corporate personality

2/2/2015 PrintArticle:CorporatePersonality

http://www.legalservicesindia.com/article/print.php?art_id=173 1/11

aarsha'sProfileanddetails

AarshaUnnikrishnan

CorporatePersonality

Source:http://www.Author:aarshaPublishedon:May22,2010

CorporatePersonalityisthecreationoflaw.LegalpersonalityofcorporationisrecognizedbothinEnglishandIndianlaw.Acorporationisanartificialpersonenjoyinginlawcapacitytohaverightsanddutiesandholdingproperty.

Acorporationisdistinguishedbyreferencetodifferentkindsofthingswhichthelawselectsforpersonification.Theindividualsformingthecorpusofcorporationarecalleditsmembers.Thejuristicpersonalityofcorporationspresupposestheexistenceofthreeconditions:(1)Theremustbeagrouporbodyofhumanbeingsassociatedforacertainpurpose.(2)Theremustbeorgansthroughwhichthecorporationfunctions,and(3)Thecorporationisattributedwillbylegalfiction.Acorporationisdistinctfromitsindividualmembers[1].

Ithasthelegalpersonalityofitsownanditcansueandcanbesuedinitsownname.Itdoesnotcometoendwiththedeathofitsindividualmembersandtherefore,hasaperpetualexistence.However,unlikenaturalpersons,acorporationcanactonlythroughitsagents.Lawprovidesprocedureforwindingupofacorporatebody[2].Besides,corporationsthebanks,railways,universities,colleges,church,temple,hospitalsetc.arealsoconferredlegalpersonality.UnionofIndiaandStatesarealsorecognizedaslegalorjuristicpersons[3].

Incertaincases,thecorpusofthelegalpersonshallbesomefundorestatewhichreservedcertainspecialuses.Forinstance,atrustestateortheestateofaninsolvent,acharitablefundetc..areincludedwithinthetermlegalpersonality.

Corporationsareoftwokinds:1.CorporationAggregate:Isanassociationofhumanbeingsunitedforthepurposeofforwardingtheircertaininterest.AlimitedCompanyisoneofthebestexample.Suchacompanyisformedbyanumberofpersonswhoasshareholdersofthecompanycontributeorpromisetocontributetothecapitalofthecompanyforthefurtheranceofacommonobject.Theirliabilityislimitedtotheextentoftheirshareholdinginthecompany.Alimitedliabilitycompanyisthusformedbythepersonificationoftheshareholders.Thepropertyisnotthatoftheshareholdersbutitsownpropertyanditsassetsandliabilitiesaredifferentfromthatofitsmembers.Theshareholdershavearighttoreceivedividendsfromtheprofitsofthecompanybutnotthepropertyofthecompany[4].TheprincipleofcorporatepersonalityofacompanywasrecognizedinthecaseofSalomanv.Saloman&Co[5].

2.CorporationSole:Isanincorporatedseriesofsuccessivepersons.Itconsistsofasinglepersonwhoispersonifiedandregardedbylawasalegalperson.Inotherwords,asingleperson,whoisinexerciseofsomeofficeorfunction,dealsinlegalcapacityandhaslegalrightsandduties.Acorporationsoleisperpetual.PostMasterGeneral,PublicTrustee,ComptrollerandauditorgeneralofIndia,theCrowninEnglandetcaresomeexamplesofacorporationsole.Generally,corporationsolearetheholdersofapublicofficewhichare

2/2/2015 PrintArticle:CorporatePersonality

http://www.legalservicesindia.com/article/print.php?art_id=173 2/11

recognizedbylawasacorporation..Thechiefcharacteristicofacorporationsoleisitscontinuousentityendowedwithacapacityforendlessduration.Acorporationsoleisanillustrationofdoublecapacity.Theobjectofacorporationsoleissimilartothatofacorporationaggregate.Initasinglepersonholdingapublicofficeholdstheofficeinaseriesofsuccession,meaningtherebythatwithhisdeath,hisproperty,rightandliabilitiesetc.,donotextinguishbuttheyarevestedinthepersonwhosucceedshim.Thusonthedeathofacorporationsole,hisnaturalpersonalityisdestroyed,butlegalpersonalitycontinuestoberepresentedbythesuccessiveperson.Inconsequence,thedeathofacorporationsoledoesnotadverselyaffecttheinterestsofthepublicingeneral.

