Preliminary ways. “It is a means of cooperation and

Preliminary Statement for Company & CorporationThe word “COMPANY” is derived from the Latin word Com=with or together & Panis =bread. For sake of understanding we say that it is the group of like-minded persons who sit together for earning a profit. In past, merchants took edge of festivals, parties & gatherings to discuss their business matters seriously. Nowadays, these matters of profit or lose become formal and hence cannot be discussed in gatherings.  Therefore, the company form of organizations are essential and need of today.It denotes, ”A joint stock enterprise in which the capital is contributed by several people”.  So, company denotes an association of likeminded persons formed for the purpose of carrying on some business.Company is called a body corporate because the persons forming it made him one body by incorporating it according to the law and cover it with legal personality. The word “CORPORATION” is derived from the Latin term Corpus which means “body”.  Accordingly, corporation is a legal person incorporated by a process which is against the rules of natural birth. It is, for this reason, sometimes called artificial legal person.An incorporated company owes its existence either to a special Act of Parliament or to Company Law. Public corporations have been brought into existence through special Acts of Parliament like Associated Press of Pakistan and Civil Aviation Authority etc. Whereas companies like Attock Refinery Ltd. have been formed under the Company law i.e. Companies Act 2017.What is Company?In the legal sense, a company is an association of both natural and artificial persons and is incorporated under the existing law of a country. In terms of the Companies Act, 2017, A “Company” means, a company incorporated under this Act or the company law.In common law, a company is a “legal person and entity” separate from its members. Company is capable of surviving its life other than the lives of its members. A company is not merely a legal institution. It is a legal tool to meet the ends of socially, politically and economically needs. Thus, the term company has been described in many ways. “It is a means of cooperation and organization in the conduct of an enterprise”.Lord Justice Lindley has defined a company as “An associations of many persons who contribute money or money’s worth to a common stock and employs it in some trade or business and who share the profit and loss arising therefrom. The persons who contributed in it or form it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his share….According to the best of my knowledge, I defined company asAn artificial person which is invisible, intangible, created by or under the law of land with a discrete legal entity, perpetual succession and a common seal. It is economic and administrative structure run by professional managers who hire capital from the investors.Types of CompaniesDistinct features of CompanySeparate legal entityAfter incorporation, a company becomes a separate legal entity as compared to its members. The company is different from its members in law. It has its own name, seal, assets and liabilities which are separate from its members.Case LawThe decision of the case in Calcutta High Court recognized the principle of separate legal entity even much earlier than the decision in Salomon v. Salomon & Co. Ltd. case.Calcutta High Court observed: “The Company was a separate person; a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property, as if the shareholders had been totally different persons.”Limited liabilityThe company, being a separate person, is the owner of its assets and bound by its liabilities. Members are neither the owners of the company’s undertakings, nor liable for its debts.Case lawIt was recognized in a case that “the members of a chartered company were not directly personally liable for the debts and obligations incurred by the company in its own name and, likewise, nor was the company liable for the members’ debts and obligations.”Perpetual successionAn incorporated company never dies, except when it is wound up as per law or the task for which it was formed has been completed. Death or insolvency of members does not affect the existence of the company.Professor L.C.B. Gower rightly mentions, “Members may come and go, but the company can go on forever. During the war all the members of one private company, while in general meeting, were killed by a bomb, but the company survived, not even a hydrogen bomb could have destroyed it”.Separate propertyA company being a legal person and entirely distinct from its members, is capable of owning, enjoying and disposing of property in its own name.Transfer of sharesThe capital of a company is divided into parts, called shares. The shares are said to be movable property and, subject to certain conditions, freely transferable, so that no shareholder is permanently or necessarily wedded to a company. Case LawWhen the joint stock companies were established, the object was that their shares should be capable of being easily transferred.Common sealA company is an artificial person & contracts made by him must be under the seal of a company which is the official signature of the company. The name of company must be engraved on the common seal. Any document not bearing the seal of the company may not be accepted as authentic and have no legal force.Sue and be suedA company can sue and be sued in its own name. To sue means to institute legal Proceedings against a person or to bring a suit in a court of law. Similarly, the company may bring an action against anyone in its own name; even sue one of its own members. The company is entitled to sue for damages in libel, slander or defamation as the case may be.Separate managementA company is managed and administered by the board of directors. The shareholders are simply the holders of the shares in the company and needed not be necessarily the managers of the company.What is Corporation?The word “CORPORATION” is derived from the Latin term Corpus which means “body”.  