Which case established that a company is a legal person distinct from its members?

Salomon v A Salomon & Co Ltd (1897)

Royal British Bank v Turquand (1856)

Salomon v A Salomon & Co Ltd (1897)

Ashbury Railway Carriage v Riche (1875)

Daimler Co v Continental Tyre (1916)

A special resolution under section 114 of the Companies Act 2013 requires:

Votes in favour of at least three times the votes against

Unanimous consent of all members

A two-thirds majority of members present

A simple majority of votes cast

Assertion (A): An outsider dealing with a company in good faith is not bound to inquire whether its internal procedures have been followed. Reason (R): The doctrine of indoor management does not protect a person who relies on a forged document. Choose the correct option.

Both A and R are true, but R is not the correct explanation of A

Both A and R are true, and R is the correct explanation of A

Both A and R are true, but R is not the correct explanation of A

Which of the following bring a company within the CSR obligation of section 135, if met in the immediately preceding financial year? Select all that apply.

Paid-up capital of ₹10 crore or more

Under section 165, the maximum number of companies in which a person can be a director at the same time is:

Twenty, of which not more than ten public companies

Ten, all of which may be public companies

Fifteen, of which not more than seven public companies

Twenty-five, with no separate limit for public companies

Twenty, of which not more than ten public companies

Assertion (A): A qualifying company can no longer satisfy section 135 merely by explaining in its board report why it did not spend on CSR. Reason (R): Since the 2019 amendment, unspent CSR amounts must be transferred to a Schedule VII fund or an Unspent CSR Account. Choose the correct option.

Both A and R are true, and R is the correct explanation of A

Both A and R are true, but R is not the correct explanation of A

Which of the following are grounds on which courts have lifted the corporate veil? Select all that apply.

Determining enemy character in wartime

Evasion of tax through a sham company

Determining enemy character in wartime

The mere fact that one person holds most of the shares

Evasion of tax through a sham company

A prospectus that does not include complete particulars of the quantum or price of the securities offered is a:

Red herring prospectus under section 32

Shelf prospectus under section 31

Deemed prospectus under section 25

Red herring prospectus under section 32

Abridged prospectus under section 33

Commercial Law III: Company Law under the Companies Act 2013 — Incorporation, Prospectus, Shares and Debentures, Directors and Meetings — and Corporate Social Responsibility

Unit VI ends with three company-law items: incorporation, prospectus, shares and debentures; directors and meetings; and corporate social responsibility. The governing statute is the Companies Act 2013, which replaced the Companies Act 1956 and made India the first country to require qualifying companies to spend on CSR by law (section 135). NET Commerce also teaches the Act from a business angle; this chapter concentrates on the legal doctrines (separate personality and its limits, ultra vires, constructive notice and indoor management), on section numbers, and on the thresholds that questions turn on.

1. Incorporation and its doctrines

A company is formed by subscribing a memorandum and registering it with the Registrar: at least seven persons for a public company, two for a private company and one for a one person company (section 3); the Registrar issues a certificate of incorporation (section 7). The memorandum (section 4) states the name, registered office, objects, liability and capital; the articles (section 5) contain the internal regulations. A private company (section 2(68)) restricts the transfer of its shares, limits its members to two hundred and prohibits invitations to the public to subscribe for its securities. A company incorporated under section 8 promotes charitable objects and applies its profits to them.

The foundational doctrines of company law
Doctrine	Rule	Authority
Separate legal personality	A company is a person distinct from its members, with perpetual succession and limited liability	Salomon v A Salomon & Co Ltd (1897)
Lifting the corporate veil	Courts disregard separate personality for fraud or improper conduct, tax evasion, enemy character, or where statute requires	Daimler Co v Continental Tyre and Rubber Co (1916); Re Sir Dinshaw Maneckjee Petit (1927); LIC v Escorts Ltd (1986)
Ultra vires	An act beyond the objects in the memorandum is void and cannot be ratified even by all the members	Ashbury Railway Carriage and Iron Co v Riche (1875)
Constructive notice	Outsiders are deemed to know the contents of the public documents, the memorandum and articles	A presumption in the company's favour
Indoor management	An outsider dealing in good faith may assume that internal procedures have been complied with; not available to one who knew of the irregularity, where forgery is involved (Ruben v Great Fingall Consolidated, 1906), or where suspicion should have prompted inquiry	Royal British Bank v Turquand (1856)

💡 Constructive notice and indoor management as a pair

Constructive notice protects the company: an outsider cannot plead ignorance of what the articles say. Indoor management protects the outsider: he is not expected to look behind the articles into the company's internal proceedings. If the articles say a director may borrow with a resolution of the general meeting, the lender is deemed to know that a resolution is needed, but need not check that it was actually passed.

