Seminar 1 (2).pptx for introduction to company law

company law intro

1. Business corporations have a fundamentally similar set of legal characteristics—and face a fundamentally similar set of legal problems—in all jurisdictions. INTRO Company? Association - with one another or others – profit making How is it different from partnership? Liability Why do you need Company law? Investor ownership - people’s interests figure largely in the functioning of a company – taxes – regulations for FDI – ACCOUNTABILITY - If no company, contracts law can regulate but on registration a company has a unique identity Do you think corporate laws all over the world may be similar because eventually a company runs almost the same way as the other?

2. NEED FOR COMPANY LAW? Corporate governance – set of rules , practices and processes by which a company is directed and controlled. – involves balancing the interests of a company's stakeholders – which are the shareholders, management, customers, suppliers, financiers, government and the community at large. Corporate governance Trump’s executive order puts a ban on nationals from seven Muslim-majority countries - halted the entire US refugee program for 120 days, indefinitely banned Syrian refugees and suspended all nationals from Iran, Iraq, Libya, Somalia, Sudan, Syria and Yemen for 90 days. - Tech firms has been protesting it – why? - CEO – Sunder Pichai and Founder, Sergey Brin of Google, Expedia and Mark Zuckerberg of Facebook have all criticized the move – Why? Trump’s new EO eliminates regulations on small businesses – “ two out-one in ”- average small-business owner spends at least $12,000 every year dealing with regulations.

3. NEED FOR COMPANY LAW? Kingfisher Hit rock bottom – Why and how? - Expenses exceeded what the company could manage - The desire to run neck-to-neck with Mr. Naresh Goyal’s Jet Airways made it worse - Merger gone wrong – Bought Air Deccan in 2007 – spent Rs . 550 cr. For 26% stake - Air D eccan became Kingfisher Red – confusing investors - Negative Equity due to larger than life services in the international sector - Subprime mortgage crisis happened in 2009-10 - Banks gave loans without checking because of his influential contacts In all of this – where does company law fit in?

4. NEED FOR COMPANY LAW? Messy Boardroom battles can lead to low investor faith and start affecting the working of the company in terms of its employees Difference of opinion and the way of doing business led to sacking Cyrus Mistry as the Chairman of Tata Group – London Court of Arbitration asked Tata Sons to pay $1.17 Billion damages to NTT Docomo (Japanese) for breaching their agreement with JV firm Tata Teleservices. Where does company law step in? Cyrus Mistry has moved to National Company Law Tribunal (NCLT) against Tata Sons which had called shareholders’ meeting on February 6 to remove him as the director of the company - plea for a stay on February 6 Extraordinary General Meeting ( EGoM )

5. Terminology Trusts - fiduciary arrangement that allows a third party (trustee) to hold assets on behalf of a beneficiary or beneficiaries Franchise - a type of license that a party (franchisee) acquires to allow them to have access to a business (the franchiser). The franchisee uses the knowledge , processes and trademarks of the franchisor – regulated by Indian Contract Act, 1872 and Specific Relief Act, 1963. Conglomerate –a company carrying different , seemingly unrelated businesses. Parent company owns a controlling stake in a number of smaller companies, which conduct business separately – eg . Reliance Industries Limited – Textiles, Petrochemicals, Infrastructure, Network 18 etc , United Breweries Holdings Limited or UB Group, Tata Group Subsidiary - As per the 2013 Act, it is as an entity of which the holding company controls more than one-half of the total share capital (50%) ( either directly or indirectly) or controls composition of the board of directors [or is explained further under classes of shares] Stock – The general term for shares - overall ownership in one or more companies Shares – of a particular company - The capital of a company is divided into shares . Each share forms a unit of ownership of a company and is offered for sale so as to raise capital for the company. Used interchangeably

6. Terminology Share 1 Share 1 2 Share 4 3 5 If you interested in PS3/4 you would be interested in  Sony Corporation  - the maker of the that system, and that Sony is a “public” company that is owned by its shareholders . So when you buy shares, you would want to buy shares of Sony , and its profits go up because lots of people buy PS3/4 systems, the value of your shares may also go up - forces of supply and demand are at work. You will buy its shares and get a small ownership in the company, just like a piece of cake in diag 2 . Each shareholder takes his share of the cake and is thereafter, the owner of his piece. If he has to return it to the owner – he will be liable to return only the piece he received.

7. Terminology Shareholder – owner of shares of a company – could be an individual, a company, a trust Share capital - the part of the capital that comes from issue of shares Branch – an extension of the parent company and not a separate legal entity – no stocks are issued nor a management is present Joint Venture - A joint venture is a partnership where two or more people or companies agree to put in goods, services and/or capital for a commercial project. In sectors where 100% FDI is not allowed in India, a joint venture is the best medium, offering a low risk option for companies wanting to enter into the vibrant Indian market. Wal-Mart, entered into a 50:50 joint venture with Bharti Enterprises for the wholesale cash-and-carry business in India. Securities – combinations of all kinds of instruments – bonds, stocks, debentures etc.

8. Terminology Franchise Dealership Agency A blueprint of a business model - its chain. The franchisee purchases a complete store with some modification of his choice, depending on the franchise agreement. Franchises capitalize on a proven, business process to seek to duplicate it elsewhere. Runs like a unit so no company is incorporated. Typically an agreement to be able to sell a specific product or service as a wholesaler or retailer. It may include the rights to be an authorized service center for the product –as per the agreement . A dealer is more independent as to business design, products available and exclusivity. The principal is liable for the acts of the Agent. No features of franchise or dealership – Mere representation of another – On behalf of. Franchisee gets the right to use the TM and the name of an already established business. The Dealer may wish to run it in his own name so will have to incorporate a company. A dealership provides more flexibility - can operate the business as the dealer wishes unless the specific dealership mandates otherwise. Liability is of the Principal – rarely used as a business format The Law that governs it – Contractual Laws If registered as a company – Companies Act, 2013 & Contractual Laws The Law that governs it – Contractual Laws

9. HISTORICAL BACKGROUND 1913 - The Indian Companies Act - the first comprehensive law 1946 – 1950 – gained independence - Bhabha Committee suggested changes to the 1913 Act – to meet economic changes and to align with the English Companies Act, 1948 Report submitted in 1952 – after 4 yrs – Companies Act, 1956 - 1956 was amended several times - Companies Bill 2009 & 2011 since UK 1948 Act was replaced by 1958 & 2006 Acts Companies Act, 2013 – 100 years after 1913 Act What was the reason to shift from 1956 Act to 2013 then?

10. SATYAM SCAM

11. INTRO The 2013 Act has 470 Sections in 29 chapters and 7 schedules vs. 700 sections and 14 schedules of 1956 Act - Critics believe it is simply cosmetic because several clauses have been added under one section with several sub-sections to reduce the total no. - ‘ as may be prescribed ’- Immense delegated legislature – the executive i.e. Central Government, has the power to amend and modify over 300 sections, as it deems fit - Already a Companies (Amendment) Act, 2015 , has come into force by MCA – minimum paid up capital removed – done to ease business - MCA has constituted a Companies Law Committee on 4 th June 2015– to make recommendation on 2013 Act - 39 clarificatory circulars and 9 orders for removal of difficulties have been issued U/s 134 high compliance and reporting is required even by a pvt. company – which are often family owned business – no sense to expect mid-sized companies to file so many declarations & explanations What about ‘Make in India’ Mantra?

12. INTRO However, the new Act has addressed several issues and introduced new concepts for better governance – one-person company , CSR , woman director , e-voting , independent directors , mandatory rotation of auditors , related party transactions S . 1(3) – different dates appointed for different provisions - so both Acts operative at the same time MCA Notification The World Bank Group’s Ease of Doing Business Rank of India in 2013 was 131 (out of 189 economies) – one has to wonder if the Act of 2013 worsens it? - The reason is – it is not JUST the Companies Act that a corporation has to abide by – there are as many as 70 different legislation to comply with.

13. INTRO COMPANY LAW FEMA - FDI Policy & RBI – SARFAESI ACT SEBI (stockbrokers, intermediaries, artificial markets) - DEPOSITORIES ACT CONTRACTS + NEGOTIATIONS PROPERTY/REAL ESTATE TAXATION Intl./VAT/Sales/Excise ARBITRATION COMPETITION ACT LABOUR LAWS ENVIRONMENTAL LAWS BANKING LAWS

14. FDI Policy – Foreign companies invest through subsidiaries or JVs - GoI , Department of Industrial Policy and Promotion (DIPP) Ministry of Commerce & Industry makes policy announcements through Press Notes, notified by RBI – Like 100% FDI permitted for LLPs and first store of single brand retail- IKEA but Amazon is not single brand ? FEMA 1991 + Regulations like the foreign exchange management (deposit) regulations 2000 RBI – foreign companies open branch office in India – merger of Indian co. with foreign co. - RBI registers and regulates NBFCs registered under the Companies Act, engaged in the business of loans and advances, acquisition of shares/stocks/securities issued by Government like nature like Toyota Financial Services India Limited - issues A.P. (DIR Series) Circulars SEBI – intermediaries – stockbrokers, promoters, regulates fraudulent and unfair trading practices, insider trading – issues notifications and circulars every now and then – SEBI (Disclosure and Investor protection) Guidelines, 2000 SARFEASI, 2002 – NPAs – ARC buy NPAs from banks on the basis of security receipts which are actually issued by Qualified Institutional investors (QBI) such as FIIs, Provident Fund/Pension Funds with a 9% profit on the security receipt and then the ARC will either takeover/restructure the management of the company to get the money back Securities Contract (Regulations) Act, 1956 – To Recognize, Supervise & control stock exchange and their contracts – BSE and NSE .