AdvantagesofIncorporation1)IndependentCorporateExistence:Acorporatepersonshallhaveanindependentcorporateexistence.Itisinlawaperson.Itissdistinctlegalpersonaexistingindependentofitsmembers.Incaseofacompany,byincorporationitgainsacorporatepersonalitywhichisseparateordistinctfromthememberswhocomposeit.ThepropertyofthecompanybelongstoitandnotitsmembersitmaysueorbesuedinitsownnameitmayenterintocontractswiththirdpartiesindependentlyandeventhemembersthemselvescanenterintocontractwiththecompanyAccordingtoSection34(2)oftheCompaniesAct,uponissueofthecertificateofincorporation,thesubscriberstothememorandumandotherpersons,whomayfromtime,bethemembersofthecompany,shallbeabodycorporate,whichiscapableofexercisingallthefunctionsofanincorporatedcompanyandhavingperpetualsuccessionandacommonseal.Thusthecompanybecomesabodycorporatewhichiscapableimmediatelyoffunctioningasanincorporatedindividual.Withtheincorporation,theentityofthecompanybecomesinstitutionalized.ThisprincipleoftheindependentcorporateexistenceandtheprincipleofcorporatepersonalityofacompanywasrecognizedinthecaseofSalomanv.Saloman&Co[6].InthiscaseSalomonwasabootandshoemanufacturer.HeincorporatedacompanynamedSalomon&CoLtd,forthepurposeoftakingoverandcarryingonhisbusiness.ThesevensubscriberstothememorandumwereSalomon,hiswife,hisdaughterandfoursonsandtheyremainedtheonlymembersofthecompany.Thecompanywentintoliquidationwithinayear.TheunsecuredcreditorscontendedthatthoughincorporatedundertheAct,thecompanyneverhadanindependentexistence,itwasinfactSalomonunderanothernamehewasthemanagingdirector,theotherdirectorsbeinghissonsandunderhiscontrol.ItwasheldthatSalomon&CoLtdwasarealcompanyfulfillingallthelegalrequirements.Itmustbetreatedasacompany,asanentityconsistingofcertaincorporators,butadistinctandindependentcorporation.Thusitwasdecidedinthiscasethatacorporatebodyhasitsownexistenceorpersonalityseparateanddistinctfromitsmembersandtherefore,ashareholdercannotbeheldliablefortheactsofthecompanyeventhoughheholdsvirtuallytheentiresharecapital.Thecasehasalsorecognizedtheprincipleoflimitedliabilityofacompany.

TheprincipleofdistinctandindependentexistenceofcompanyconsequenttoitsincorporationwasrecognizedinIndiaevenbeforethedecisioninSalomoncase.TheHighCourtofCalcuttainacaseobservedthatthecompanywasaltogetheraseparateperson,differentfromitsshareholdersandthereforethetransferwasasmuchaconveyance,atransferoftheproperty,asiftheshareholdershadbeentotallydifferentpersons[7].Inthiscase,thememberstransferredaTeaEstatetoacompanyandclaimedexemptionfromadvaloremdutyonthegroundthattheythemselvesbeingtheshareholdersinthecompany,itwasinfactatransfertothemselvesinanothername.TheCourt,however,rejectedtheircontentionandruledthatintheeyesoflawthecompanywasadistinctindependentperson,separatefromitsshareholders.

TheSupremeCourtinM/s.ElectronicsCorporationofIndiaLtd.v.Secretary,Revenue

2/2/2015 PrintArticle:CorporatePersonality

http://www.legalservicesindia.com/article/print.php?art_id=173 3/11

Department[8].,GovernmentofAndhraPradesh,interaliaobservedthatacleardistinctionmustbedrawnbetweenacompanyanditsshareholders,eventhoughthatshareholdermaybeonlyonei.e.theCentraloraStateGovernment.Intheeyesofthelaw,acompanyregisteredundertheCompaniesActisadistinctlegalentityotherthanthelegalentityorentitiesthatholditsshares.

