Corporate Law Case Brief – RC Cooper v. Union of India

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Facts:

  • The government decided to nationalize 14 major commercial banks on 19th July, 1969. All commercial banks with a deposit base over Rs.50 crores were nationalized
  • Petitioners- shareholders, depositors and a director. Shareholders had to give up their shares at low values due to nationalization of banks.

Arguments:

  • Petitioner- 14, 19 and 31.
    • The act lacked legislative competence
    • The act interfered with guarantee of freedom of trade and commerce
    • The act (and thus the acquisitions) was not made in public interest
    • Petitioner’s value of investment reduced, right to receive dividends ceased; suffered financial loss. ‘deprived of the right as a shareholder to carry on business through the agency of the company’
  • UOI- petition not maintainable because no fundamental right of the petitioner was directly impaired as he was not the owner of the property of the undertaking taken over.

Test:

  • Whether shareholder’s rights impaired?-Not formal but qualitative test- if the State action impairs the right of the shareholders as well as of the company, the court will not, concentrating merely upon technical operation of the action, deny to itself jurisdiction to grant relief.
  • Under the Constitution the extent of protection against impairment of a fundamental right is determined not by the object of the legislature nor by the form of the action, but by its direct operation upon the individual’s tights.

Holding

  • A company registered under the Indian Companies Act is a legal person, separate and distinct from its individual members. Hence a shareholder, a depositor or a director is not entitled to move a petition for infringement of the rights of the company unless by the action impugned his rights are also infringed.
  • Challenging infringement of his own rights and not of the banks.
  • Rights under article 19- an individual right of a shareholder as a citizen because his/her rights are equally and necessarily affected when the rights of the company are affected.
  • The Act was held to be valid. However there were a few disproportionalities with regards to the fair sum of compensation, it was not considered to be a valid ground for repealing the act. The court orders the government to grant ‘just equivalent’ or ‘fair indemnification’ to the aggrieved parties. The nationalization was allowed.

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Corporate Law Case Brief – Ajay Hasia v. Khalid Majid

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Facts: The petitioners in this case challenged the procedure of admission in the Regional Engineering College. The admission process was that they were two tests conducted one was a written exam and the other was a viva test. The viva test of the petitioners lasted only for 2 or 3 minutes where formal relating to their parentage, residence were and no questions relating to the subject. When the admissions were announced, the petitioners found that though they had obtained very good marks in the qualifying examination, they had not been able to secure admission to the college because the marks awarded to them at the viva voce examination were very low and candidates who had much less marks at the qualifying examination, had succeeded in obtaining very high marks at the viva voce examination and thereby managed to secure admission in preference to the petitioners. The petitioners thus filed a writ against the college and challenging the validity of the admissions on various grounds. One of the grounds for admission was that their right to equality under Article 14 of the constitution was violated.

Issue: The issue in the present case was whether college was a state and if it was state whether it violated Article 14 of the Constitution.

Analysis: With increasing Government commercial ventures and economic projects, the corporation has become an effective legal contrivance in the hands of the Government for carrying out its activities, for it is found that this legal facility of corporate instrument provides considerable flexibility and elasticity and facilitates proper and efficient management with professional skills and on business principles. For meeting this administrative need the corporation came into being as the third arm of the Government and over the years it has been increasingly utilized by the Government for setting up and running public enterprises and carrying out other public functions. The corporation even though is a distinct juristic entity with a corporate structure of its own and it carries on its functions on business principles with a certain amount of autonomy which is necessary as well as useful from the point of view of effective business management, but behind the formal ownership, the reality that the government still continues to have deeply pervasive control. It is really the Government that acts through the instrumentality or agency of the corporation and has the juristic veil of corporate personality for the purpose of convenience of management and administration.  The features of a corporation may be adopted in order to free the Government from the inevitable constraints of red-tapism and slow motion but by doing so, the Government cannot be allowed to neglect the basic human rights. As this would lead to the government assigning almost every State business such as Post and Telegraph, Rail Road and Telephones, etc., in short every economic activity and thereby cheat the people of India out of the Fundamental Rights guaranteed to them.