Accordingly, corporation is a legal person created by a process other than natural birth. It is, for this reason, sometimes called artificial legal person. An incorporated company owes its existence either to a special Act of Parliament or to Company Law. In the legal sense, a company is an association of both natural and artificial persons and is incorporated under the existing law of a country.Corporation in the Pakistan Companies Act 2017: The expression Body corporate OR Corporation is wider than the word ‘Company’. Both these words are used in the Pakistan Companies Act 2017 with exceptions.Body Corporate OR Corporation includes—(a)  A company incorporated under this Act or company law; or (b)  A company incorporated outside Pakistan, or(c)  A statutory body declared as body corporate in the relevant statute, but does not include—(i)  A co-operative society registered under any law relating to cooperative societies; or(ii)  Any other entity, not being a company as defined in this Act  or  any  other  law  for  the  time  being  which  the concerned  Minister-in-Charge  of  the  Federal Government may, by notification, specify in this behalf.According to the best of my knowledge, I defined corporation asAn association of persons incorporated according to the relevant law and clothed with legal personality separate from the persons constituting it is known as corporation.Essence of corporationThe Indian Supreme Court laid down the 5 essence of corporation in a famous Unani Tibbia College case10 given below:-Lawful authority of incorporationThe persons to be incorporatedA name by which the persons are incorporatedA placeSufficient words in law to show incorporationCharacteristics of CorporationThe five core structural characteristics of the business corporation are:-Legal personalityLimited liabilityTransferable sharesCentralized management under a board structureShared ownership by contributors of capitalAs we can study these characteristics above in distinct features of company thoroughly so there is no such need to explain them.John Armour, Henry Hansman & Reinier stated in their paper thatIn virtually all economically important jurisdictions, there is a basic statute that provides the formation of firms with these five characteristics. As this pattern of five characteristics suggests; these characteristics have strongly complementary qualities for many firms globally.Saloman Vs. Saloman 1897 A.C. 22Saloman had a sole proprietor business of a leather merchant. He formed a company on his name Saloman & Co. LTD. He himself, his wife, daughter and 4 sons are members of this company. The wife, daughter and 4 sons have a one share each. Saloman sold his sole proprietor business to his company Saloman & Co. LTD. & obtained 20 thousand shares and 10 thousand debentures. Debentures were secured as the assets of Company.As Saloman act as director of his company so he borrowed a round about £6000 from outside creditors on which security is not given to them. After company suffered from heavy losses and became bankrupt. The asset of Company was £7000 but the liabilities are nearly £16000. As a result company was wound up and the question arose that whether the debentures secured on assets issued to Salomon will get preference against the other debt of company. The argument brought by creditors was that Salomon and Salomon & Co. LTD is same person so he should be payed after the payment of outside debtors.In this situation court held that Salomon and Salomon & Co. LTD are 2 different persons and Salomon can claim to be a secured creditor for his debentures. Therefore proceeds of the assets should be first allocated to settle the debentures of Salomon.Different rules established in Salomon caseFollowing are the rules settled in Salomon case.Recognition of family owned companies.Recognition of principal of separate legal entity.Recognition of members limited liability.Recognition of a loan to company given by a member of it.Corporate VeilThe doctrine in Salomon’s Case creates “thin wafer clothing” on the company due to which no one can access that who is behind the curtain of company.This curtain on company is well known as Veil on the corporation of Company OR Veil of corporation. But there are exceptions under which court ordered to break this veil of incorporation. Following are some instances when court pierces this veil.Company is agency of another company / Alter ego doctrineFraudSingle economic unitDetermination of residence for taxationDanger to national security and many more.Corporate Veil and its lifting:-Starting with a juristic perspective, a company is a lawful representative unique from its parts. It is held in famous case of Salomon v. Salomon and co. Ltd. (1897) discussed above. This standard give birth a principal of ‘Veil on incorporation’ which create a narrative cover between the company &its members. The courts by and large think about themselves certain by this principal. But in certain circumstances, the court will penetrate the corporate cover alternately or disregard the corporate veil to reach at those representatives who are behind this cover and so uncover the genuine structure of