2)LimitedLiability:Oneoftheprincipaladvantagesofanincorporatedcompanyistheprivilegeoflimitedliability.Itisthemainfeatureofregisteredcompanieswhichprovidesaspecialattractiontoinvestors.Theprincipleoflimitedliabilityimpliesthattheliabilityofamemberintheeventofthecompany'swindingup,inrespectofthesharesheldbyhimislimitedtotheextentoftheunpaidvalueonsuchshares.Thustheliabilitydoesnotfluctuatebutremainslimitedtotheamountwhich,forthetimebeingremainsunpaid,whetherfromtheoriginalshareholderorthetransfereeofsuchsharesasthecasemaybe.limitedliabilityofmembersextendsonlyforcompany'sdebtintheeventofitswindingup.Thecompanyitself,beingalegalpersona,isalwaysfullyliableandthereforeitsliabilityisunlimited.Inotherwords,itisliabletopaythedebtssolongasassetsareavailable.Theorderofpriorityforpaymentofdebtshall,however,dependontheclassofcreditorsaslaiddownintheCompaniesAct.Nomemberisboundtocontributeanythingmorethanthenominalvalueofthesharesheldbythem[9].Section34(2)oftheCompaniesAct,1956providesthatintheeventofthecompanybeingwoundup,themembersshallhaveliabilitytocontributetotheassetsofthecompanyinaccordancewiththeAct,Inthecaseoflimitedcompanies,nomemberisboundtocontributeanythingmorethanthenominalvalueofsharesheldbyhim.Theprivilegeoflimitingtheliabilityisoneofthemainadvantagesofcarryingonbusinessunderacorporateorganization.

3)PerpetualSuccession:Anincorporatedcompanyhasperpetualsuccession,thatisnotwithstandinganychangeinitsmembers,thecompanyshallretainasthesameentitywiththesameprivilegesandimmunities,estateandpossessions.thedeathorinsolvencyofindividualmemberdoesnotinanyway,affectitscorporateexistenceandthecompanyshallcontinueitsexistenceasusualuntilitiswoundupinaccordancewiththeprovisionsoftheCompaniesAct,Theperpetualexistenceofanincorporatedcompanyiswellillustratedbyproverbialsaying,"membersmaycomeandmembersmaygo,butthecompanycangoonforever."

InGopalpurTeaCo.Ltd.v.PenhokTeaCo,Ltd.[10],thecourtwhileapplyingthedoctrineofcompany'sperpetualsuccessionobservedthatthoughthewholeundertakingofacompanywastakenoverunderanActwhichpurportedtoextinguishallrightsofactionagainstthecompany,neitherthecompanywastherebyextinguishednoranybody'sclaimagainstit.

4)Transferabilityofshares:Section82oftheCompaniesAct,1956,specificallyprovidesthatthesharesorotherinterestofanymemberinacompanyshallbemovableproperty,transferableinthemannerprovidedbythearticlesofassociationofthecompany.Thusthememberofanincorporatedcompanycandisposeofhissharebysellingthemintheopenmarketandgetbacktheamountsoinvested.Thetransferabilityofshareshastwomainadvantages,namelyitprovidesliquiditytoinvestorsandatthesametimeensuresstabilityofthecompany.Thetransferofsharesofacompanydoesnotinanywayaffectitsexistenceormanagementandtheshareholdercanconvenientlygetrelievedofhisliabilitybytransferringhissharestosomeotherperson.

5)SeparateProperty:Incorporationhelpsthepropertyofthecompanytobeclearly

2/2/2015 PrintArticle:CorporatePersonality

http://www.legalservicesindia.com/article/print.php?art_id=173 4/11

distinguishedfromthatofitsmembers.Thepropertyisvestedinthecompanyasabodycorporate,andnochangesofindividualmembershipaffectthetitle.Incaseofacompany,itbeingalegalpersoniscapableofowning,enjoyinganddisposingofpropertyinitsownname.Thecompanybecomestheownerofitscapitalandassets.Theshareholdersarenottheseveralorjointownersofcompanysproperty.InBachaFGuzdarv.CITBombay[11]itwasheldthatthecompanyisarealpersoninwhichallitspropertyisvested,andbywhichitiscontrolled,managedanddisposedof.InMacaurav.NorthernAssuranceCoLtd[12]itwasheldthatthepropertyofacompanyisnotthepropertyoftheshareholdersitisthepropertyofthecompany.