A corporation may be created in one of two ways. It may be either established by statute or incorporated under a law such as the Companies Act 1956 or the Societies Registration Act 1860. Where a Corporation is wholly controlled by Government not only in its policy making but also in carrying out the functions entrusted to it by the law establishing it or by the Charter of its incorporation, there can be no doubt that it would be an instrumentality or agency of Government. Thus the court in the present case laid down the following test to determine whether the corporation comes within the ambit of other authorities under Article 12 of the constitution.

(1) If Government holds the entire share capital of the corporation it would go a long way towards indicating that the corporation is an instrumentality or agency of Government.

(2) Where the financial assistance of the State is so much as to meet almost entire expenditure of the corporation, it would afford some indication of the corporation being impregnated with governmental character.

(3) It may also be a relevant factor…whether the corporation enjoys monopoly status, which is the State conferred or State protected.

(4) Existence of deep and pervasive State control may afford an indication that the Corporation is a State agency or instrumentality.

(5) If the functions of the corporation of public importance and closely related to governmental functions, it would be a relevant factor in classifying the corporation as an instrumentality or agency of Government.

(6) Specifically, if a department of Government is transferred to a corporation, it would be a strong factor supportive of this inference of the corporation being an instrumentality or agency of Government.

Holding:

The government stated what the memorandum and articles of association of the company should contain. The Memorandum of Association confers power on the Society to acquire and hold property in the name of the State Government, and the monies for running the college would be provided by the State and Central Governments. The rules made, amended, varied or rescinded for the conduct of the affairs of the Society from time to time needed the approval of the Government of Jammu and Kashmir State. Clause 7 of the Memorandum of Association states that in case the Society or the college is not functioning properly, the State Government will have the power to take over the administration and assets of the college with the prior approval of the Central Government. Clause 6 of the Memorandum of Association empowers the State Government to appoint one or more persons to review the working and progress of the Society, or the college and to hold inquiries into the affairs thereof and to make a report and on receipt of any such report, the State Government has power, with the approval of the Central Government, to take such action and issue such directions as it may consider necessary in respect of any of the matters dealt with in the report and the Society or the College. Thus as the Government of Kashmir satisfied all the six provisions of the test and had complete control over the working of the college, the society was the agency of the government.

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Corporate Law Case Brief – Bennett Coleman vs Union of India

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Facts:

The appeals have been preferred by respondent 1 i.e. the company (represented by its shareholders) and respondent 8 and 10 in their capacity as the directors of the company; challenging the judgment and order passed on August 28, 1969 wherein the judge directed reconstitution of the board of directors for the said company in the manner done for seven years. This order has been challenged on certain grounds via appeal.

Issues:

Whether the appeal can be held to be maintainable?

Reasoning & Analysis:

It was contended that appellants had lost right to appeal on ground that it had submitted to Orders of Court. The order of the court specifically meant that they would make such orders fit as it thought based on the circumstances of the case and that no party would have any right of appeal against such order. Thus, the court dwelled into determining whether the right to appeal is lost to the party by laying down a test for the same which stated that the correct test for judging whether the right to appeal be lost is to ascertain what procedure the original court had followed because of the agreement. Should because of the agreement the procedure for reaching the decision be fundamentally different to that usually followed by courts, the right of appeal would be lost.

The appellants challenged the reconstitution of the board of directors contending that it contravened provisions of Section 255 (Appointment of directors and proportion of those who are to retire by rotation) of the Companies Act of 1956. The order of the judge had immuned 2/3rd of directors from retiring by rotation and further the board had fixed a period of seven years thus depriving the shareholders of the company a right in the management of the affairs of the company. The appellants contended that by appointing three directors by the Government was in violation of Section 408 (Powers of Company Law Board on application under sections 397 or 398) of the Companies Act of 1956 stating that the court was not entitled to frame a new article 95 contravening Section 255 which the judge by amendment modified article 95 of the articles of association to provide that at each general meeting, the directors elected by the shareholders would retire from office and there is no provision made for retirement by rotation in regard to the remaining directors.