company. The justification behind this is likely that the law won’t permit the corporate structure to misused and make the society abused.In Littlewoods Mail Order Stores Ltd V. Inland Revenue Comrs. Lord Denning stated:”The doctrine laid down in Salomon v. Salomon and Co. Ltd, has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited liability 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”.The situation where the judiciary or legislature has decided that the separation of the personality of the company and its members is necessary and not to be maintained furthermore, then the veil of incorporation is said to be lifted.Comprehensively there are two sorts for procurements for the lifting of the corporate veil. Legal procurements OR we say judicial provisions. Judicial provisions discussed about fraud, character of company, protection of revenue, single economic entity. Same time statutory procurements or provisions discussed about decrease in membership, Misdescription of name, fake conduct of business, Failure to refund application money and so on.The corporate veil is lifted when in defense proceedings, such as for the evasion of tax, an entity relies on its corporate personality as a shield to cover its wrong doings.Judicial lifting of corporate veil:-Since the decision in Salomon v.  Salomon & Co. Ltd. (1897), generally courts are very reluctant and cautious to lift the corporate veil to see the real personalities behind the scene. For many years the judiciary swings his face from strict principles of the Salomon, Lee & MacCuara case but in famous case of United States V. Milwaukee Refrigerator Co., it was summed up that:”A corporation will be looked upon as a legal entity as a general rule but when the tool of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation as an association of persons which is opposite which held in Salomon, Lee & MacCuara case.”Following are the situations when court thinks that it deems fit to uplift the corporate veil over the company:-Fraud, duplicity or inappropriate Conduct :-Where the corporate veil has been used for commission of fraud or improper conduct. In such a situation, Courts have lifted the veil and looked at the realities of the situation. The Courts won’t permit the Salomon vital will utilized as a motor for cheating. Courts will lift the veil on the registered company to make sure that corporation prevents to use device of fraudulent purposes or evading a contractual obligation or liability.Case lawsIn Jones vs. Lipman case Mr. Lipman had entered into a contract with Mr. Jones for the sale of land. Mr. Lipman then changed his mind and did not want to complete the sale. He formed a company in order to avoid the transaction and conveyed the land to it instead. He then claimed he no longer owned the land and could not comply with the contract. The Lord Russel found the company was but a façade or front for Mr. Lipman. He stated that, “A mask which Mr.  Lipman holds before his face in an attempt to avoid recognition by the eye of equity” and hence granted an order for specific performance.Drawing on the authority of Jones v Lipman, the Court of Appeal, in another case was prepared to accept, for the purposes of that case, that the veil could be lifted where a defendant used the corporate form to evade: (a) Limitations imposed on conduct; and(b) Such rights of relief against him as third parties already possess.For Benefit Of Revenue:-The Court has the power to checkout the company if it is used for the purpose of tax evasion or prevents from his tax obligations. Where it was found that the sole purpose for which the company was formed was to evade taxes the Court will ignore the concept of separate entity and make the individuals concerned liable to pay the taxes which they would have paid but for the formation of the company.Case LawBrief facts of the case are that the assesse might have been a rich wealthy man enjoying immense profit and investment wage. He shaped four private companies and suitably for each should hold a block of investment and agenize to it. Money accepted might have been credited in the accounts of the particular company yet the agency gave back the amount to him as a pretended loan. This way he divided his income into four parts in a bid to reduce his tax liability. Yet it has been held that, “the shares of the company might have been framed by those assesse purely Furthermore basically as a method for avoiding super taxation and the company might have been simply an assesse himself. It did no business, but was created simply as a legal entity to ostensibly receive the dividends and interests and to hand them over to the assesse as pretended loans”.Foe/Enemy Character:-A company might an adversary character when persons of foe characters accepted control of its undertakings over a foe nation. In such a case, court might analyze the character of persons in genuine control of the company, and announce the company to a chance to be a enemy agency.Case LawIn Daimler case, it was held that “a company will be regarded as having enemy character, if the persons having de facto control of its affairs are resident in an enemy country or, wherever they may be, are acting under instructions from or on behalf of the enemy.”Company avoiding lawful Obligations:- The place the utilization of a consolidated company is, no doubt aggravated will evade legitimate obligations, the court might neglect those legitimate personalities of the particular company and proceed on the supposition that no company existed.Abused corporate personality & public interests:- Where it is found that a company has abused