BCOC 135 Company Law Solved Question Paper June 2026 for IGNOU Bachelor of Commerce (General) BCOMG

Corporate veil, its lifting, and the doctrine of ultra vires

Question 1 (a): What is the meaning of corporate veil? How can the corporate veil be lifted? (5 + 5)

Question 1 (b): Illustrate the Doctrine of ultra vires with suitable examples. (10)

(a) Meaning of corporate veil

When a company is incorporated, the law treats it as a legal person separate from the members who form it. Section 9 of the Companies Act, 2013 says that from the date of incorporation the company becomes a body corporate with perpetual succession, able to hold property, enter into contracts and sue or be sued in its own name.

This principle was settled in Salomon v A Salomon and Co Ltd (1897). The House of Lords held that the company was a different person from Mr Salomon, even though he held almost all of its shares and was also its secured creditor. The company's debts were its own, not his.

The imaginary curtain that separates the company from the people behind it is called the corporate veil. In the normal course, courts look only at the company as a person and do not look through it at its shareholders or directors. Members are protected, and their liability stays limited to what they agreed to contribute.

(a) Statutory grounds for lifting the veil

Lifting or piercing the corporate veil means ignoring the separate personality of the company and treating the members or directors as the real actors. Because separate personality can be misused, the Act and the courts both allow the veil to be lifted in defined situations.

1. Section 3A, members falling below the minimum: if a company carries on business for more than six months after its membership falls below the legal minimum, every member aware of this becomes severally liable for debts contracted during that period.
2. Section 7(7), incorporation by false information: where a company was incorporated by furnishing false or incorrect information or by suppressing material facts, the Tribunal may pass orders including making the liability of members unlimited.
3. Sections 34 and 35, misstatement in prospectus: every person who authorised the issue of a prospectus with an untrue or misleading statement faces criminal liability and must compensate those who suffered loss.
4. Section 339, fraudulent conduct of business: if, in winding up, it appears that business was carried on to defraud creditors, the Tribunal can make the persons responsible personally liable without any limit.

(a) Judicial grounds developed by the courts

1. Fraud or sham: in Gilford Motor Co Ltd v Horne (1933), a former employee formed a company to escape a covenant not to solicit customers. The court restrained both him and the company. In Jones v Lipman (1962), a seller transferred land to his company to avoid a sale, and specific performance was ordered against both.
2. Enemy character: in Daimler Co Ltd v Continental Tyre and Rubber Co (1916), a company registered in England but controlled by German nationals during wartime was treated as an enemy company.
3. Tax evasion: in Re Dinshaw Maneckjee Petit (1927), the assessee formed companies only to split his income and avoid super-tax. The court ignored the companies and taxed him directly.
4. Public interest: in LIC v Escorts Ltd (1986), the Supreme Court said the veil may be lifted where a statute requires it, where fraud or improper conduct is intended, or where public interest demands it.

So separate personality is the rule and lifting the veil is the exception. Courts use it only when the company is being used as a mask to defeat the law, cheat creditors or hurt the public.

(b) Doctrine of ultra vires, with examples

"Ultra vires" means "beyond the powers". A company can do only what its Memorandum of Association allows.

Section 4(1)(c) of the Companies Act, 2013 requires the memorandum to state the objects for which the company is incorporated and any matter considered necessary in furtherance of them. Any act outside these objects is ultra vires the company.

The leading case: in Ashbury Railway Carriage and Iron Co Ltd v Riche (1875), the company's objects were to make and sell railway carriages and to carry on business as mechanical engineers. The directors agreed to finance the building of a railway line in Belgium. The House of Lords held the contract ultra vires and void, and said that even the unanimous approval of all shareholders could not make it valid.

An Indian example: in A. Lakshmanaswami Mudaliar v LIC (1963), the directors of an insurance company resolved to pay ₹2 lakh to a trust formed to promote technical and business knowledge. The Supreme Court held the payment ultra vires because it was not covered by the company's objects.

(b) Everyday illustrations

1. A company formed to run hotels starts producing films when its objects clause does not cover film production. The film contracts are ultra vires the company.
2. Directors declare a dividend out of capital. This breaks Section 123, which allows dividend only out of profits, so the act is ultra vires the Act and void.
3. Directors borrow beyond the limit set in the Articles. The act is ultra vires the directors but within the company's powers, so the shareholders can ratify it.

Types of ultra vires acts: an act ultra vires the Act or the memorandum is void and cannot be ratified. An act ultra vires the articles can be regularised by altering the articles through a special resolution. An act ultra vires the directors but within the company's powers can be ratified by the members in general meeting.

Consequences: the contract is void and cannot be enforced by either side. Any member can obtain an injunction to stop it. Directors who used company funds for ultra vires purposes must make good the loss personally. A lender under an ultra vires loan cannot sue on the loan, though it may trace and recover its money if still identifiable.

Conclusion: The doctrine protects shareholders, who invest on the strength of the stated objects, and creditors, who rely on the company's funds being used only for those objects. Because the 2013 Act allows objects to cover matters considered necessary in furtherance of the main objects, the doctrine now bites mainly where a company moves into a clearly unrelated activity.