To answer the above contentions, the court distinguishes between the powers of the Government and the powers of the court by looking at Sections 408 and 402 of the Companies Act of 1956 by stating that while dealing with the prevention of oppression and mismanagement; some limitation has been set on the Government’s powers however no limitations or restrictions have been set on the court’s powers (Section 402 of the Companies Act of 1956) that may be required by the court to act upon for bringing about an end to the oppression and management complained of and to prevent any further oppression or mismanagement in the future. Under Section 397 read with Section 402 of the Companies Act of 1956, power has been conferred on the court to make such orders as it thinks fit. This the court would judicially exercise with the objective of preventing the affairs of the company from being conducted in a way that may be prejudicial to public interest. Sections 397 and 398 (Application to Company Law Board for relief in cases of oppression & mismanagement respectively) of the Companies Act of 1956 are intended to avoid the winding up of the company and to keep it going while at the same time providing relief to the minority shareholders of the company from acts of oppression and mismanagement and this the court can only do so by interfering with the normal corporate management of the company.

 Held:

While acting under Section 398 and Section 402 of the Companies Act of 1956, the court has ample jurisdiction and very wide powers to pass such orders and give directions as it thinks fit to achieve the object and the same will not be violative of Section 255.

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Corporate Law Case Brief – Vodafone International Holdings v. Union of India

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Facts of the Case:

Vodafone International Holding (VIH) and Hutchison telecommunication international limited or HTIL are two non-resident companies. These companies entered into transaction by which HTIL transferred the share capital of its subsidiary company based in Cayman Island i.e. CGP international or CGP to VIH.

The Indian Revenue authorities issued a show cause notice to VIH as to why it should not be considered as “assesse in default” and thereby sought an explanation as to why the tax was not deducted on the sale consideration of this transaction. The Indian revenue authorities thereby through this sought to tax capital gain arising from sale of share capital of CGP on the ground that CGP had underlying Indian Assets.

Procedural History:

The Indian Revenue Authorities issued a show-cause notice to Vodafone (VIH) when the transaction took place. VIH filed a writ petition in the High Court challenging the jurisdiction of Indian revenue authorities. This writ petition was dismissed by the High Court and VIH appealed to the Supreme Court which sent the matter to Revenue authorities to decide whether the revenue had the jurisdiction over the matter. The revenue authorities decided that it had the jurisdiction over the matter and then matter went to High Court which was also decided in favor of Revenue and then finally Special Leave petition was filed in the Hon’ble Supreme Court of India.

Issues:

There were three prime issues in this case:

  1. Whether the situs of shares happened in India or in Cayman Islands?
  2. Whether, in this transaction, there was a sale of assets?
  3. Whether to lift the corporate veil of CGP to determine if the company had all the interests in India?

Holding:

In the first issue, the Indian Revenue Authorities contested that the situs of shares has taken place in India to which the Court observed that the situs of shares has happened in Cayman Island which is not a part of Indian jurisdiction. The Court observed that shares of CGP were registered in Cayman Island and law of Cayman also does not recognize multiplicity of registers and hence site of shares and transfer of shares is situated in Cayman and shall not shift to India.

In the second issue, the Indian Revenue Authorities contested that while buying the CGP’s investment of Hutch, they have acquired the control over an Indian subsidiary and, therefore, this is a transfer of assets and such transfer of assets are covered under the Indian Income Tax Act.

To this, the Court said, that the entire investment was bought by the Vodafone Holdings. This kind of transaction is not equivalent to sale of assets in an item-wise basis. It was not like controlling the interests in a split manner. The entire transaction is to be seen as a whole. The Court, therefore, held that this is not sale of assets. This is a sale of shares in Cayman Islands. Sale of shares as a whole is not sale of assets.[1]

In the third issue, the Indian Revenue Authorities contested that if the CGP’s corporate veil is lifted, it can be observed that the Company has all the interests in India.