its corporate personality for an unjust and inequitable purpose, the court would not hesitate to lift the corporate veil. Further, the corporate veil could be lifted  when  acts  of  a  corporation  are  allegedly  opposed  to  justice,  convenience  and  interests  of revenue or workmen or are against public interest.SINGLE ECONOMIC ENTITY:-Sometimes in the case of group of enterprises the Salomon principal may not be adhered to and the Court may lift the veil in order to look at the economic realities of the group itself.In the case of DHN LTD. case it has been said that, “the Courts may disregard Salomon’s case whenever it is just and equitable to do so.” In this regard Lord Denning argued that, “a group of companies was in reality a single economic entity and should be treated as one.”Two years later after DHN LTD. case the House of Lords in Woolfson vs. Strathclyde R.C 1978 SLT 159 specifically disapproved of Denning’s views on group structures in finding that the veil of incorporation would be upheld unless it was a facade. However, Denning’s views on the lifting of veil still had considerable effect.Statutory lifting of corporate veil:-Following are the situations when statute permits that it deems fit to uplift the corporate veil over the company:-Reduction of number of members:-According to Pakistan Companies Act 2017, there is a liability of uplifting the corporate veil for carrying on business with less than three or, in the case of a private company, two members. A company may be wound up by the Court, if  the  number  of  members  is  reduced,  in  the  case  of  public company, below three and in the case of a private  company below two.Fraudulent Trading:-According to Pakistan Companies Act 2017, a company may be wound up by the Court if the company is conceived or brought forth for, or is or has been carrying on, unlawful or fraudulent activities. Also, if any business of a company is carried on with the intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, who was knowingly a party to the carrying on of the business in that manner is liable to imprisonment or fine or both.Conceal name of creditor:-According to Pakistan Companies Act 2017, there is a penalty of uplifting veil on concealment of name of creditor. If any officer of the company conceals the name of any creditor entitled to object to the reduction, or willfully misrepresents  the  nature  or  amount  of  the  debt  or  claim  of  any creditor,  or  if  any  officer  of  the  company  abets  any  such  concealment  or misrepresentation  as  aforesaid,  every  such  officer  shall  be  punishable  with imprisonment for a term which may extend to one year, or with fine which may extend to five million rupees, or with both.Misdescription of company:-According to Pakistan Companies Act 2017, If a company does not display its name in the manner provided for by this Act, and also on bill of exchange, promissory note, endorsement, cheque or order for money or goods in which the companies name is not mentioned in legible letters, it shall be liable to a penalty not exceeding level 1 on the standard scale and every officer of the company who authorizes or permits the default shall be liable to the like penalty.Failure to conduct Annual General Meetings:-According to Pakistan Companies Act 2017, a company may be wound up by the Court if default is made in holding any two consecutive annual general meetings.Refund application money:-According to Pakistan Companies Act 2017, if the repayments of money received for shares application are not allotted then court uplift the veil on company. If the refund required is not made within the time specified, the directors of the company shall be jointly and severally liable to repay that money with surcharge at the rate of two percent for every month or part  thereof  from  the  expiration  of  the  fifteenth  day  and,  in  addition,  shall  be liable to a penalty of level 3 on the standard scale.Premature trading:-According to Pakistan Companies Act 2017, the consequences of non-compliance of section 19 i.e. commencement of business by a public company is uplifting the veil of company. Under this segment, a state funded restricted company recently consolidated all things considered must not “do business or exercise whatever obtaining power” until it need got starting with the registrar of companies. If it enters into any transaction contrary to this provision not only are the company and its officers in default, liable to pay fines but if the company fails to comply with its obligations in that connection within 21 days of being called upon to do so, the directors of the company are jointly and severally liable to indemnify the other party in respect of any loss or damage suffered by reason of the company’s failure.Relationship between Uplifting of veil & Tort:-A finding of tortious liability against a shareholder for activities carried out through the medium of a company has the possibility of negating the Salomon principle i.e. uplifting the veil on company. The courts have increasingly been faced with this possibility. If the tort is deceit rather than negligence the courts will more readily allow personal liability to flow to a Director or employee.Concluding Remarks:-The act of piercing the corporate veil until now remains one of the most controversial subjects in corporate law. There are classes for example fraud, agency, sham or facade, shamefulness and group enterprises, which are accepted particular support under which the Judiciary and statute might penetrate in the corporate cover.

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