6)CorporateFinances:Thesharesofanincorporatedcompanybeingtransferable,itcanraisemaximumcapitalinminimumpossibletime.Thatapart,anincorporatedcompanyhastheprivilegeofraisingitscapitalbypublicsubscriptionseitherbywayofsharesordebentures.Thepublicfinancialinstitutionswillinglylendloantocompaniesasitisgenerallysecuredbyfloatingchargewhichisanexclusiveprivilegeofaregisteredcompany.

InR.T.Perumalv.JohnDeavin,[13]ithasbeenobservedthatacompanyisarealpersoninwhichallitspropertyisvested,andbywhichitiscontrolled,managedanddisposedof.TheirLordshipsfurtherobservedthat"nomembercanclaimhimselftobetheownerofthecompany'spropertyduringitsexistenceorinitswindingup."

7)CentralizedManagement:Theshareholdershavenodirectconcernwiththemanagementofthecompany.Theyexercise,onlyaformativecontrol.Thusthemanagementofthecompanyisaltogetherdifferentfromitsownership.Independentfunctioningofmanagerialpersonnelattractstalentedprofessionalpersonstoworkforthecompanyinanatmosphereofindependencethusenablingthemtoachievehighesttargetsofproductionandmanagementleadingtocompany'soverallprosperity.

ThemanagementofthecompanygenerallyvestsinthedirectorswhodecidethepolicymattersinthemeetingsoftheBoardofDirectors.Withskilledprofessionalmanagerssupportedbyfinancialresources,companiesareabletodevelopandcarryontheirbusinessefficiently.Inshort,professionalformofmanagementofbusinessdisassociatesthe'ownership'fromcontrolofbusinessandthushelpstopromoteefficiency.Besides,itprovidesflexibilityandautonomytobusinessundertakingswithintheframeworkofcompanylaw.

8)Capacitytosueandtobesued:Acompanybeingabodycorporatecansueandcanbesuedinitsownname.[14].Acriminalcomplaintcanbefiledbyacompany,butitshouldberepresentedbyanaturalperson.Acompanyhastherighttoprotectitsfairname.Itcansueforsuchdefamatoryremarksagainstitasarelikelytodamageitsbusinessorpropertyetc.Acompanyhastherighttoseekdamagewhereadefamatorymaterialpublishedaboutitaffectsitsbusiness.InTVSEmployeesFederationv.TVS&SonsLtd[15]itwasheldthatthepreparationofavideocassettebytheworkmenofacompanyshowingtheirstruggleagainstthecompany'smanagementandexhibitioncouldberestrainedonlyonshowingthatthematterwouldbedefamatory.InRv.BroadcastingStandardsCommissionthecourtofappealheldthatacompanycancomplainundertheBroadcastingAct,1996aboutunwarrantedinfringementofitsprivacy.InthiscasethecomplaintwasaboutthesecretfilmingoftransactionsinshopsbytheBBCandtheallegationwasthatthisconstitutedaninfringementofthecompanysprivacy.