To this, the Court said, this is not required as this is not a case of tax evasion or forgery. The directors of the company are not personally benefitting from the transaction. The Indian Courts do not have a jurisdiction on this.

The Indian Revenue Authorities lost in this case but later the decision was legislatively overturned by a retrospective amendment.

[1] To put it in a simpler way, a sale of share is construed as sale of asset but if an entire investment is sole, it is not just sale of assets.

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Corporate Case Brief – Macaura v. Northern Assurance Company

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FACTS:

The appellant, Mr. Macaura, formerly owned a timber estate in Northern Ireland, who consequently sold the timber to a Canadian Milling Concern, agreeing to accept payment in the shares of the company. The appellant received 42,000 fully paid up £1 shares, making him the whole owner. He was also an unsecured creditor for £19,000. The appellant took out an insurance policy on the timber in his own name, and shortly afterwards damage was caused by the fire. The appellant sought to recover from such an insurance policy, but Northern Assurance Co. refused to pay up as timber was owned by the company, and the fact that company is a separate legal entity.

ISSUE:

Is the insurance company liable to pay for the damage caused by fire to Mr. Macaura?

HELD:

The House of Lords held that insurers were not liable on the contract, as Mr. Macaura had no insurable interest in the timber, as his relation was to the company, and not to its goods. Unusually, in this case, request to lift the corporate veil was made by the corporation’s owner himself, as he contended that he held the maximum percentage of shares. However the court held that the corporator, even if he holds all the shares, is not the corporation, and neither he nor any creditor of the company has any property legal or equitable in the assets of the corporation.

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Corporate Case Brief – Daimler Co Ltd v. Continental Tyre & Rubber Co Ltd

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Facts:

Continental Tyre and Rubber Company was incorporated in England, but the holders of all its shares except one, and also all the directors, were Germans, residing in Germany. The secretary was English.

Continental Tyre and Rubber Co Ltd supplied tyres to Daimler, but Daimler was concerned that making payment might contravene a common law offence of trading with the enemy as well as a proclamation issued under s 1(2) Trading with the Enemy Act 1914. After the outbreak of the First World war, Continental Tyre Company brought an action against Daimler Co. Ltd. to recover trade dept.

Issue:

Whether the character of a company’s corporators is relevant to determine the character of the company; is the company capable of acquiring enemy character?

Ratio:

“I think that the analogy is to be found in control, an idea which, if not very familiar in law, is of capital importance and is very well understood in commerce and finance. The acts of a company’s organs, its directors, managers, secretary, and so forth, functioning within the scope of their authority, are the company’s acts and may invest it definitely with enemy character… it must at least be prima facie relevant… Certainly, I have found no authority to the contrary.”

The court said that the actions and character of the members of the company are capable of changing the nature of a company and a company can acquire enemy character on the basis of the character of its members.

Holding:

The House of Lords held that though the Continental Tyre Company was incorporated in England, its effective control was in the hands of Germans and, therefore, the company had acquired the enemy character.

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Corporate Case Brief – State of UP v. Renusagar Power Co

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Facts:

Renusagar was a 100% subsidiary of Hindalco, wholly owned and controlled by Hindalco. The agreement between Renusagar and Hindalco indicated this was not a normal sale-purchase agreement between two independent persons at arm’s length. The price of electricity was determined according to the cash needs of Renusagar. It was thus contended that Renusagar must be treated as alter ego of Hindalco, i.e., own source of generation. ‘Own source of generation’ is an expression connected with the question of lifting or piercing the corporate veil.

Appellant’s Contention:

  • The appellants contended that in this case there was no ground for lifting the corporate veil, urging that there was no warrant either in law or in fact to lift the corporate veil and treat Renusagar’s plant as Hindalco’s own source of generation.
  • Appellants also contended that HC order was in violation of principles of natural justice.