15. INTRO Depositories Act, 1996 – trustees like banks who hold securities - NSDL and CDSL - recognized by SEBI – various banks and stockbrokers act as Depository Participants (DP) registered with NSDL and CDSL Ministry of Corporate Affairs - regulates the functioning of the corporate sector – such as accounting fraud of Satyam – register new company, change company information, CIN, DIN, Directors Signature Essentially what is it that you are likely to do in a ‘corporate’ Firm – Incorporate new companies Drafting and advising on AoA and MoA Custodian Agreement Shareholder Agreement JV Agreement – research - foreign companies set up – FIIs, QIB, Venture Capital Funds Franchise agreement Corporate advising – kind of company, fund raising, re-structuring, branch office vs. subsidiary vs. associate, etc.

16. Assessment Final Exam – 50% Internal Assessment – 50% ‘ Partner of a law firm’ – 30% - 2 big assignments + viva 2 Surprise Tests of 5 marks each – 10% On the spot Q&A – 10% Rules No Laptop Policy Do not dream of him

17. Core Characteristics 5 core structural characteristics of a modern corporation: legal personality, limited liability, transferable shares, centralized management, and shared ownership by contributors of capital Almost all large-scale business firms adopt a legal form that possesses above five of the basic characteristics of business corporation Corporate re-structuring and corporate finance are simply fancy words!

18. Why is there a need for Company Law? Enron Corporation - an American energy company based in Texas -used accounting loopholes & poor financial reporting to mislead its BoD – hid details of debts of billions of dollars from failed deals and projects & pressurized its auditing firm, Arthur Andersen to ignore the issues too - Stock price suddenly fell to $1 in 2001 from $90 in 2000 - Shareholders filed a $40 billion lawsuit – investigation was carried out and in Dec 2001, Enron filed for bankruptcy-Many executives were sentenced to prison - Arthur was asked to close its business Same was witnessed by WorldCom , an American Telecommunications company, inflated assets by $11 dollars – investors lost about $180 billion and 30,000 jobs were lost - Sarbanes-Oxley Act was passed Lehman Brothers – hid $50 billion as loan amount – crashed due to Buying 5 banks who had further given credit to people with low credit rating – led to subprime crisis WOLF OF WALLSTREET Jordan Belfort

19. A general hierarchy of a company – eg . Google Shareholders Chairman/ MD – elected from the Board Supervises the Board of Directors (S. 2(34)) All those who invest – Larry Page & Sergey Brin + Who trade in shares of Google - Brin has nearly 21 million shares & Page owns 75,000 shares CEO – Sundar Pichai / President Depending on how the co. wants its structure – there may be a President and a VP instead of CEO and CTO, CFO etc. or may have both – or linear set up too These employees run day to day affairs of the Co. 99% Owners/ founders will be on the Board IPO in 2004 CFO CTO Mostly Directors hold shares- but not a rule - otherwise through Shareholders a Director is appointed – One director can be on the Board of 10 companies at the same time – but depends on any restriction placed by a company COO Sometimes Directors hold these positions PROMOTERS

20. INDIA Eg . If India is considered a company - we get to choose our leaders , we are shareholders - leaders/Central Govt. forms the Board of Directors working for us & the country - Bureaucrats IAS, IFS, IPS etc. are CEO/Manager + employees ensuring proper working of the country - Judiciary is like an Independent Director – ensuring the Government is not defrauding its members - Central Government is the holding company (S. 2 (46)) with States as subsidiary companies (S. 2 (87) holding co. controls more than 50%of the share capital and the composition of Directors) - Two companies which belong to the same holding/parent co. – sister company – so Mumbai and Kolkata belong to the same country but they both work independently of each other and have no say in the governance of each other - In cases of a Trade Treaty with India – where the other country has a bit of a say in what is to be conducted and how, say USA - Associate co. (S. 2(6) 20% of share capital or of business decisions by virtue of an agreement) - A stake less than 50% is called a minority shareholder with no controlling interest Walt Disney Corporation owns about 40% stake in the History Channel , 80% stake in ESPN and 100% interest in the Disney Channel. In this case, the History Channel is an associate company, ESPN is a subsidiary and the Disney Channel is a wholly owned subsidiary company.

21. Discuss Gauarv & Onshi Partners would mean? - Partnership – not a company in the legal sense – Partnership Act, 1939 - where the partners are liable Now if it is titled – Rhea, Malvika & Sisters? - & Sisters would still denote partnership – it means there are more partners – even if it was & Company, it would not automatically qualify as a company – it will be a partnership firm until it is incorporated i.e ., registered under the Companies Act, 2013 Gaurav & Onshi Limited? Does the word Private and Public make a difference? - The word limited makes the difference - liability is limited – owner/director/investor cannot be made responsible for any unfulfilled obligations and debts of the company. What does M/s stand for? - Messrs – usually partnerships that converted to company Then can lawyers form a company?

22. Discuss What is limited liability? Kopal is an interior decorator and Eesha is a great cook. To earn money, both start their own respective business. Kopal earns a living by doing renovations/re-décor consignments. She buys her own equipment and advertises her services under her own name. She is a sole proprietor. Eesha starts a bakery and forms a small corporation called Bakshi 's Cakes Pvt. Ltd. She invests her savings as starting capital and buys her baking equipment. She leases her shop in favor of Bakshi ’s Cakes Pvt. Ltd. So long as things go well for both the entrepreneurs there are almost no differences between the two ways of doing business. As soon as things turn sour though, the differences become apparent. One day, Kopal’s employee mops the floor she had just painted & forgets to put up a sign. A customer walks in, slides on the wet floor and brakes an ankle. He sues Kopal for medical expenses and lost wages. Eesha accidentally drops a peanut in a wrong batch of batter and causes severe allergy to one of her customer. That customer sues her for medical bills, pain and suffering. What is at risk they run individually ? Kopal runs the risk of losing everything she owns – her equipment, her truck, her earnings, house, personal belongings. She must sell anything she owns to pay. Eesha risks only her business assets - equipment, cash reserves and anything owned by Bakshi's Cakes. Her personal things are safe. Her business may become bankrupt, but her life will not be destroyed.

23. Discuss Prodigy Networks – a Manhattan based company looks for a commercial property out on auction in Manhattan. If the property is worth $80,000: - Prodigy will invest about $ 40,000 in it to bid for the property - It will call for other investor who might want to contribute for the leftover $ 40,000 - It will create a fund for buying the property – eg . Capitals Contribution - General public can contact the company and invest as much as they want - as little as $10,000 - Y decides to invest $ 10,000 with $2,000 as paid up/called share capital and $8,000 as uncalled - Prodigy holds this property for the next 3-4 months – puts it on rent or re-develops it - Once the prices of the land increase, Prodigy decides to sell it - P rofit made is 40% higher than the investment of $80,000, i.e. $32,000, - O ut of $32,000 Y will be entitled to his return as per the share he had invested – 2% - If the company decides to dissolve – then Y’s liability is limited to the extent of unpaid shares – he will have to contribute the leftover $8,000 In this – Capitals Contribution will be the company Prodigy is the promotor/founder – who will be a majority shareholder, on the Board of Directors and could be also the CEO, if needed All those who invest are shareholders – Y – if majority shares then he can qualify as a Director, if he expresses to be one otherwise as an ordinary shareholder Y gets the right to vote – a new Director or remove Dividend - What is paid as profit to the shareholder is from the profit that the company makes depending on the no. of shares Y owns Liability – to the extent of unpaid share capital

24. Why is there a need for Company Law? Shweta buys 500 shares of PepsiCo. for Rs . 8 per share in 2015 – She is asked to pay half the price for now as called share capital (i.e. Rs . 4/-) and the other half to be paid later (uncalled). In 2017, PepsiCo decides to go in for Liquidation i.e. wind up its business – What is Shweta’s liability on winding up? - S. 2 (22) - company having the liability of its members limited by the memorandum to the amount, if any , unpaid on the shares respectively held by them – so liability is of the unpaid Rs . 4/-. Company - L atin words, ' com ' which means ' together ‘ and ' panies ' which means ' bread '. A company is thus, an association of persons who took their meal together. Lord Justice Lindley defined - “ A company is meant an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business, and who share the profit and loss (as the case may be) arising there from. The common stock contributed is denoted in money and is the capital of the company. The persons who contribute it, or to whom it belongs, are members . The proportion of capital to which each member is entitled is his share . Shares are always transferable although the right to transfer them is often more or less restricted”

25. Nuances of the basic terms Securities - (S. 2(81)) shares/stocks, debentures, security receipts, shares by government co., mutual fund – traded on stock exchanges like BSE, NSE, etc. by listed companies. Listed co. – Public companies listed on recognized Stock Exchanges – BSE, NSE Share – (S. 2 (46)) – Equity (ordinary) Preference •earn dividends + vote in AGMs •earn fixed dividends + no voting rights •share the profits and also bear the losses incurred by the Co. •Get paid before the creditors of the company on winding up •Regarded as real owners Mostly concerned with profit, however, if dividends not paid for 3 years then they get the right to vote CONTROLLING INTEREST NON - CONTROLLING INTEREST

26. Control A shareholder signs an agreement with the company when she/he buys shares – Shareholders Agreement – can be of any kind - Compulsory convertible, Employee (non-voting), Redeemable (buy-back ) – voting or non voting - so that makes it a controlling interest vs. NCI – non-controlling interest. I own 10 shares of Reliance Industries Ltd. and and Sathvik owns 5 shares – Naturally, you think I have a larger shareholding than Sathvik , however, If I have one vote per share and Sathvik has 5 votes per share – what now? A company generally creates different classes of shares – Class A & Class B – Class B shares will have lesser votes per share while Class A has higher votes per share – eg . 3 or 5 votes per share (Sch. I Table F - AoA – Cl. 6) Class A will be provided mostly to founders , executives or other large stakeholders to keep greater insider control – key insiders may maintain majority voting rights without owning more than 50% of the shares Voting Right - right of a stockholder to vote on who will make up the board of directors and on matters of corporate policy, including decisions on issuing securities, initiating corporate actions and making substantial changes in the corporation's operations.

