Corporate Personality: An Analysis under Companies Act, 1956

 

Khushal Suryawnshi

 

3rd Year Student, Hidyatullah National Law University, Raipur(C.G)

 

 

INTRODUCTION:

Corporate Personality is the creation of law. Legal personality of corporation is recognized both in English and Indian law. A corporation is an artificial person enjoying in law capacity to have rights and duties and holding property.1

 

A corporation is distinguished by reference to different kinds of things which the law selects for personification. The individuals forming the corpus of corporation are called its members. The juristic personality of corporations pre-supposes the existence of three conditions :2

(1) There must be a group or body of human beings associated for a certain purpose.

(2) There must be organs through which the corporation functions, and

(3) The corporation is attributed will by legal fiction. A corporation is distinct from its individual members3.

 

It has the legal personality of its own and it can sue and can be sued in its own name. It does not come to end with the death of its individual members and therefore, has a perpetual existence. However, unlike natural persons, a corporation can act only through its agents. Law provides procedure for winding up of a corporate body4. Besides, corporations the banks, railways, universities, colleges, church, temple, hospitals etc. are also conferred legal personality. Union of India and States are also recognized as legal or juristic persons5. In certain cases, the corpus of the legal person shall be some fund or estate which reserved certain special uses. For instance, a trust – estate or the estate of an insolvent, a charitable fund etc.; are included within the term ‘legal personality’

 

Attributes of corporate personality

1) Independent Corporate Existence6:

A corporate person shall have an independent corporate existence. It is in law a person . It is s distinct legal persona existing independent of its members. In case of a company, by incorporation it gains a corporate personality which is separate or distinct from the members who compose it. The property of the company belongs to it and not its members ; it may sue or be sued in its own name ; it may enter into contracts with third parties independently and even the members themselves can enter into contract with the company According to Section 34(2) of the Companies Act , upon issue of the certificate of incorporation , the subscribers to the memorandum and other persons, who may from time , be the members of the company, shall be a body corporate, which is capable of exercising all the functions of an incorporated company and having perpetual succession and a common seal.

 

 


Thus the company becomes a body corporate which is capable immediately of functioning as an incorporated individual. With the incorporation, the entity of the company becomes institutionalized. This principle of the independent corporate existence and the principle of corporate personality of a company was recognized in the case of Saloman v. Saloman & Co7. In this case Salomon was a boot and shoe manufacturer. He incorporated a company named Salomon & Co Ltd, for the purpose of taking over and carrying on his business. The seven subscribers to the memorandum were Salomon, his wife, his daughter and four sons and they remained the only members of the company. The company went into liquidation within a year. The unsecured creditors contended that though incorporated under the Act, the company never had an independent existence, it was in fact Salomon under another name; he was the managing director, the other directors being his sons and under his control. It was held that Salomon & Co Ltd was a real company fulfilling all the legal requirements. It must be treated as a company, as an entity consisting of certain corporators, but a distinct and independent corporation. Thus it was decided in this case that a corporate body has its own existence or personality separate and distinct from its members and therefore, a shareholder cannot be held liable for the acts of the company even though he holds virtually the entire share capital. The case has also recognized the principle of limited liability of a company.

 

2) Limited Liability :

One of the principal advantages of an incorporated company is the privilege of limited liability. It is the main feature of registered companies which provides a special attraction to investors. The principle of limited liability implies that the liability of a member in the event of the company's winding up, in respect of the shares held by him is limited to the extent of the unpaid value on such shares. Thus the liability does not fluctuate but remains limited to the amount which, for the time being remains unpaid, whether from the original shareholder or the transferee of such shares as the case may be. limited liability of members extends only for company's debt in the event of its winding up. The company itself, being a legal persona, is always fully liable and therefore its liability is unlimited. In other words, it is liable to pay the debts so long as assets are available. The order of priority for payment of debt shall, however, depend on the class of creditors as laid down in the Companies Act. No member is bound to contribute anything more than the nominal value of the shares held by them8. Section 34(2) of the Companies Act, 1956 provides that in the event of the company being wound up, the members shall have liability to contribute to the assets of the company in accordance with the Act, In the case of limited companies, no member is bound to contribute anything more than the nominal value of shares held by him. The privilege of limiting the liability is one of the main advantages of carrying on business under a corporate organization9.