2. Prospectus, shares and debentures

A prospectus (section 2(70)) is any document described or issued as a prospectus, including a red herring prospectus, shelf prospectus and any notice, circular or advertisement inviting offers from the public for the subscription or purchase of securities. Section 26 prescribes its contents. A red herring prospectus (section 32) omits the price or quantity of securities; a shelf prospectus (section 31) covers several issues over a period; and a document by which a company allots securities with a view to their being offered for sale to the public is deemed to be a prospectus (section 25). Liability for untrue or misleading statements is both criminal (section 34) and civil (section 35), and fraudulently inducing a person to invest is punishable (section 36).

Shares and debentures
Security	Key provisions
Equity shares	With voting rights, or with differential rights as to dividend or voting (section 43); issue at a discount is prohibited except sweat equity (sections 53 and 54); further issues must be offered to existing shareholders as a rights issue unless a special resolution approves otherwise (section 62); bonus shares from free reserves (section 63); buy-back within limits (section 68)
Preference shares	Preferential rights to dividend and to repayment of capital on winding up; no company may issue irredeemable preference shares, and they must ordinarily be redeemed within twenty years (section 55)
Debentures	Instruments of debt, secured or unsecured, with no voting rights (section 71); a debenture trustee must be appointed where debentures are offered to more than five hundred persons, and a debenture redemption reserve created as prescribed

🧠 Shareholder or creditor?

A shareholder is a member and owner who shares in profits and bears the residual risk; a debenture holder is a creditor entitled to interest whether or not there are profits, repaid before shareholders on winding up, and without a vote. A question asking who has voting rights at general meetings points to equity shareholders.

3. Directors

Directors under the Companies Act 2013
Provision	Rule
Composition, section 149	At least three directors in a public company, two in a private company and one in a one person company, and at most fifteen unless a special resolution allows more; at least one director who has stayed in India for 182 days or more in the previous year; at least one woman director in prescribed classes; independent directors making up at least one-third of the board of a listed public company, each serving up to two terms of five years
Directorships, section 165	No more than twenty companies at a time, of which no more than ten may be public companies
Duties, section 166	Act in accordance with the articles; in good faith to promote the objects of the company for the benefit of its members as a whole and in the interests of employees, shareholders, the community and the environment; with due and reasonable care, skill and diligence; avoid conflicts of interest; not achieve undue gain; not assign the office
Disqualification and removal	Grounds of disqualification in section 164; removal by ordinary resolution of the shareholders after special notice and a hearing (section 169)
Interested transactions	Disclosure of interest (section 184); restrictions on loans to directors (section 185); related-party transactions need board or shareholder approval (section 188)

🎯 Why section 166 matters

The 1956 Act left directors' duties to case law. Section 166 codifies them and, notably, directs directors to act in the interests of employees, the community and the environment as well as shareholders, a stakeholder formulation that sits naturally beside the CSR obligation in section 135. Minority shareholders can seek relief against oppression and mismanagement under sections 241 and 242 before the National Company Law Tribunal; the scope of that remedy was examined in Tata Consultancy Services v Cyrus Investments (2021).

4. Meetings and resolutions

General meetings and board meetings
Meeting	Section	Rule
Annual general meeting	s.96	Every company other than a one person company; the first within nine months of the close of its first financial year, later ones within six months of the close of the year, and no more than fifteen months between two
Extraordinary general meeting	s.100	Called by the board, or on the requisition of members holding at least one-tenth of the paid-up voting capital
Notice and quorum	ss.101 and 103	At least 21 clear days' notice; quorum of a public company is five, fifteen or thirty members depending on whether it has up to 1,000, up to 5,000 or more members, and two for a private company
Resolutions	s.114	An ordinary resolution needs more votes in favour than against; a special resolution needs votes in favour of at least three times the votes against
Board meetings	ss.173 and 174	The first within thirty days of incorporation; at least four a year with no more than 120 days between two; seven days' notice; quorum of one-third of the directors or two, whichever is higher

⚠️ Special resolution arithmetic

A special resolution is not a two-thirds majority. It requires votes cast in favour to be not less than three times the votes cast against, which is a 75 per cent majority of those voting. Questions often offer "two-thirds" as a distractor.

