINGS
1. LIC of India v. Escorts Ltd.
LIC called for EOGM to remove 9 directors who had filed a writ petition. The directors
claimed that the resolution was malafide.
The holder of the majority of the stock of a corporation have the power to appoint, by
election, Directors of their choice and the power to regulate them by a resolution for their
removal. And, an injunction cannot be granted to restrain the holding of a general meeting to
remove a director and appoint another. Every shareholder of a company has the right, subject
to statutorily prescribed procedural and numerical requirements, to call an extraordinary
general meeting in accordance with the provisions of the Companies Act. He cannot be
restrained from calling a meeting and he is not bound to disclose the reasons for the
resolutions proposed to be moved at the meeting, nor are the reasons for the resolutions
subject to judicial review.
This is a duty cast on the management to disclose, in an explanatory note, all material facts
relating to the resolution coming up before the general meeting to enable the shareholders to
form a judgment on the business before then. It does not require the shareholders calling a
meeting to disclose the reasons for the resolutions which they propose to move at the
meeting.
LIC of India, as a shareholder of Escorts Limited, has the same right as every shareholder to
call an EoGM of the company for the purpose of moving a resolution to remove some
Directors and appoint others in their place. LIC cannot be restrained from doing so nor is it
bound to disclose its reasons for moving the resolutions. When the State or an instrumentality
of the State (LIC) ventures into the corporate world and purchases the shares of a company, it
assumes to itself the ordinary role of a shareholder, and dons the robes of a shareholder, with
all the rights available to such a shareholder. There is no reason why the State as a
shareholder should be expected to state its reasons when it seeks to change the management,
by a resolution of the Company like any other shareholder.
2. Chandrakant Khare v. Shantaram Kale
A properly convened meeting cannot be postponed. The proper course to adopt is to hold the
meeting as originally intended, and then and there adjourn it to a more suitable date. If this
course be not adopted, members will be entitled to ignore the notice of postponement, and, if
sufficient to form a quorum, hold the meeting as originally convened and validly transact the
business thereat. Even if the relevant rules do not give the chairman power to adjourn the
meeting, he may do so in the event of disorder. Such an adjournment must be for no longer
than the chairman considers necessary and the chairman must, so far as possible,
communicate his decision to those present.
The HC was right in holding that the first meeting of the Municipal Corporation fixed by the
Municipal Commissioner for May 6, 1988 was not 'adjourned for the day' but had only been
put off to a later hour i.e. the proceedings had only been suspended, to re-commence when
peace and order were restored.
If the contention that the meeting having been adjourned without specifying a definite point
of time were to prevail, it would give rise to a serious anomaly. The effect of adjourning the
first meeting to another day would imply the coming into existence of another deemed date
under s. 6(2) of the Act for commencement of the term of the Councilors. The fact that the
Municipal Commissioner did not leave the House or vacate the seat lends support to the
version that he had merely suspended the proceedings till order was restored
3. M.S. Madhusoodan v. Kerala Kaumudi
There should have been atleast 21 days prior notice for holding the meeting and stating the
intention of the resolution and 75% vote was required for passing the resolution. There was
no proper delivery of the notice informing Madhusoodhan of the meeting for issuance of
additional shares. The records kept are also unclear as to whether the sealed envelope
delivered to the assistant of Madhusoodhan did in actuality have the notice for the meetings.
The notice for the meeting did not have the fact that the deletion of article 74 would be
considered. According to section 189(2)(a) of the Act, the notice should be sufficiently
specific so to inform each member of the actual resolution to be passed. The notice is to be
frank and clear. If not then the notice is bad and the special resolution is vitiated and cannot
be acted upon. Hence, deletion of article 74 was wrong and Madhusoodhan continues to be
the MD of the company. Also according to S. 53 of the Act here are only two methods
envisaged of serving the notice which are personal service or service by post. But neither
method was used for informing Madhusoodhan and KIPL of the meeting. The notice for the
holding of the meeting has not been produced and there is a presumption against Srinivasan
and others. Although the Act does provide that if a document is sent by post in the manner
specified "service thereof shall be deemed to be effected". The word "deemed" literally
means "thought of“ or, in legal parlance "presumed”. This is a rebuttable presumption even
though the words used are ‘shall presume”. There are letters by Madhusoodhanan to Madhavi
which prove that he was not aware of the meeting in which the resolution to issue additional
shares were taken. Thus, the additional issuance and allotment of shares are invalid.
Note- The Supreme Court in 2003 in its decision in M.S. Madhusoodhanan v. Kerala
Kaumudi Pvt. Ltd. not disagreeing with the decision in V.B Rangaraj but distinguishing
itself from the facts in that judgment, held that a restriction in relation to identified
members on identified shares of a private company did not amount to restriction of
transferability of shares per se.