27. Terms Member – (S. 2(55)) the subscriber to MoA and is entered as member in its register of members; person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository – Initial subscribers + Shareholders – Shareholders is not defined in the Act Paid-up capital – (S. 2(32)) the amount of issued share capital and the shareholders have agreed to pay consideration in cash – eg . Co. issues 600 shares for each share worth Rs . 10 – if all shares are bought and paid for the paid-up share capital is Rs . 6,000/, if Rs . 2 is to be paid upfront and Rs . 8 at a later date – then total of paid capital ( Rs . 2) Promoter – S. 2(69) the one to start the business – pays the initial capital, prepares the Memorandum, registers it, finds first directors – gets the show running Dividends - distribution of a portion of a company's profits, decided by the BoD , to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property. Let's assume that company ABC Ltd. makes quarterly payments of Re 1 each = total of Rs . 4 per share. The company makes a profit so its net annual earnings are Rs . 20 per share. The dividend payout ratio will be calculated (4 x 100/20) so if it comes down to 20% - ABC Ltd. will distribute 20% earnings as dividends and retain 80% for further growth.

28. Terminology Memorandum – (S. 2(56)) – S. 4 – should contain name of the co.– “Limited” & “Pvt. Limited”, object, share capital , Registered office, Name should not be similar to any other existing company, should not give an impression of a Govt. Co. Memorandum is like the mother document – Tables A, B, C, D, & E of Sch. I Articles of Association – (S. 2(5)) – S. 5 - What happens within the company and how the Board and management is to run – regulations, ways of altering the Articles, information on shares, meetings, Board, loans, voting of shareholders – should be in the form as specified under Tables F, G, H, I & J of Schedule 1 of the Act – sometimes also referred to as the Shareholders Agreement - incudes information w.r.t. Share capital, Lien, Calls on shares, Transfer of Shares, how the company can Forfeiture Shares and Alter its Capital, or Buy Back its issued Shares, Promoters and Shareholders, details about General Meetings – its Proceedings, Adjournment & Voting, Board of Directors, dividends, winding up, accounts, etc. Limited by Shares Limited by Guarantee Unlimited Most common form Has no share capital or shareholders. Instead it has members who undertake to contribute a nominal amount towards any shortfall in the company's assets to settle its debts in the event of its being wound up. Unlimited liability of members

29. Formation S. 3 - A company may be formed for any lawful purpose by— seven or more persons, where the company to be formed is to be a public company; two or more persons, where the company to be formed is to be a private company; or one person, where the company to be formed is to be One Person Company that is to say, a private company, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration - This company may be – limited by shares, guarantee or unlimited - The members – i.e. the ones starting the company – have to sign on the MoA showing their intention of being admitted to the company as a member – Schd . I - There are various other ways of conducting business - Sole Proprietorship, LLP, Partnership

30. Type of Company Form Sole proprietorship Partnership – Partnership Act , 1932 LLP – Limited Liability Partnership, 2008 One person company – CA, 2013 Private company – CA, 2013 Public company – CA, 2013 Ownership Proprietor – no formal registration Partners – min. 2 & max. 20 - Partnership Deed Min 2 Partners with no max limit – LLP Agreement Individual Min 2 persons - up to 200 max Min 7 persons - no max limit Liability Unlimited Unlimited- Each Partner is jointly and severally liable Limited to the extent of partner’s contribution, except fraud Limited to shareholding Limited to shareholding Limited to shareholding Management Owner Partners – concept of agency works Partners – not an agent of the other Director along with Nominee Director BoD BoD Succession None None after death of all partners Separate legal entity- will continue after death of partners Separate legal entity- but requires a nominee Separate Legal Entity Separate Legal Entity Formation Minimal – Current a/c with a bank & depending on the nature of work – VAT/ Service Tax/ Shops & Establishment C. May or may not register – under Partnership Act 1932 - Stamp paper from Notary for Agreement & register with Registrar of Firms Compulsory registration with MCA under LLP Act - no registration will make it a partnership Mandatory registration - Considerable paperwork – S. – 7 Application to RoC Mandatory registration – o/w illegal association Considerable paperwork – S. 7 - Application to RoC Mandatory registration – o/w illegal association Considerable paperwork – S. 7 - Application to RoC & SEBI Profits Proprietor Partners as per deed Partners as per deed Individual Shareholders Shareholders

31. Corporate Governance issues General function of the company 1. Establish the structure Prepare house keeping rules to support the structure 2. Attempts to control conflicts Insiders vs. Outsiders Majority/controlling s/holders v. minority shareholders & creditors Owners vs. hired managers Company vs. Third parties - Employees, creditors, etc. Referred to as – Principal – Agent problems i.e. – welfare of one party termed the ‘principal’ depends on the actions of the other party termed the ‘agent’

32. Agency problems First conflict b/w – OWNERS & HIRED MANAGERS owners are the principal & managers are the agents – the problem lies in assuring that the managers will be responsive to the interests of the company and not pursue individual goals. 2. Second conflict b/w – OWNERS/MAJORITY OR CONTROLLING INTEREST & MINORITY Owners are the agent and minority are the principals – right to sell shares (transfer) or dissenting s/holder 3. Third conflict b/w – OWNERS & THIRD PARTIES – employees, creditors, customers Owners are the principal and third parties are the agents All these conflicts increase agency costs – which is why – strategy is needed in terms of law – Regulatory and Governance - eg . AoA

33. Companies Act, 2013 – Establish the structure S. 2(20) – defines “company ” as - a company incorporated under this Act or under any previous company law – can be a company limited by guarantee or limited by shares) S. 1(4) – Companies regulated by Companies Act, 2013 – (a ) companies incorporated under this Act or under any previous company law; (b) insurance companies , except in so far as the said provisions are inconsistent with the provisions of the Insurance Act, 1938 or the Insurance Regulatory and Development Authority Act, 1999; (c) banking companies , except in so far as the said provisions are inconsistent with the provisions of the Banking Regulation Act, 1949; (d) companies engaged in the generation or supply of electricity , except in so far as the said provisions are inconsistent with the provisions of the Electricity Act, 2003; (e) any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act; and (f) such body corporate, incorporated by any Act for the time being in force, as the Central Government may , by notification , specify in this behalf, subject to such exceptions, modifications or adaptation , as may be specified in the notification - Statutory Company – Incorporated under Special Act of Central and State Legislature – Airports Authority of India

34. What does the word ‘COMPANY’ mean? Facts – - Sir Henry Morton Stanley empowered the trustees of his will to invest monies in stocks, funds and securities of “any corporation or company”, municipal , commercial or otherwise . Tennant v. Stanley [In re Stanley] (1906) 1 Ch. 131 Issue - What is the true construction of the will – whether the trustees were empowered to invest the trust money in stocks, funds and securities of any corporation or company formed or registered in the United Kingdom, but carrying on business abroad; and any corporation or company formed or registered outside the United Kingdom. - What is the meaning and scope of the word “company ”? Held – The word “company” has no strictly technical meaning. It involves two ideas: Firstly , the association is of persons so numerous as not to be aptly described as a firm; and Secondly , the consent of all the members is not required to the transfer of a member’s interest. It must include an incorporated company. The phrase in the will is “any corporation or company , municipal, commercial or otherwise” which is of wide import and includes associations that are “corporations ” within the meaning of domestic law, as well as, associations that are formed and registered outside the State. Thus , The trustees were empowered to invest the trust money in stocks, funds and securities of corporations or companies of formed or registered in the United Kingdom, but carrying on business abroad and those formed or registered outside the United Kingdom. The term “company” has no strict legal meaning. Loosely, it refers to a group of people (too numerous to be a firm) who come together for a common purpose (usually profit) and create a separate legal entity for that purpose.

35. Companies Act, 2013 – Incorporation Procedure – S. 7 - Incorporation means registered with the Registrar of Companies under MCA with appropriate jurisdiction – where registered office is proposed Relevant documents such as: the MoA & AoA of the company duly signed by all the subscribers; a declaration in the prescribed form by a person engaged in the formation of the company that all the requirements of this Act and the rules made thereunder in respect of registration have been complied with; an affidavit from each of the subscribers to the memorandum and from persons named as the first directors, if any, in the articles that he is not convicted of any offence with regard to the company the address for correspondence till its registered office is established……… ……… S. 7(7) where a company has been got incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company or by any fraudulent action, the Tribunal may, on an application made to it, on being satisfied that the situation so warrants ,— (a)…… …….( b) direct that liability of the members shall be unlimited ; or…..