5. Corporate social responsibility: section 135

Section 135 applies to every company having, in the immediately preceding financial year, a net worth of ₹500 crore or more, or a turnover of ₹1,000 crore or more, or a net profit of ₹5 crore or more. Such a company must constitute a CSR Committee of the board (of three or more directors, at least one independent), unless its CSR obligation does not exceed ₹50 lakh, in which case the board discharges the committee's functions. The board must ensure that the company spends, in every financial year, at least two per cent of its average net profits made during the three immediately preceding financial years on activities within Schedule VII, giving preference to the local area where it operates.

Schedule VII lists eligible activities, among them eradicating hunger and poverty, promoting health care and sanitation, education, gender equality, environmental sustainability, protection of national heritage, rural development, slum development and contributions to specified funds such as the Prime Minister's National Relief Fund.
Unspent amounts: money not relating to an ongoing project must be transferred to a Schedule VII fund within six months of the end of the financial year; money for an ongoing project goes to an Unspent CSR Account within thirty days and must be spent within three financial years.
The mandatory regime came through the Companies (Amendment) Act 2019; the Companies (Amendment) Act 2020 replaced the criminal sanction for non-compliance with a civil penalty, and the CSR Rules were substantially revised in 2021.
CSR expenditure is not deductible as a business expense under the Income-tax law, which treats it as an application of profit rather than a cost of earning it.

ℹ️ From "comply or explain" to "comply"

As enacted in 2013, section 135 required a qualifying company to spend or to explain in its board report why it had not. The 2019 amendment ended that option by requiring unspent money to be transferred to a fund or an Unspent CSR Account, turning CSR from a disclosure duty into a spending duty.

Key takeaways

Salomon (1897) established separate personality; the veil is lifted for fraud, tax evasion, enemy character or by statute; ultra vires acts are void (Ashbury, 1875); indoor management (Turquand, 1856) protects outsiders.
Prospectus is s.2(70) with contents in s.26, red herring s.32, shelf s.31; misstatement carries criminal (s.34) and civil (s.35) liability; preference shares must be redeemable (s.55); debentures carry no vote (s.71).
Board: minimum 3/2/1, maximum 15 (s.149); one-third independent in listed companies; at most 20 directorships, 10 public (s.165); duties codified in s.166.
AGM within six months of year-end with a 15-month gap limit (s.96); special resolution needs three times as many votes for as against (s.114); board meets four times a year with gaps under 120 days (s.173).
CSR (s.135): thresholds of ₹500 crore net worth, ₹1,000 crore turnover or ₹5 crore net profit; spend 2 per cent of the average net profit of the last three years on Schedule VII activities; unspent sums must be transferred since 2019.

Practice questions (10)

Attempt each one before opening the answer. Every explanation names the tempting wrong option as well as the right one, because that is where marks are lost.