 

3) Perpetual Succession:

An incorporated company has perpetual succession, that is notwithstanding any change in its members, the company shall retain as the same entity with the same privileges and immunities, estate and possessions. the death or insolvency of individual member does not in any way, affect its corporate existence and the company shall continue its existence as usual until it is wound up in accordance with the provisions of the Companies Act, The perpetual existence of an incorporated company is well illustrated by proverbial saying, "members may come and members may go, but the company can go on forever."

 

In Gopalpur Tea Co. Ltd. v. Penhok Tea Co, Ltd.10, the court while applying the doctrine of company's perpetual succession observed that though the whole undertaking of a company was taken over under an Act which purported to extinguish all rights of action against the company, neither the company was thereby extinguished nor any body's claim against it.

 

4) Transferability of shares :

Section 82 of the Companies Act, 1956, specifically provides that the shares or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of association of the company. Thus the member of an incorporated company can dispose of his share by selling them in the open market and get back the amount so invested. The transferability of shares has two main advantages, namely it provides liquidity to investors and at the same time ensures stability of the company. The transfer of shares of a company does not in any way affect its existence or management and the shareholder can conveniently get relieved of his liability by transferring his shares to some other person.

 

5) Separate Property :

Incorporation helps the property of the company to be clearly distinguished from that of its members. The property is vested in the company as a body corporate , and no changes of individual membership affect the title.11 In case of a company, it being a legal person is capable of owning, enjoying and disposing of property in its own name. The company becomes the owner of its capital and assets. The shareholders are not the several or joint owners of company’s property.

 

6) Corporate Finances :

The shares of an incorporated company being transferable, it can raise maximum capital in minimum possible time. That apart, an incorporated company has the privilege of raising its capital by public subscriptions either by way of shares or debentures. The public financial institutions willingly lend loan to companies as it is generally secured by floating charge which is an exclusive privilege of a registered company.

 

In R.T. Perumal v. John Deavin12, it has been observed that a company is a real person in which all its property is vested, and by which it is controlled, managed and disposed of. Their Lordships further observed that "no member can claim himself to be the owner of the company's property during its existence or in its winding up."

 

7) Centralized Management :

The shareholders have no direct concern with the management of the company. They exercise, only a formative control. Thus the management of the company is altogether different from its ownership. Independent functioning of managerial personnel attracts talented professional persons to work for the company in an atmosphere of independence thus enabling them to achieve highest targets of production and management leading to company's overall prosperity.

 

8) Capacity to sue and to be sued :

A company being a body corporate can sue and can be sued in its own name13. A criminal complaint can be filed by a company, but it should be represented by a natural person. A company has the right to protect its fair name. It can sue for such defamatory remarks against it as are likely to damage its business or property etc. A company has the right to seek damage where a defamatory material published about it affects its business.

 

Disadvantages of incorporation

A company has a separate legal personality from its members. However, under special circumstances this disparity may be removed.14

 

 Lifting the Corporate Veil:

The advantages of incorporation are extended only to those wishing to make honest use of a company.

 

1) Lifting or Piercing the Corporate Veil :

A corporation is cloth with a distinct personality by fiction of law, yet in reality it is an association of persons who are in fact , in a way , the beneficial owners of the property of the body corporate. In the case of dishonest and fraudulent use of the facility of incorporation, the law lifts the corporate veil and identifies the persons (ie, members) who are behind the scenes and responsible for the perpetration of fraud. A company being an artificial person, cannot act on its own, it can act only through natural persons. The whole theory of incorporation is based on the theory of corporate entity but the separate personality of the company and its statutory privileges should be used for legitimate purposes only. Where the legal entity of the company is being used for fraudulent and dishonest purpose, the individuals concerned will not be allowed to take the shelter behind the corporate personality. The court in such cases shall break through the corporate shell and apply the principle of what is known as “lifting or piercing the corporate veil”. The corporate veil of a company may be lifted to ascertain the true character and economic realities behind the legal personality of the company. Undoubtedly, the theory of corporate entity of a company is still the basic principle on which the whole law of corporations is based. But the separate personality of the company, being a statutory privilege, it must always be used for legitimate business purposes only. Where the legal entity of a corporate body is misused for fraudulent and dishonest purposes, the individuals concerned will not be allowed to take shelter behind the corporate personality. In such cases, the court will break through the corporate shell and apply the principle of what is known as "lifting or piercing the corporate veil". That is, the court will look behind the corporate entity.The principle of 'lifting the corporate veil' has found statutory recognition in certain provisions like Sections 45, 147, 212, 247 and 542 of the Companies Act. Corporate veil is said to be lifted when the court ignores the company and concerns itself directly with the members or managers. The courts have found it necessary to disregard the separate personality of a company, in the following situations :—

.