Held:

  • The person generating and consuming energy were the same and the corporate veil should be lifted.
  • Hindalco and Renusagar were inextricably linked up together. Renusagar had in reality no separate and independent existence apart from and independent of Hindalco.
  • Must be treated as one concern and the consumption of energy by Hindalco must be regarded as consumption by Hindalco from own source of generation.
  • The Government did not act in violation either of the principles of natural justice or arbitrarily or in violation of the previous directions of the High Court.
  • Appeal dismissed.

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Corporate Case Brief – Solomon v. Solomon & Co. Ltd.

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Facts: Mr Salomon had incorporated his long standing personal business of shoe manufacture into a limited company. He held 20,001 shares and the other 6 members of his family each got one share making a total of 20,007 shares. The company failed after sometime. The debentures in the company were held mainly by Broderip and Mr Salomon himself. Upon liquidation of the company, Broderip got back his share of debenture money. The rest was taken up by Mr. Salomon himself as he was the next big secured debenture holder. Therefore the minor unsecured creditors got nothing from the liquidation.

Issue: Should the amount that was paid to Mr Salomon, the major debenture holder, be paid back to the company and distributed amongst the minor unsecured creditors?

Holding:

  • High Court – Company is an agent of Mr. Salomon. He should pay the Company’s debt.
  • Court of Appeal – Agreed with the HC. Decision upheld.
  • House of Lords – The Company was a separate legal entity and a distinct independent corporation. A majority shareholder does not own the Company. The Company will not lose its identity to the majority shareholder.

Ratio:

  • The Company is a separate legal entity.
  • The creditors of a company cannot sue the company’s shareholders to pay the company’s debts.

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Corporate Case Brief – In re The Kondoli Tea Estate

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Facts:

A certain Tea Estate was transferred to a company by a group of 8 people who were the sole shareholders of the company. The consideration for this exchange was £43,320, the said consideration being payable in shares and debentures of the company taken at par. However, the shareholders of the company refused to pay the ad valorem duty, payable on every conveyance on such transfer of the property and hence this case. The shareholders’ reason for not paying the tax was that since they were the only shareholders of the company, therefore the transfer of the property was from them to themselves under another name.

Issue: Whether the document carrying out a particular transfer is a conveyance?

Ratio:

Whoever the shareholders in the Kondoli Tea company were, the Kondoli Tea Company, Limited, was a, separate person, a separate body, and a conveyance to the Kondoli Tea Company, Limited, 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, Limited, is a separate body, 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.

Holding:

The Court held that the Kondoli Tea Company was a separate legal entity and therefore ordered the shareholders to pay the ad valorem duty on the said transfer of property from them to the company.

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Corporate Law Case Brief – In Re: Stanley (1906) 1 Ch. 131

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Facts –

A testator empowered the trustees of his will to invest moneys in the parliamentary stocks or public funds or in Government securities of Great Britain or India or any British colony or dependency or any foreign country or State, or upon freehold, copyhold, leasehold or chattel real securities in Great Britain……….or in the stocks, funds and securities (not payable to bearer) of any corporation or company, municipal, commercial or otherwise

Issue –

Whether trustees can invest money in the stocks, funds or securities of

  1. any corporation or company formed or registered in the United Kingdom, but carrying on business abroad, and
  2. any corporation or company formed or registered outside the United Kingdom.

Held –

According to BUCKLEY J. no reason occurs, why a corporation or company formed or registered in the United Kingdom should not be within the words “any corporation or company, municipal, commercial or otherwise,” merely because it carries on its business abroad.

The word ‘company’ has no strictly technical meaning. It involves two ideas–namely, first that the association is of persons so-numerous as not to be aptly described as a firm; and secondly, that the consent of all the other members is not required to the transfer of a. member’s interest.The words “corporation or company” here means, an incorporated body or an unincorporated body which is “municipal, commercial or otherwise,” and which is of such a kind as not to be what is commonly called “a firm.”

Therefore, that the trustees are at liberty to invest in the stocks, funds and securities (not payable to bearer) of any corporation or company, notwithstanding the fact that it is not formed or registered in the United Kingdom.

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