Which case established that a company is a legal person distinct from its members?
1. Royal British Bank v Turquand (1856)
2. Salomon v A Salomon & Co Ltd (1897)
3. Ashbury Railway Carriage v Riche (1875)
4. Daimler Co v Continental Tyre (1916)
Show answer
Answer: B — Salomon v A Salomon & Co Ltd (1897)
Salomon held that a duly incorporated company is a separate person even where one shareholder holds almost all the shares. Turquand is on indoor management, Ashbury on ultra vires, and Daimler on lifting the veil to find enemy character.
A special resolution under section 114 of the Companies Act 2013 requires:
1. Votes in favour of at least three times the votes against
2. Unanimous consent of all members
3. A two-thirds majority of members present
4. A simple majority of votes cast
Show answer
Answer: A — Votes in favour of at least three times the votes against
A special resolution needs the votes cast in favour to be not less than three times those cast against, a 75 per cent majority of votes cast. A simple majority is an ordinary resolution; two-thirds and unanimity are distractors.
Assertion (A): An outsider dealing with a company in good faith is not bound to inquire whether its internal procedures have been followed. Reason (R): The doctrine of indoor management does not protect a person who relies on a forged document. Choose the correct option.
1. Both A and R are true, and R is the correct explanation of A
2. Both A and R are true, but R is not the correct explanation of A
3. A is true, but R is false
4. A is false, but R is true
Show answer
Answer: B — Both A and R are true, but R is not the correct explanation of A
Both are true, but R does not explain A. A states the doctrine of Royal British Bank v Turquand; R states one of its exceptions, from Ruben v Great Fingall Consolidated (1906). An exception cannot be the reason for the rule it limits.
Under section 135, a company must spend on CSR at least what percentage of its average net profits of the three immediately preceding financial years?
1. Two per cent
2. Five per cent
3. Ten per cent
4. One per cent
Show answer
Answer: A — Two per cent
The obligation is at least two per cent of the average net profits of the three immediately preceding financial years. The thresholds that bring a company within section 135 are separate: ₹500 crore net worth, ₹1,000 crore turnover or ₹5 crore net profit.
Which of the following bring a company within the CSR obligation of section 135, if met in the immediately preceding financial year? Select all that apply.
1. Turnover of ₹1,000 crore or more
2. Paid-up capital of ₹10 crore or more
3. Net profit of ₹5 crore or more
4. Net worth of ₹500 crore or more
Show answer
Answer: A — Turnover of ₹1,000 crore or more; C — Net profit of ₹5 crore or more; D — Net worth of ₹500 crore or more
Any one of the three thresholds, net worth, turnover or net profit, is enough. Paid-up capital is not a CSR criterion.
Under section 165, the maximum number of companies in which a person can be a director at the same time is:
1. Ten, all of which may be public companies
2. Fifteen, of which not more than seven public companies
3. Twenty-five, with no separate limit for public companies
4. Twenty, of which not more than ten public companies
Show answer
Answer: D — Twenty, of which not more than ten public companies
Section 165 caps directorships at twenty, including not more than ten public companies. Fifteen is the default maximum number of directors on a single board under section 149, a different rule.
Assertion (A): A qualifying company can no longer satisfy section 135 merely by explaining in its board report why it did not spend on CSR. Reason (R): Since the 2019 amendment, unspent CSR amounts must be transferred to a Schedule VII fund or an Unspent CSR Account. Choose the correct option.
1. Both A and R are true, and R is the correct explanation of A
2. Both A and R are true, but R is not the correct explanation of A
3. A is true, but R is false
4. A is false, but R is true
Show answer
Answer: A — Both A and R are true, and R is the correct explanation of A
Both are true and R explains A. The original "comply or explain" approach was replaced by a transfer obligation, so an explanation alone no longer discharges the duty.
Which of the following are grounds on which courts have lifted the corporate veil? Select all that apply.
1. Determining enemy character in wartime
2. Fraud or improper conduct
3. The mere fact that one person holds most of the shares
4. Evasion of tax through a sham company
Show answer
Answer: A — Determining enemy character in wartime; B — Fraud or improper conduct; D — Evasion of tax through a sham company
Enemy character (Daimler, 1916), tax evasion (Dinshaw Maneckjee Petit, 1927) and fraud are recognised grounds. Concentrated shareholding alone is not; that was exactly the situation in Salomon, where separate personality was upheld.
A prospectus that does not include complete particulars of the quantum or price of the securities offered is a:
1. Shelf prospectus under section 31
2. Deemed prospectus under section 25
3. Red herring prospectus under section 32
4. Abridged prospectus under section 33
Show answer
Answer: C — Red herring prospectus under section 32
A red herring prospectus omits the price or quantity, which are fixed later, typically by book-building. A shelf prospectus covers several issues over a period, a deemed prospectus arises from an offer for sale through an intermediary, and an abridged prospectus is a summary accompanying application forms.
Under section 173, what is the maximum gap, in days, allowed between two consecutive board meetings? Type the number.
Numerical answer — type the value.
Show answer
Answer: 120
Section 173 requires at least four board meetings a year with not more than 120 days between two consecutive meetings; the first board meeting must be held within thirty days of incorporation.