(b) For the benefit of revenue :

The court has the power to disregard corporate entity if it is used for tax evasion or to circumvent the tax obligation15. In this case the assessee was a wealthy man, enjoying huge dividends and interest income. He formed four private companies and agreed with each to hold a block of investment as an agent for it. Income received was credited in the accounts of the company, but the company handed back the amount to him as pretended loans. The court held that the company was formed by the assessee purely and simply as a means of avoiding super – tax and the company was nothing more than the assessee himself.

 

(c) Fraud or improper conduct :

The courts will refuse to uphold the separate existence of the company where it is formed to defeat or circumvent law, to defraud creditors or to avoid legal obligations. In Gilford Motor Co v. Horne16, Horne was appointed as a managing director of the plaintiff company on the condition that he shall solocite or entice away the customers of the company at any point of time. He was employed under an agreement. Shortly he opened a business in the name of a company which solicited the plaintiff’s customers. It was held that the company was mere cloak or sham for the purpose of enabling the defendant to commit a breach of his covenant against the solicitation.

 

In P.N.B. Finance Ltd. v. Shital Prasad Jain17, the court held that "the doctorine of piercing the corporate veil may be invoked whenever necessary by the court in the interest of justice, to prevent the corporate entity from being used as an instrument of fraud, and the fundamental principle of corporate personality itself may be disregarded having regard to the exigencies of the situation and for the ends of justice.

 

(d) To punish the real persons in Quasi-Criminal cases against the Company

The courts have sometimes applied the doctrine of lifting the corporate veil in quasi-criminal cases relating to companies in order to look behind the legal person and punish the real persons who have violated the law.

 

(e) To prevent abuse of Process of Law

The doctrine of lifting the corporate veil can also be used to prevent abuse of process of Court. Thus in Bijay Kumar Agarwal & others v. Ratanlal Bagaria & others18, the Court observed that although broadly speaking the principle of lifting the corporate veil will be available in the statute like Companies Act, and other financial and taxing statutes etc. but admittedly one cannot rule out the applicability of the principle elsewhere if the situations are falling under the following categories : (a) depend upon the relevant statutory or other provisions; (b) the object sought to be achieved; (c) the impugned conduct; (d) the involvement of the element of public interest; (e) the effect on parties who may be affected. It, therefore, logically follows that the doctrine of lifting the corporate veil or principle analogous thereto cannot be ruled out from being used as a tool of judiciary in adjudicating over the dispute between two parties. Thus the "Lifting of corporate veil' or principle analogous thereto cannot be monopoly of any particular statute. It can well be used by the judiciary or the Court to prevent the abuse of process of Court of Law.

 

2. Personal Liability of Directors or Members

Secondly, the company law imposes personal liability on the directors or members of a company in certain cases notwithstanding the cardinal principles of 'separate personality' and 'limited liability'. There are certain statutory provisions, in the Companies Act, 1956, apart from the liability of the company as an independent legal person, those cloaked behind it are also made liable. Such cases are :—

 

 

(a) Reduction of membership (Section 45)

Section 45 of the Companies Act, 1956 specifically provides that if at any time the number of members of a company falls below the statutory minimum i.e. seven in case of a public company and two in the case of a private company, and the company carries on business for more than six months while the number is so reduced, every person who is a member of that company during the time the company so carries on business after those six months and is aware of that fact, shall be severally liable for the payment of company's debts contracted during that time. Thus, in such cases, the privilege of limited liability is denied to the shareholders.

 

(b) Misrepresentation in Prospectus (Section 62)

In case of misrepresentation in the prospectus of a company, every director, promoter, and every other person who authorizes issue of such prospectus, incurs liability towards those who subscribe for shares on the faith of untrue statement.

(c) Ultra vires acts

The directors of a company shall be personally liable for all those acts done by them on behalf of the company if they are ultra vires the company.

 

3. Expenses and formalism :

Incorporation of a company is an expensive affair. Besides, it involves completion of a number of formalities. Moreover, the administration of a company has to be carried on strictly in accordance with the provisions of the company law and activities are limited by its memorandum which at times creates problems in its progress.