36. Companies Act, 2013 – Incorporation In Oct, 2016, MCA introduced SPICe Form INC-32 which is a Simplified Porforma for Incorporating Company through Companies (Incorporation) Fourth Amendment Rules, 2016 . SPICe or Form INC-32 can help incorporate a company with a single application for: reservation of name incorporation of a new company and/or application for allotment of DIN. The Integrated Form INC-29 has been replaced with SPICe Form INC-32 and - fast track incorporation of a company in India . Form No. INC-32, e- Memorandum of Association in Form No. INC-33 and e-Articles of Association in Form No. INC-34 . So , now there are 2 ways to incorporate a company: INC – 1 for name approval along with INC-7 (not OPC) or INC -2 (for OPC), DIR-12 & INC-22 and INC-32 (formerly INC-29), INC-33 & INC-34

37. Incorporation S. 9 – Effect of Registration – (One person co., Private & Public) From the date of incorporation mentioned in the certificate of incorporation, such subscribers to the memorandum and all other persons , as may, from time to time , become members of the company, shall be a body corporate by the name contained in the memorandum , capable of exercising all the functions of an incorporated company under this Act and having perpetual succession with power to acquire , hold and dispose of property , both movable and immovable, tangible and intangible, to contract and to sue and be sued , by the said name . - On receipt of the Certificate of Incorporation – from the date mentioned therein - body corporate – S. 2(11 ) ― body corporate or ― corporation includes a company incorporated outside India, but does not include — ( i ) a co-operative society registered under any law relating to co-operative societies; and ( ii) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf. - is a wider term – it includes foreign companies, companies under special Acts passed Parliament or State, LLPs, LIC etc.

38. Incorporation ARITIFICIAL PERSON - with no physical presence but is a separate legal entity – separate from its members - acts through its Board of Directors for carrying out its activities and for entering into various agreements When a company is registered , it is clothed with a legal personality. It comes to have almost the same rights and powers as a human being. Its existence is distinct and separate from that of its members. Members may change or die but the company goes on until it is wound up on the grounds specified by the Companies Act, 2013. In other words, it means that it has perpetual succession. A company can own property, have a banking account , be liable for taxes, raise loans, incur liabilities, and enter into contracts. Even members can contract with the company, acquire rights against it or incur liability to it. For the debts of the company, only its creditors can take legal action against it, and not its members. PERPETUAL SUCCESSION - Even if a director dies or turns lunatic, or member is bankrupt the company does not come to an end – ends only as laid down in the Act APPLE INC. V. SAMSUNG ELECTRONICS CO . Loans taken, shares issued, property bought or sold like machinery is all by the company in its own name S. 464 – An association with more than 100 members and an objective to make gain has to be registered under the Companies Act, else, it shall be treated as an illegal association – so in a way puts a limit on the max partners a LLP can have

39. Incorporation The company gains Nationality of which country? where it is registered – the Registrar with appropriate jurisdiction, which is why you must have read UB Group headquartered in Bangalore Residence? F or Tax Purposes – where the central control of the co. is – where actual management is carried out – otherwise co. could be registered in Bahamas (tax Haven) and all the actual management, along with dividend to investors all over the world could be distributed from Texas. Any restrictions? Reasonable, yes; it cannot eat or sleep or provide any form of entertainment One cannot marry a company nor cannot be appointed as a guardian for children Can a company claim for fundamental rights? Can a company face imprisonment? What if a shareholder or a director move a petition for infringement of Fundamental rights?

40. FACTS: Salomon vs. Salomon & Co. Ltd. (1897) A.C. 22 A Leather Merchant, trading in boots and shoes, decided to convert the business into a Ltd. Co. The company consisted only of the vendor, his wife, a daughter and four sons, who subscribed for one share each. Total of 20,007 shares were issued. In part payment of the purchase-money, £10,000 of debentures forming a floating charge were issued to the vendor and 20,001 shares were also issued to the vendor. These shares gave the vendor the power of outvoting the six other shareholders. No shares other than these 20,007 were ever issued . All the requirements of the Companies Act 1862 were complied with. The vendor was appointed managing director. Bad times came and the company was wound up. Receiver appointed – a creditor named Broderip sued the company; he was repaid his £5,000. This left £1,055 company assets remaining, of which Salomon claimed his debentures. No money was left, thereafter, for unsecured creditors, of which £70,000 was owing . Floating charge is on all the assets of the company – fixed is on a particular property so the co. cannot sell that property but for a floating charge the co. can continue functioning the way it is and as and when it will add/replace property the charge will be on the new/replaced assets ISSUE: When the company failed, the company's liquidator contended that the floating charge should not be honored , and Salomon should be made responsible for the company's debts, since he was the major shareholder and there never was an independent existence of the Co. Wad the company an agent of Salomon.

41. Salomon vs. Salomon & Co. Ltd. (1897) A.C. 22 The Company is at law a separate person. Act created limited liability companies as legal persons separate and distinct from the shareholders. They held that there was nothing in the Act about whether the subscribers (i.e. the shareholders) should be independent of the majority shareholder. It was held that: "Either the limited company was a legal entity or it was not. If it were, the business belonged to it and not to Mr. Salomon. If it was not, there was no person and nothing to be an agent [of] at all; and it is impossible to say at the same time that there is a company and there is not." Hence the business belonged to the company and not to Salomon, and Salomon was its agent. " The company is at law a different person altogether from the [shareholders] ...; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands received the profits, the company is not in law the agent of the [shareholders] or trustee for them. Nor are the [shareholders], as members, liable in any shape or form, except to the extent and in the manner provided for by the Act ." Shareholders are shareholders for all purposes with their respective rights and liabilities. The extent or degree of interest which each shareholder had or their influence over the other shareholders is irrelevant. HELD: Salomon followed the required procedures to set the company; shares and debentures were issued. The House of Lords held that the company has been validly formed since the Act merely required 7 members holding at least one share each. There was no fraud as the company was a genuine creature of the Companies Act as there was compliance and it was in line with the requirements of the Registrar of Companies.

42. Salomon vs. Salomon & Co. Ltd. (1897) A.C. 22 Moreover, the shareholder need not be an independent and beneficially interested person. Once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities. The motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are . In a popular sense, a company may in every case be said to carry on business for and on behalf of its members; but this certainly does not in point of law constitute the relation of principal and agent between them or render the shareholders liable to indemnify the company against the debts which it incurs Company being in law, a person quite distinct from its members, could not be regarded as an ‘alias’ or agent or trustee for Salomon - Company’s assets (and not the member’s assets) must be applied in the payment of the debentures as a secured creditor is entitled to payment out of the assets on which his debt is secured in priority to unsecured creditors HELD:

43. In re The Kondoli Tea Estate (1886) ILR 13 Cal. 43 A tea garden jointly owned by eight gentlemen was transferred to the Kondoli Tea Company for certain consideration. These eight gentlemen were also the only shareholders of this transferee company. The consideration was payable in shares and debentures of the transferee-company. It was contended that this was not really a conveyance or transfer by way of sale, but a mere handing over of the property from one name to one’s own self under another name. FACTS: HELD: What was the real transaction? Because the only shareholders in the Kondoli Tea Company were the 8 gentlemen who conveyed the estate, and that therefore it was not really a conveyance or transfer by way of sale, but a mere handing over of the property from them in one name to themselves under another name. This is a fallacy. Whoever the shareholders in the Kondoli Tea company Ltd., were, the Kondoli Tea Company Ltd., was a, separate person, a separate body, and a conveyance to the Kondoli Tea Company Ltd., of property which was the property of the sharers in their individual capacity, was just as much a conveyance, a transfer of the property as if the shareholders in the Company had been totally different persons. The Kondoli Tea Company Ltd., is a separate body; and for the purpose of seeing what their transactions are, I do not think it is possible to look at the Register of Shareholders to ascertain who the shareholders were; and, consequently, although the conveying parties here were the shareholders of the Company, there was just as much a sale and transfer of the property and a change of ownership as there would have been if the shareholders had been different persons . ISSUE:

44. Lee v. Lee’s Air Farming Limited, (1961) A.C. 12 A company was formed for the purpose of manufacturing aerial top dressings. Out of 3,000 shares, 2, 999 shares were held by Lee as the sole governing director. He was also appointed as the official pilot of the company. Lee was killed while piloting the company’s aircraft, and his widow claimed compensation for his death under the (United Kingdom) Workmen Compensation Act. The company opposed the claim on the grounds that Lee was not a ‘worker’ per se as the same person could not be employer and the employee at the same time. FACTS: Was the company merely an agent under the leadership of Lee, thus, not entitled to receive compensation? ISSUE: HELD The same principle of Salomon was applied – The Co. was a different entity – The Co. is not an agent of the members or its employees. Lee had a contractual relationship with the company and died while working for the company as an employee – master and servant. Compensation was paid

45. LEGAL IDENTITY Members of a company, while in a general meeting, were killed by a bomb. The contention made by the shareholders was the company has no one left to be run by, thus, should be wound up. Comment. Mr. X, owner of a Timber Estate sold the whole of the timber to a timber company in consideration of fully paid up shares in the company. Subsequently with several insurance companies he insured this timber against fire - in his own name. Mr. X was the sole shareholder in the company and was also a creditor of the company to a large extent. A great part of the timber was destroyed by fire - he sued the insurance companies to recover the loss, but the court dissalowed his claims because…….? Gilford motor company ltd v. Horne - Mr. Horne was an ex-employee of The Gilford motor company and his employment contract provided that he could not solicit the customers of the company. In order to defeat this he incorporated a limited company in his wife's name and solicited the customers of the company. The company brought an action against him. The Court of appeal was of the view that……? Jones v. Lipman - a man contracted to sell his land and thereafter changed his mind - in order to avoid an order of specific performance he transferred his property to a company. The property now fell under the ownership of the company and he was not personally liable. The buyer sued the man and the Court held that…….? Discuss

46. Lifting the Corporate Veil The advantages of a corporate personality exist only to those who use it Woolfson v Strathclyde Regional Council 1978 S.C. 2 (HL ) 90 , at page 96: “ it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere facade concealing the true fact…. If a company follows proper laws, makes an honest use of the company – it is clothed with a legal personality. In case of a dishonest and fraudulent use of the facility of incorporation, the law lifts the corporate veil and identifies the persons (members) who are behind the scene and responsible for the penetration of fraud. The term lifting the corporate veil has been defined as “looking behind the company as a legal person, that is, disregarding the corporate entity and paying regard, instead, to the realities behind the legal façade. “The concept of lifting the corporate veil is a changing concept. The veil of corporate personality, even though not lifted sometimes, is becoming more and more transparent in modern jurisprudence. It is high time to reiterate that, in the expanding horizon of modern jurisprudence, lifting of the corporate veil is permissible ; its frontiers are unlimited. But it must depend primarily upon the realities of the situation .” The corporate veil may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented, or a taxing or beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be , in reality, part of one concern.