Contents of Articles of Association and limits on altering them

Question 4: Explain the contents of Articles of Association. What are the limitations on power to alter articles of association? (20)

Meaning of Articles of Association

"Articles" means the articles of association of a company as originally framed or as altered from time to time. (Section 2(5), Companies Act, 2013)

The articles are the internal rule book of the company. The memorandum sets out what the company may do; the articles set out how it will do it.

Under Section 5, the articles contain the regulations for the management of the company. Section 5(6) says the articles shall be in the forms given in Tables F to J of Schedule I, as applicable: Table F for a company limited by shares, Tables G and H for companies limited by guarantee (with and without share capital), and Tables I and J for unlimited companies (with and without share capital).

Under Section 5(7), if a company does not exclude or modify the model articles, the regulations of the applicable model automatically apply to it as if they were its own articles.

Contents of Articles of Association

The headings of Table F give the clearest list of what articles usually contain for a company limited by shares:

1. Interpretation: meanings of words used in the articles.
2. Share capital and variation of rights: share certificates, issue of shares and how class rights may be varied.
3. Lien: the company's first and paramount lien on partly paid shares for unpaid amounts.
4. Calls on shares: how and when unpaid amounts are called up and interest on late payment.
5. Transfer and transmission of shares: the instrument of transfer, the board's power to decline registration, and transfer on death or insolvency.
6. Forfeiture of shares: notice before forfeiture and the effect of forfeiture.
7. Alteration of capital, capitalisation of profits and buy-back: increase, consolidation or sub-division of capital, bonus issues and buy-back of own shares.
8. General meetings, their proceedings and adjournment: calling of extraordinary general meetings, quorum, chairperson and adjournment.
9. Voting rights and proxies: voting on a show of hands and on a poll, and the appointment of proxies.
10. Board of directors and proceedings of the board: number of directors, their powers, board meetings and committees.
11. Chief Executive Officer, Manager, Company Secretary and Chief Financial Officer: their appointment and terms.
12. The seal, dividends and reserve, accounts, winding up and indemnity: use of the common seal, declaration of dividend, inspection of accounts, distribution in winding up and indemnity of officers.

Entrenchment: Section 5(3) allows the articles to contain entrenchment provisions, which can be altered only if conditions more restrictive than a special resolution are met. Under Section 5(4), such provisions can be made only on formation, or later by an amendment agreed by all members in a private company or by special resolution in a public company.

The articles cannot contain anything that goes against the Act. Section 6 gives the Act overriding effect over the memorandum and articles, and any provision in the articles that is repugnant to the Act is void to that extent.

Power to alter the articles

Section 14 allows a company to alter its articles by a special resolution, which needs votes in favour at least three times the votes against. A company cannot give up this power by contract: in Walker v London Tramways Co (1879), a clause saying an article could never be altered was held invalid.

Under Section 14(2), every alteration, together with a printed copy of the altered articles, must be filed with the Registrar within fifteen days.

Limitations on the power to alter the articles

1. Must not conflict with the Act: an alteration cannot contain anything the Companies Act, 2013 prohibits, because Section 6 makes the Act override the articles.
2. Must not conflict with the memorandum: the memorandum is the superior document. An alteration of articles cannot enlarge the objects or powers granted by the memorandum.
3. Must not be illegal or opposed to public policy: the altered articles must be lawful in their effect as well as their wording.
4. Must be bona fide for the benefit of the company as a whole: in Allen v Gold Reefs of West Africa Ltd (1900), extending the company's lien to fully paid shares was upheld because it was made in good faith for the company as a whole.
5. Must not be a fraud on the minority: in Sidebottom v Kershaw, Leese and Co (1920), an article allowing the company to buy out a member who competed with it was upheld. In Dafen Tinplate Co v Llanelly Steel Co (1920), a power to expel any member without reason was struck down, and in Brown v British Abrasive Wheel Co (1919) a compulsory purchase aimed at the minority was restrained.
6. Central Government approval for conversion: an alteration that turns a public company into a private company takes effect only after approval of the Central Government under the proviso to Section 14(1).
7. Entrenched articles: an entrenched provision can be changed only by meeting the stricter conditions laid down under Section 5(3).
8. Variation of class rights: under Section 48, the rights of a class of shareholders can be varied only with the written consent of holders of at least three-fourths of the issued shares of that class, or by a special resolution passed at a separate meeting of that class.
9. No compulsory increase of liability: a member cannot be made to take more shares or pay more towards capital by an alteration, unless the member agrees in writing.
10. Breach of contract still attracts damages: the company may alter its articles even if this breaks a contract with an outsider, but it must pay damages. In Southern Foundries (1926) Ltd v Shirlaw (1940), a managing director removed under altered articles recovered damages for wrongful dismissal.

Conclusion: The articles are flexible by design, since a special resolution is enough to change them. That flexibility is fenced in by the Act, the memorandum, the entrenchment rules, class-right protections and the courts' test of good faith for the company as a whole. A strong answer shows both sides: what the articles contain and exactly where the power to change them stops.