 

CONCLUSION:

It has been established that while members of a company are not directly liable for its acts, there are circumstances under which the barrier that stands between the members and third parties may be broken down. It has also been established that although a company is a person (if not a natural person), it is not a citizen under the Constitution or Citizenship Act and thus cannot claim protection of its fundamental rights.  'Company' in simple terms means a voluntary association of persons who have come together for carrying on same business and sharing the profits there from.

 

Section (1) (i) and (ii) of the Companies Act defines a company as a company formed and registered under those Act or an existing company. characteristics features of a company are incorporated association, distinct legal entity, artificial personality, limited liability, perpetual succession, common seal free transfer of shares. The 'corporate veil' of the company may be lifted in certain cases to identify the persons who are guilty of any fraud or improper conduct. There are certain circumstances provided by the statue itself and certain circumstances provided through judicial pronouncements under which the 'corporate veil' may be lifted viz.  Reduction of membership below statutory minimum, Misrepresentation in Prospectus, Failure to return application money, Failure to deliver share certificate etc. Within stipulate time period, Mis-description of name, For investigation of ownership of company, Fraudulent Conduct, Liability for ultra-vires Acts, Protection of revenue, Prevention of fraud or improper conduct, Determination of the enemy character of a company, To punish for contempt of court, etc. A 'company' should however, be distinguished from a 'body corporate'. The expression 'body corporate' is a wider expression than 'company'. 'Body corporate' includes, besides a 'company', a company incorporated outside India, public financial institutions, nationalized banks and any other association of persons declared as a body corporate by the Central Government.

 

REFERENCE:

1.       Avtar Singh, Company Law, 15thedi, 2009, Eastern Book Company, Lucknow.

2.       A.K. Majumdar and Dr. G.K. Kapoor, Company Law and Practice, 16thedi, Taxmann’s Publications Ltd, New Delhi.

3.       Section 34 of Companies Act, 1956.

4.       Section 433 to 526 of Companie Act, 1956.

5.       Art 300 of Constitution of India.

6.       rci.rutgers.edu/.../phil/machen_v_dewey-corporate_personhood.pdf

7.       [1895 – 99] All ER Rep 33.

8.       J.H. Rayner Ltd v. Deptt of Trade and Industry , (1989) 3 WLR 969 HL.

9.       www.internationallawoffice.com/.../detail.aspx

10.     (1982) 52 Comp. Out. 238.

11.      www.legavox.fr/.../corporate-personality-possibility-lift-veil-230.htm.

12.     AIR 1960 Mad. 43.

13.     Union Bank of India v. Khaders International Constructions Ltd , [1993] 2Comp Lj 89 Ker.

14.     www.scribd.com/doc/19011637/1-Indian-Companies-Act-1956.

15.     Juggilal v. CIT , (1969) 2 SCC 376.

16.     [1944] 1 Ch 935.

17.     (1983)53Comp. Cas.66.

18.     AIR 1999 Cal. 106, (107).

 

BIBLIOGRAPHY

Books Referred

1.       Avtar Singh, Company Law, 15thedi, 2009, Eastern Book Company, Lucknow.

2.       A.K. Majumdar and Dr. G.K. Kapoor, Company Law and Practice, 16thedi, Taxmann’s Publications Ltd, New Delhi.

3.       S. N. Mishra,Labour& Industrial Laws, 25thedi, 2009, Central Law Publications, Allahabad.

 

SITES REFFERED

1.       en.wikipedia.org/wiki/Corporate_personality

2.       www.frontierlaw.com.au/Sites/192/Images%20Files/Lecture05.doc

3.       rci.rutgers.edu/.../phil/machen_v_dewey-corporate_personhood.pdf

4.       legalservicesindia.com/article/article/corporate-personality-173-1.html

5.       www.internationallawoffice.com/.../detail.aspx

6.       www.legavox.fr/.../corporate-personality-possibility-lift-veil-230.htm

7.       www.ijfm.org/PDFs_IJFM/02_4_PDFs/2_4Porras.pdf

8.       www.scribd.com/doc/19011637/1-Indian-Companies-Act-1956

9.       www.bhojvirtualuniversity.com/ss/sim/llm_pre_pap3_bl1.doc

10.     www.llphelpline.com/.../Analysis-provisions-Companies-Act-1956.p...

 

Received on 01.02.2013

Modified on 22.02.2013

Accepted on 26.02.2013           

© A&V Publication all right reserved

Research J. Humanities and Social Sciences. 4(2): April-June, 2013, 140-144