47. Lifting the Corporate Veil In Delhi Development Authority v. Skipper Construction Company Pvt. Ltd . , the company failed to pay the full purchase price of a plot to the DDA. In addition, construction was started and space sold to various persons . The two sons of the directors who had businesses in their own names claimed that they had separated from the father and the companies they were running had, in fact, nothing to do with the properties of the parents. But no satisfactory proof in support of their claim could be produced. What could be the holding of the case? Merchandise Transport Ltd. v. British Transport Commissioner (1962) 2QB 173 – a transport company wanted to obtain licenses for its vehicles but it was not entitled to apply in its own name. It, therefore, formed a subsidiary company and applications for licenses were made in the name of the subsidiary. After obtaining the licenses, they were to be transferred to the parent company. Application was rejected – why? It was held that the transfer of the shareholding between the father and the sons must be treated as a sham. The fact that the director and members of his family had created several corporate bodies did not prevent the court from treating all of them as one entity belonging to and controlled by the director and his family. The subsidiary and the parent were acting as one unit – subsidiary was to obtain an advantage for the parent company.

48. Exception to the Rule - Lifting the Corporate Veil - The court will pierce the corporate veil or will ignore the corporate veil to reach the person behind the veil or reveal the true form and character of the concerned company. Courts use this sparingly as it is difficult to lay down the exact reasons for which a court will definitely lift the corporate veil, it depends on the facts and circumstances of the case – Some instances: Against public Policy and welfare legislations W here the Co. is merely acting as an agent of the members To defraud creditors To circumvent the law Where subsidiary is acting as an agent of the holding co. – whereas, they are 2 separate entities LIC v. Escorts Ltd., (1986) I SCC 264 - A group of 13 companies incorporated abroad separately applied for permission under the Foreign Exchange Regulation Act, 1974 for investment in Indian companies. The Act on the one hand, encouraged flow of such investment from non-resident Indians, and, on the other imposed a ceiling so that the privilege may not be used to destabilize Indian companies. It was contended that all 13 companies belonged to one family trust. How would this make a difference?

49. Exception to the Rule - Lifting the Corporate Veil Apthorpe v. Peter Schoenhofen Brewing Co. Ltd. (1899) 4 TC 41 – The Law did not permit foreigners to hold land in New York. Despite this, an English Co. acquired the business and assets of a New York co. The American company to avoid legal complications and evade tax continued its American name, whereas, the whole business was being run and financed by the English Co. All shares, except 3, were held by the English Co. The Court lifted the corporate veil on the ground that the American Co. was merely acting as an agent of the English Co. – The profits were taxed as the income of the English Co. Official Liquidator v. Bagri Brothers Ltd . – a trader to avoid paying debts to his creditors, converted his sole proprietorship to a company and transferred all his assets to the Co., with his wife and himself as the directors of the company & thereafter, declared himself insolvent claiming that he had no funds to pay. The Court lifted the corporate veil to assess the real nature . The true form & purpose of the company has to be assessed . Workmen v. Associated Rubber Industry Ltd., (1985) SCC 14 – The co. created a subsidiary in order to transfer its investments to it in order to avoid paying bonus to its workmen. The subsidiary co. had no assets or business or income of its own except for the ones transferred by the Parent co. The SC lifted the corporate veil and set aside the independent status of the subsidiary. It was stated that the subsidiary was merely an agent. Avoidance of Welfare Legislations + Subsidiary acting as an agent of the holding co . are grounds for lifting the corporate veil.

50. State of UP v. Renusagar Power Co., (1991) 70 Comp Cas 127 (SC) . FACTS: M/s Hindustan Aluminium Corporation Ltd., (HINDALCO) established an aluminum factory at Renukut in Mirzapur District, U.P. in 1959. It is the case of the respondents that it was induced to do so on the assurance that cheap electricity and power would be made available. M/s Renusagar Power Co. Ltd. a wholly owned subsidiary of HINDALCO was incorporated in 1964. It had its own separate Memorandum and Articles of Association. This was done so that power plant under Renusagar could generate and provide electricity to HINDALCO. Renusagar was supplying electricity to Hindalco, alone. Steps for the expansion of the power in Renusagar so as to match the power requirement of Hindalco's expansion were taken by Hindalco. Applications for all the necessary sanctions and permissions were made by Hindalco. Permissions and sanctions were first intimated to Hindalco even though Renusagar was in existence. Changes in the sanctions and/or permissions were obtained by Hindalco and not Renusagar . Hindalco consumed about 255 MW power out of which 250 M W came from Renusagar . U.P. Electricity (Duty) Act in 1953, enforced a duty on the consumption of electrical energy in the State of U.P. An amendment to the Act provided for different rates of charge on consumption and sale of electrical energy in different capacities. Therefore, the duty levied on sale of electrical energy by licensees was different from the duty levied on generation of electrical energy that was generated for self-consumption. Renusagar applied to the UP govt. for an exemption but this was denied.

51. State of UP v. Renusagar Power Co., (1991) 70 Comp Cas 127 (SC) . ISSUE: Whether Renusagar Power Co. was the same as the consumer i.e. Hindalco? Was the wholly owned subsidiary company the “own source of generation” for Hindalco or a licensee? HELD: Renusagar was brought into existence by Hindalco who consumed all of the power generated. There were no other transmission lines going anywhere. The capacity of Renusagar was made specifically for the requirements of Hindalco. Further, power lines to Hindalco from the state grid were cut on the basis that it had its own power source. Renusagar has no independent existence- it cannot sell power to anyone but Hindalco. The concept of lifting the corporate veil is a changing concept. In the expanding horizon of modern jurisprudence, lifting of corporate veil is permissible. Its frontiers are unlimited. It must, however, depend primarily on the realities of the situation. The veil on corporate personality, even though not lifted sometimes, is becoming more and more transparent in modern company law jurisprudence. “Own source of generation” is an expression connected with the question of lifting or piercing the corporate veil. The following three factors must be considered:

52. State of UP v. Renusagar Power Co., (1991) 70 Comp Cas 127 (SC) . HELD: Renusagar Power Co. was the wholly owned subsidiary of Hindalco. The former was under the complete control of the latter, even with regard to its day-to-day affairs. This includes the undertaking of various obligations for the running of the subsidiary company. Renusagar Power Co. did not indicate its independent volition at any point in time. Hindalco was the sole consumer of the electrical energy generated by Renusagar Power Co. Renusagar Power Co. only generated electrical energy to the extent required by Hindalco. Lifting the corporate veil the court held that Renusagar Power Co. was the own source of generation for Hindalco. Thus, Hindalco and Renusagar must be considered to be one and the same entity as Hindalco seemed to take an advantage of a regulation which otherwise, would not be available to it. The rate of sale was different for self consumption and what Renusagar was doing here was a sale of electricity – which was shown as self consumption of

53. Daimler Co. Ltd v. Continental Tyre & Rubber Co. Ltd. (1916) 2 AC 307 . FACTS: Continental Tyre & Rubber Co. Ltd., a German Co., was incorporated in England for selling tyres in England. It supplied tyres to Daimler, a British co. The holders of the shares in Continental (except one) and all the directors were Germans resident in Germany . One share was registered in the name of the secretary, who was born in Germany, but resided in England and had become a naturalized British subject. The First World War b/w England and Germany broke out – Continental brought a suit claiming for payment of a trade debt from Daimler. Daimler alleged that Continental was an alien enemy company and that payment of the debt would be trading with the enemy. ISSUE: The issue was whether the corporate veil could be lifted to know the real character? Did the Co. exist independently of its members ?

54. Daimler Co. Ltd v. Continental Tyre & Rubber Co. Ltd. (1916) 2 AC 307 . HELD: As a general principle, a company incorporated in the United Kingdom is a legal entity, a creation of law with the status and capacity which the law confers. It is not a natural person with mind or conscience. It can be neither loyal nor disloyal. It can be neither friend nor enemy. Such a company may, however, assume an enemy character. This will be the case if its agents or the persons in de facto control of its affairs, whether authorized or not, are resident in an enemy country, or, wherever resident, are adhering to the enemy or taking instructions from or acting under the control of enemies. A person knowingly dealing with the company in such a case is trading with the enemy. The character of individual shareholders cannot of itself affect the character of the company. This is admittedly so in times of peace, during which every shareholder is at liberty to exercise and enjoy such rights as are by law incident to his status as shareholder. It would be anomalous if it were not so also in a time of war, during which all such rights and privileges are in abeyance. The enemy character of individual shareholders and their conduct may, however, be very material on the question whether the company’s, agents, or the persons in de facto control of its affairs, are in fact adhering to, taking instructions from, or acting under the control of enemies. This materiality will vary with the number of shareholders who are enemies and the value of their holdings. The fact, if it be the fact, that after eliminating the enemy shareholders, the number of shareholders remaining is insufficient for the purpose of holding meetings of the company or appointing directors or other officers may well raise a presumption in this respect. Such a company can only act through agents properly authorized, and so long as it is carrying on business in this country through agents so authorized and residing in this or a friendly country it is, prima facie to be regarded as a friend, and all His Majesty’s lieges may deal with it as such.

55. Daimler Co. Ltd v. Continental Tyre & Rubber Co. Ltd. (1916) 2 AC 307 . HELD: In a similar way a company registered in the UK, but carrying on business in a neutral country through agents properly authorized and resident here or in the neutral country, is prima facie to be regarded as a friend, but may, through its agents or persons in de facto control of its affairs, assume an enemy character. A company registered in the UK but carrying on business in an enemy country is to be regarded as an enemy. In matters of public policy, the corporate veil may be lifted.

56. In re Dishaw Maneckjee Petit AIR 1972 Bom 371 . FACTS: The assessee , Dinshaw Maneckjee formed 4 pvt. Ltd. companies. Each of these companies took over a particular block of his investments. At the same time, he executed a Trust Deed which stated that the investment of the company shall be held by him as a trustee/agent of the company. He stated that the legal owners are his nominees, and he actually receives the interest and dividends in the capacity of a trustee, that the interest and dividends are theirs and not his. All the shares in these companies except for 3, were held by him. The 3 shares were held by his subordinates who were in his complete control. The company was doing no business other than receiving dividends and lending that to Dinshaw as a loan with an interest. No interest was actually ever paid – no record. The Income Tax Commissioner claimed that Dinshaw retained all interest and dividends, and applied the same to his own use. There was no record to show that he disbursed it to anyone else. It was actually his profit/dividend which he was avoiding to be taxed by showing it as loan. ISSUE: Whether the corporate veil can be lifted ?

57. In re Dishaw Maneckjee Petit AIR 1972 Bom 371 . HELD The assessee was receiving under the guise of loans or advances the profits which were made by the company which he controlled and in which he held all the shares except three which were held by his subordinates. The company was created by him merely, so that he could make entries in the company's books suggesting that it received the interest and dividends and paid them as loans whilst in reality the receipt of dividends and interest, if it could be called the business of the company, was its only business and was in fact the business of the assessee himself. Under such circumstances, the company cannot be regarded as carrying on its business separate from that of the assesse. Held, the company was not a genuine co. The company is a separate legal entity. It would be necessary to follow that every alleged transaction b/w individual and the company is genuine. However, there are facts which suggest that the company in this case was formed by the assessee purely and simply as a means of avoiding super-tax and that the company was nothing more than the assessee himself. It did no business but was created purely and simply as a legal entity to ostensibly receive the dividends and interest and hand them over to the assessee as pretended loans.

58. Macaura v. Northern Assurance Company (1925) AC 619 . FACTS The claimant was the sole shareholder in the company and was also a creditor of the company to a large extent . The arbitrator held that the claimant had no insurable interest in the goods insured, either as shareholder or creditor , and disallowed the claim. ISSUES: The appellant claimed to lift the corporate veil to ensure insurable interest in the goods as that was the sole asset of the company and all of it was contributed by the Appellant. The owner of a timber estate sold the whole of the timber to a timber company in consideration of fully paid up shares in the company. Subsequently with several insurance companies he insured this timber against fire - effected in his own name. A great part of the timber was destroyed by fire - he sued the insurance companies to recover the loss, but the actions were stayed and the matter was referred to arbitration in pursuance of the conditions in the policies.

59. Macaura v. Northern Assurance Company (1925) AC 619 . HELD However, neither a simple creditor nor a shareholder in a company has any insurable interest in a particular asset which the company holds. It is true that the timber was owned by the company, but practically the whole interest in the company was owned by the appellant. He would receive the benefit of any profit and on him would fall the burden of any loss. But the principles on which the decision of this case rests must be independent of the extent of the interest held. The appellant could only insure either as a creditor or as a shareholder in the company. And if he was not entitled in virtue of either of these rights he can acquire no better position by reason of the fact that he held both characters . The appellant’s position as shareholder, must be independent of the extent of his share interest. If he were entitled to insure holding all the shares in the company, each shareholder would be equally entitled, if the shares were all in separate hands. Now, no shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein. Legal ownership is not necessary for insurable interest . So to confine it would be adding a restriction to a contract of insurance which does not arise out of its nature. To be interested in the preservation of a thing is to be so circumstanced with respect to it as to have benefit from its existence, prejudice from its destruction. If there is a legal certainty of loss arising from the destruction of the property insured then there is an insurable interest. A shareholder in a company is entitled to insure the goods of the company to the extent of his holding in order to protect the value of his shares.

60. Macaura v. Northern Assurance Company (1925) AC 619 . HELD He is entitled to a share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the company is wound up. If he were at liberty to effect an insurance against loss by fire of any item of the company’s property, the extent of his insurable interest could only be measured by determining the extent to which his share in the ultimate distribution would be diminished by the loss of the asset - a calculation almost impossible to make . There is no means by which such an interest can be definitely measured and no standard which can be fixed of the loss against. The corporate veil was not lifted.

61. Vodafone International Holdings vs. Union Of India & Anr ( 2011) 198 Taxman 480 (SC) Hutchinson Télécommunications Int. Ltd (HTIL), a unit of Hutchison Whampoa . Through JV – B/w Hutchison & Essar - by the name Hutchison Max Telecom Ltd. (HMTL) - later renamed as HEL. first invested into the telecom business in India 1. CGP Investments Holdings Ltd. ["CGP "] stood incorporated in Cayman Islands, Mauritius. 2 . 100% subsidiary CGP held 52% of shares in HEL with an option to buy another 15% 3 . Transfer of 100% shares of CGP from HTIL (1.) to Vodafone International Holdings BV, Netherlands, vide transaction dated 11.02.2007. Controlled by Vodafone Group, London

62. Vodafone International Holdings vs. Union Of India & Anr (2011) 198 Taxman 480 (SC) . FACTS In 2007, the Indian tax department issued a show-cause notice to Vodafone to explain why tax was not paid on payments made to HTIL for acquiring stake in CGP which had the effect of indirect transfer of assets situated in India. Capital gains should have been taxed as the purchase was intended to buy Indian asset. Vodafone filed a writ petition in the Bombay HC challenging the jurisdiction of the tax authorities Bombay HC, ruled that where the underlying assets of the transaction between two or more offshore entities lies in India, it is subject to capital gains tax under relevant income tax laws in India. Vodafone appealed before the SC. ISSUE : Can the corporate veil be lifted to know the real essence of the transfer?

63. Vodafone International Holdings vs. Union Of India & Anr (2011) 198 Taxman 480 (SC) . HELD When it comes to taxation of a Holding Structure, at the threshold, the burden is on the Revenue to allege and establish abuse, in the sense of tax avoidance in the creation or use of such structure(s). In the application of a judicial anti-avoidance rule, the Revenue may invoke the “ substance over form ” principle or “piercing the corporate veil” test only after it is able to establish on the basis of the facts and circumstances surrounding the transaction that the impugned transaction is a sham or tax avoidant. To give an example, if a structure is used for circular trading or round tripping or to pay bribes then such transactions, though having a legal form, should be discarded by applying the test of fiscal nullity. Similarly, in a case where the Revenue finds that in a Holding Structure an entity which has no commercial/business substance has been interposed only to avoid tax then in such cases applying the test of fiscal nullity it would be open to the Revenue to discard such inter-positioning of that entity . However, this has to be done at the threshold. In this connection, we may reiterate the “ look at ” principle which states that the Revenue or the Court must look at a document or a transaction in a context to which it properly belongs to. It is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach . Thus, whether a transaction is used principally as a colourable device for the distribution of earnings, profits and gains, is determined by a review of all the facts and circumstances surrounding the transaction

64. Vodafone International Holdings vs. Union Of India & Anr (2011) 198 Taxman 480 (SC) . HELD The Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/saving device but that it should apply the “look at” test to ascertain its true legal nature - Applying the above tests, we are of the view that every strategic foreign direct investment coming to India, as an investment destination, should be seen in a holistic manner. While doing so, the Revenue/Courts should keep in mind the following factors: the concept of participation in investment, the duration of time during which the Holding Structure exists; the period of business operations in India; the generation of taxable revenues in India; the timing of the exit; the continuity of business on such exit. In short, the onus will be on the Revenue to identify the scheme and its dominant purpose . The corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not undertaken as a colorable or artificial device. The stronger the evidence of a device, the stronger the corporate business purpose must exist to overcome the evidence of a device. Applying the above tests to the facts of the present case, we find that the Hutchison structure has been in place since 1994. It operated during the period 1994 to 11.02.2007. It has paid income tax ranging from `3 crore to `250 crore per annum during the period 2002-03 to 2006. This indicates “continuity” of the telecom business on the exit of its predecessor, namely, HTIL. Thus, it cannot be said that the structure was created or used as a sham or tax avoidant. It cannot be said that HTIL or VIH was a “fly by night” operator/short time investor.

65. Vodafone International Holdings vs. Union Of India & Anr (2011) 198 Taxman 480 (SC) . HELD If one applies the look at test discussed hereinabove, without invoking the dissecting approach, then, in our view, extinguishment took place because of the transfer of the CGP share and not by virtue of various clauses of SPA. In a case like the present one, where the structure has existed for a considerable length of time generating taxable revenues right from 1994 and where the court is satisfied that the transaction satisfies all the parameters of participation in investment then in such a case the court need not go into the questions such as de facto control vs. legal control, legal rights vs. practical rights, etc.

66. Shukraan Petrochem Ltd (Syria) Al Maqsood Jordan Ltd Zira Oilfields Ltd. Al Mehrbaan Mauritius Ltd Al Mubarak Cyprus (I) Ltd Khalifa bin Zayed Wholly Owned Subsidiaries Together hold 60% 40% Kabuliwallah Pvt Ltd is a company registered in Mumbai, India. Its main operations include the import of crude oil from various parts of the Middle East. One of its vendors is the Zira Oilfields Ltd, a major crude oil supplier registered in Abu Dhabi. Zira is owned by two shareholders. Sheikh Khalifa bin Zayed holds 40% of the shares as the monarch of Abu Dhabi. The remaining 60% is held by three offshore companies – Al Mubarak Cyprus (I) Ltd, Al Mehrbaan Mauritius Ltd and Al Maqsood Jordan Ltd. None of these three companies have any operations- they act only as holding companies and have been set up for tax purposes. Each of these three companies is a wholly owned subsidiary of Shukraan Petrochem Ltd. Shukraan Petrochem Ltd is registered in Syria and has its registered and corporate office in the city of Al- Hasakah , located at the eastern part of Syria. The shareholding structure of Zira as follows: DISCUSS Kabuliwallah Pvt. Ltd.

67. In terms of control, Sheikh bin Zayed has two nominees on the board of Zira. The directors nominated by bin Zayed act as observers and do not take part in the day to day affairs of the company. The other three companies each nominate one member to the board of Zira. These three directors look after the functional aspects of Zira and are appointed on the directions of Shukraan Petrochem. Zira and Kabuliwallah had entered into a long term supply agreement for the sale and purchase of crude oil. As part of this agreement, on 28 th December 2012, Zira loaded an oil tanker with a shipment of 2,000,000 barrels of crude oil which was bound for Kandla Port in India, where it would be received by Kabuliwallah . Payment of this shipment was to be made within 180 days of receipt by Kabuliwallah . The oil tanker reached Kandla Port and the crude oil was duly accepted by Kabuliwallah . In early January 2013, the city of Al- Hasakah was attacked by the Kurdish Army. Through a series of skirmishes and battles, control over Al- Hasakah changed hands a number of times and was finally taken over by the Islamic State of Iraq and Syria (ISIS) by March 2013. At the same time, ISIS also took over control and ownership of Shukraan . In April 2013, Zira Oilfields sent an invoice to Kabuliwallah seeking payment for the supply of the 2 million barrels of crude. By then, the Indian Government had declared Islamic State of Iraq and Syria as a banned terrorist organization under Section 35 of the Unlawful Activities (Prevention) Act, 1967. The Unlawful Activities (Prevention) Act, 1967 prohibits any Indian resident to enter into a contract with a banned organization. Kabuliwallah refuses to make payment to Zira and responds saying that they will be returning the crude oil shortly. Zira files a suit for damages before the High Court of Maharashtra. Decide whether this contract is void.   DISCUSS

68. Discuss . Saurabh Exports v. Blaze Finance & Credits (P.) Ltd .–   Defendant no. 1 was a private limited company. Defendant no. 2 and 3 were the directors of that company. D- 4 was the husband of D-3 and the brother of D-2. Allegedly on representation of D-4, D-1 company was inviting short term deposits at good interest rates, plaintiff made a deposit of Rs . 15 lakhs in the company for a period of 6 months. When the company failed to pay the amount, the plaintiff sued it for the said amount along with interest. D-2 and 3 denied their liability in the ground that there was no personal liability of the directors as the deposit was received in the name of the company. D-4 denied the liability on the ground that it had nothing to do with the transaction in question as he was neither a director nor a shareholder of the company so it was held that he had no locus in the company and hence not liable. It was held that D-3 being a house wife had little role to play and therefore could not be made liable. The petitioner demanded lifting of corporate veil. Valid? Universal Pollution Control India (P.) Ltd. v. Regional Provident Fund Commissioner –  This is a case of ‘default in payment of employee’s provident fund’- Certain amount was due and payable to provident fund office by the sister concern of the petitioner-company, a demand was raised on the petitioner company only on the ground that two directors of these two companies were common, therefore, the corporate veil be lifted?

69. Prest v Petrodel Resources Ltd, [2013] UKSC 34 . FACTS: An appeal arose out of proceedings for ancillary relief following a divorce. The parties were Michael and Yasmin Prest . They were married in 1993, and during the marriage the matrimonial home was in England. There was also a second home in Nevis. The wife petitioned for divorce in March 2008. The appeal concerns only the position of a number of companies belonging to the group known as the Petrodel Group which the judge found to be wholly owned and controlled (directly or through intermediate entities) by the husband. There were originally seven companies involved - Petrodel Resources Ltd ("PRL"), Petrodel Resources (Nigeria) Ltd ("PRL Nigeria"), Petrodel Upstream Ltd ("Upstream"), Vermont Petroleum Ltd ("Vermont"), Elysium Diem Ltd, Petrodel Resources (Nevis) Ltd ("PRL Nevis") and Elysium Diem Ltd (Nevis). Three of these companies, PRL, Upstream and Vermont, all incorporated in British Isle, are the respondents. PRL was the legal owner of the matrimonial home, which was bought in the name of the company in 2001 but was found by the judge to be held for the husband beneficially . There is no longer any issue about that property, which is apparently in the process of being transferred to the wife. In addition, PRL was the legal owner of five residential properties in the United Kingdom and Vermont is the legal owner of two more . Matrimonial Causes Act 1973 confers wide powers on the court to order ancillary relief in matrimonial proceedings. S. 23 provides for periodical and lump sum payments to a spouse or for the benefit of children of the marriage. Under section 24(1)(a), the court may order that "a party to the marriage shall transfer to the other party... such property as may be so specified. The Judge of the lower court, Moylan J. opined that he under this section had the authority to order the husband to transfer the 7 seven properties in the name of the wife

70. Prest v Petrodel Resources Ltd, [2013] UKSC 34 . HELD: . Maylon J. of Court of Appeal – held that the husband should transfer the 7 properties - because, the husband during the proceedings either ignored, evaded or tired to conceal the extent of his assets in the course of his evidence, and the collusive proceedings by which he sought declarations that certain of the companies were held in trust for his siblings. However, a seven-member panel of the UK Supreme Court unanimously overturned the Court of Appeal’s judgment – which was largely delivered by Lord Sumption . Lord Sumption stated that the ownership of the respondent companies proved to be more difficult to establish. The husband did not admit to having any personal interest in the shares of any company of the group, and declined to say who the ultimate shareholders were. Substantially all of the issued shares of PRL are owned by PRL Nigeria. Almost all the shares of that company are owned by PRL Nevis, a company about which very little is known, but whose accounts show substantial balances, apparently derived from trading. ISSUE : Whether the court has power to order the transfer of these seven properties to the wife given that they legally belong not to him but to his companies?

71. Prest v Petrodel Resources Ltd, [2013] UKSC 34 . HELD: That accounted for PRL, PRL Nigeria and PRL Nevis and Vermont whose shares were held 49% by PRL and 51% by PRL Nigeria . The judge found that the husband had "unrestricted access" to the companies' assets, unconfined by any board control or by any scruples about the legality of his drawings. He used PRL's assets to fund his and his family's personal expenditure, including the substantial legal costs incurred in these proceedings. The group was "effectively … the husband's money box which he uses at will .“ Denning LJ in a famous dictum in Lazarus Estates Ltd v Beasley [1956] 1 QB 702, 712 : "No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything. The court is careful not to find fraud unless it is distinctly pleaded and proved; but once it is proved, it vitiates judgments, contracts and all transactions whatsoever…" The husband's evidence was that the shares of PRL Nevis were owned by its own subsidiary PRL Nigeria. The judge described this as "puzzling" but made no finding as to whether it was true. It was suggested that PRL Nevis was owned by a family trust about which, however, nothing was disclosed. The judge cut through the complexities of the corporate structure by accepting the evidence of the wife that the husband was the true owner of the Petrodel Group, as he had always told them he was, even if the exact means by which he held it remained obscure.

72. Prest v Petrodel Resources Ltd, [2013] UKSC 34 . HELD : Property legally vested in a company may belong beneficially to the controller, if the arrangements in relation to the property are such as to make the company its controller's nominee or trustee for that purpose. Equitable remedies, such as an injunction or specific performance may be available to compel the controller whose personal legal responsibility is engaged to exercise his control in a particular way. But when we speak of piercing the corporate veil, we are not (or should not be) speaking of any of these situations, but only of those cases which are true exceptions to the rule in Salomon v A Salomon and Co Ltd [1897] AC 22, i.e. where a person who owns and controls a company is said in certain circumstances to be identified with it in law by virtue of that ownership and control . "Piercing the corporate veil" is an expression rather indiscriminately used to describe a number of different things. Properly speaking, it means disregarding the separate personality of the company. There is a range of situations in which the law attributes the acts or property of a company to those who control it, without disregarding its separate legal personality. The controller may be personally liable, generally in addition to the company, for something that he has done as its agent or as a joint actor.

73. Prest v Petrodel Resources Ltd, [2013] UKSC 34 . HELD: It was submitted that the authorities justified piercing the corporate veil in three, possibly overlapping, cases: ( i ) where the company was a "facade or sham"; (ii) where the company was involved in some form of impropriety; and (iii) where it was necessary to do so in the interests of justice. In each of these cases, the right of the court to pierce the corporate veil was said to be subject to there being no third party interests engaged, such as unconnected minority shareholders or creditors. Munby J formulated six principles at paras 159-164 in A v. A which he considered could be derived from them: ( i ) ownership and control of a company were not enough to justify piercing the corporate veil; (ii) the court cannot pierce the corporate veil, even in the absence of third party interests in the company, merely because it is thought to be necessary in the interests of justice; (iii) the corporate veil can be pierced only if there is some impropriety; (iv) the impropriety in question must, as Sir Andrew Morritt had said in Trustor, be "linked to the use of the company structure to avoid or conceal liability"; (v) to justify piercing the corporate veil, there must be "both control of the company by the wrongdoer(s) and impropriety, that is ( mis )use of the company by them as a device or facade to conceal their wrongdoing"; and (vi) the company may be a "facade" even though it was not originally incorporated with any deceptive intent, provided that it is being used for the purpose of deception at the time of the relevant transactions. The court would, however, pierce the corporate veil only so far as it was necessary in order to provide a remedy for the particular wrong which those controlling the company had done. n my view, the principle that the court may be justified in piercing the corporate veil if a company's separate legal personality is being abused for the purpose of some relevant wrongdoing is well established in the authorities.

74. Prest v Petrodel Resources Ltd, [2013] UKSC 34 . HELD: Moylan J. considered that it was enough to justify his order to transfer the properties that the husband should have the practical ability to procure their transfer, whether or not he was their beneficial owner. He found that this was established in the present case because of the power which the husband had over the companies by virtue of owning and controlling them. The judge did not make any finding about whether the properties of the corporate respondents were held in trust for the husband, except in the case of the matrimonial home in Warwick Avenue, which he found to be beneficially his What he held was that the assets of the companies were "effectively" the husband's property, because he treated them as such. He was "able to procure their disposal as he may direct, based again on his being the controller of the companies and the only beneficial owner." The judge accepted that as a matter of company law, the husband as shareholder had no more than a right of participation in accordance with the company's constitution, and that that did not confer any right to any particular property of the company. "But, what if the shareholder is, in fact, able to procure the transfer to them of a particular item of company property, such as a matrimonial home," the judge asked, "as a result of their control and ownership of the company and the absence of any third party interests." The judge's answer to that question was that the "purpose and intention" of the Matrimonial Causes Act 1973 was that the companies' assets should be treated as part of the marital wealth. "Effectively", he said, "the husband, in respect of the companies and their assets, is in the same position he would be in if he was the beneficiary of a bare trust or the companies were his nominees.

75. Prest v Petrodel Resources Ltd, [2013] UKSC 34 . HELD: The difficulty is to identify what is a relevant wrongdoing. References to a "facade" or "sham" beg too many questions to provide a satisfactory answer. It seems to me that two distinct principles lie behind these protean terms, and that much confusion has been caused by failing to distinguish between them. They can conveniently be called the concealment principle and the evasion principle . Moylan J laid down: The concealment principle is legally banal and does not involve piercing the corporate veil at all. It is that the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In these cases the court is not disregarding the "facade", but only looking behind it to discover the facts which the corporate structure is concealing. The evasion principle is different. It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company's involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement. Many cases will fall into both categories, but in some circumstances the difference between them may be critical. This may be illustrated by reference to those cases in which the court has been thought, rightly or wrongly, to have pierced the corporate veil . The broader principle is that the corporate veil may be pierced only to prevent the abuse of corporate legal personality. It may be an abuse of the separate legal personality of a company to use it to evade the law or to frustrate its enforcement. It is not an abuse to cause a legal liability to be incurred by the company in the first place. It is not an abuse to rely upon the fact (if it is a fact) that a liability is not the controller's because it is the company's. On the contrary, that is what incorporation is all about.

76. Prest v Petrodel Resources Ltd, [2013] UKSC 34 . HELD: I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company's separate legal personality. It was held that he could not pierce the corporate veil under the general law without some relevant impropriety, and declined to find that there was any. The husband has acted improperly in many ways. In the first place, he has misapplied the assets of his companies for his own benefit, but in doing that he was neither concealing nor evading any legal obligation owed to his wife . Nor, more generally, was he concealing or evading the law relating to the distribution of assets of a marriage upon its dissolution. It cannot follow that the court should disregard the legal personality of the companies with the same insouciance as he did. Secondly, the husband has made use of the opacity of the Petrodel Group's corporate structure to deny being its owner. But that, is simply [the] husband giving false evidence." It may engage the concealment principle, but that simply means that the court must ascertain the truth that he has concealed, as it has done. The problem in the present case is that the legal interest in the properties is vested in the companies and not in the husband. They were vested in the companies long before the marriage broke up. Whatever the husband's reasons for organizing things in that way, there is no evidence that he was seeking to avoid any obligation which is relevant in these proceedings. The judge found that his purpose was "wealth protection and the avoidance of tax". It follows that the piercing of the corporate veil cannot be justified in this case by reference to any general principle of law

77. State of Rajasthan & Ors v Gotan Limestone Khanji Udyog Pvt. Ltd. & Anr . - . FACTS: Gotan Limestone Khanji Udhyog (GLKU), a partnership firm, held a mining lease for mining limestone at village Dhaappa , Nagaur . The said lessee applied for transfer of the lease in favour of Gotan Limestone Khanji Udhyog Pvt. Ltd. (GLKUPL) which was nothing but the change in the form of GLKU i.e. a case of a partnership becoming a limited company on 28th March, 2012. The partners of the firm and Directors of the company were the same. The newly formed private limited company to which the mining leases were transferred, instead of operating the mining lease itself sold its entire shareholding to another company allegedly for Rs . 160 crores which is alleged to be the sale price of mining lease. The company subsequently became a subsidiary of Ultra Tech Cement Limited Company (UTCL) which was quoted on the Bombay Stock Exchange. There were also allegations that the partnership firm had not revealed the true facts that led to the sale of the company . Ultimately, the competent authority held that the transfer of mining rights was in violation of Rule 15 of the Rajasthan Minor Mineral Concession Rules, 1986 (the Rules) the sum and substance being that the erstwhile partners of the firm which was original lessee, had in effect transferred the lease in favour UTCL . ISSUE : The question was whether in the sale of the shares to UTCL, whether it was a sale of a company or whether it was in substance a sale of mining lease which amounted to violation of Rule 15?

78. State of Rajasthan & Ors v Gotan Limestone Khanji Udyog Pvt. Ltd. & Anr . - . HELD The Supreme Court further held that the principle of lifting the corporate veil as an exception to the distinct corporate personality of a company or its members is well recognized not only to unravel tax evasion but also where protection of public interest is of paramount importance and the corporate entity is an attempt to evade legal obligations and lifting of veil is necessary to prevent a device to avoid welfare legislation. Citing the case of   State of U.P. v. Renusagar Power Co. [1988] 4 SCC 59  in which it was noted that  “It is high time to reiterate that in the expanding horizon of modern jurisprudence, lifting of corporate veil is permissible. Its frontiers are unlimited. It must, however, depend primarily on the realities of the situation. The aim of the legislation is to do justice to all the parties. The horizon of the doctrine of lifting of corporate veil is expanding………”.  In the present case, the original lessee sought transfer merely by disclosing that the partnership firm was to be transformed into a private limited company with the same partners continuing as directors and there was no direct or indirect consideration involved. The Supreme Court held that there were two transactions ostensibly, i.e.  (a) transfer of lease from the firm to the company, with the permission of the competent authority, and (b) transfer of shares to UTCL., realistically, it was nothing but a transfer of mining lease to UTCL without the approval of the State Government. In other words,  the lessee has achieved indirectly what could not be achieved directly by concealing the real nature of the transaction.

79. State of Rajasthan & Ors v Gotan Limestone Khanji Udyog Pvt. Ltd. & Anr . - . HELD It was specifically declared that no pecuniary advantage was being taken in the process which is clearly false. The permission to transfer the lease in favour of a private limited company was granted on that basis. Thus, it was a case of  suppression of facts. Once it is held that transfer of lease is not permissible without permission of the competent authority, the competent authority was entitled to have full disclosure of facts for taking a decision in the matter so that a private person does not benefit at the expense of public property. The original lessee did not disclose that the real purpose was not merely to change its partnership business into a private limited company as claimed but to privately transfer the lease by sale to a third party. Therefore, sale of shareholding by GLKUPL to UTCL is a private unauthorized sale of mining lease which being in violation of rules is void. GLKUPL has been formed merely as a device to avoid the legal requirement for transfer of mining lease and to facilitate private benefit to the parties to the transaction, to the detriment of the public.”