DisadvantagesofIncorporation

2/2/2015 PrintArticle:CorporatePersonality

http://www.legalservicesindia.com/article/print.php?art_id=173 5/11

1)LiftingorPiercingtheCorporateVeil:Acorporationisclothwithadistinctpersonalitybyfictionoflaw,yetinrealityitisanassociationofpersonswhoareinfact,inaway,thebeneficialownersofthepropertyofthebodycorporate.Acompanybeinganartificialperson,cannotactonitsown,itcanactonlythroughnaturalpersons.Thewholetheoryofincorporationisbasedonthetheoryofcorporateentitybuttheseparatepersonalityofthecompanyanditsstatutoryprivilegesshouldbeusedforlegitimatepurposesonly.Wherethelegalentityofthecompanyisbeingusedforfraudulentanddishonestpurpose,theindividualsconcernedwillnotbeallowedtotaketheshelterbehindthecorporatepersonality.Thecourtinsuchcasesshallbreakthroughthecorporateshellandapplytheprincipleofwhatisknownasliftingorpiercingthecorporateveil.Thecorporateveilofacompanymaybeliftedtoascertainthetruecharacterandeconomicrealitiesbehindthelegalpersonalityofthecompany.Undoubtedly,thetheoryofcorporateentityofacompanyisstillthebasicprincipleonwhichthewholelawofcorporationsisbased.Buttheseparatepersonalityofthecompany,beingastatutoryprivilege,itmustalwaysbeusedforlegitimatebusinesspurposesonly.Wherethelegalentityofacorporatebodyismisusedforfraudulentand.dishonestpurposes,theindividualsconcernedwillnotbeallowedtotakeshelterbehindthecorporatepersonality.Insuchcases,thecourtwillbreakthroughthecorporateshellandapplytheprincipleofwhatisknownas"liftingorpiercingthecorporateveil".Thatis,thecourtwilllookbehindthecorporateentity.

InNewHorizonsLtd.v.UnionofIndiaandothers,[16]theappellantcompanywhenseenthroughtheveilcoveringthefaceofNewHorizonsLtd.wasfoundtobeajointventurecreatedasaresultofreorganizationin1992.SixtypercentofitssharecapitalwasownedbyanIndiangroupofcompaniesandfortypercentsharecapitalwasownedbyaSingaporebasedforeigncompany.TheGovernmenthadinvitedtendersfordistributionofStatelargesse.Theappellant'stenderwasnotconsideredonthegroundthattheexperienceofitsconstituentswasnotthesameasthatoftheappellantandbecauseofinadequateexperience,therespondent'stenderwasacceptedastheyhadlongexperienceandhadalsoofferedamuchloweramountofroyalty.Theappellantspleadedtheexperienceofconstituentsofthejointventurecompanyshouldbetreatedasitsownexperienceandcorporateveilshouldbeseenthroughforthispurpose.Allowingtheappeal,theSupremeCourtruledthattheactionoftheStateGovernmentindeterminingtheeligibilityoftenderswasnotinconsonancewiththestandardsornormsandwasarbitraryandirrational.TheCourtfurtherobservedthatincaseofajointventurecorporation,theCourtcanseethroughthecorporateveiltoascertainthetruenatureofacompany.Thedoctrineofliftingthecorporateveilisinvokedwhenthecorporatepersonalityisfoundtobeopposedtojustice,convenienceorinterestofrevenue.

Theprincipleof'liftingthecorporateveil'hasfoundstatutoryrecognitionincertainprovisionslikeSections45,147,212,247and542oftheCompaniesAct.Corporateveilissaidtobeliftedwhenthecourtignoresthecompanyandconcernsitselfdirectlywiththemembersormanagers.Thecourtshavefounditnecessarytodisregardtheseparatepersonalityofacompany,4inthefollowingsituations:

(a)DeterminationofRealcharacterofacompanyAtthetimeofwar,itmaybecomenecessarytoliftthecorporateveilofacompanytodeterminewhetherthecompanyhasanenemycharacter.Insuchacasethecourtsmayintheirdiscretionexaminethecharacterofpersonswhoareinrealcontrolofthecorporateaffairsofthecompany.

Inacase[17]acompanywasincorporatedinEnglandforthepurposeofsellingtyres

2/2/2015 PrintArticle:CorporatePersonality

http://www.legalservicesindia.com/article/print.php?art_id=173 6/11

manufacturedinGermanybyaGermancompany,allthesharesexceptonewereheldbytheGermansubjectsresidinginGermany.TheremainingonesharewasheldbyaBritishsubjectwhowastheSecretaryofthecompany.ThustherealcontroloftheEnglishcompanywasinGermanhands.DuringWorldWarI,thecompanycommencedanactiontorecovertradedebts.ThequestionthereforewaswhethercompanyhadbecomeanenemycompanyconsequenttoWorldWarI.TheHouseofLords,interaliaobserved:

Butitcanassumeenemycharacterwhenpersonsindefactocontrolofitsaffairsareresidentsinanyenemycountryor,whereverresident,areactingunderthecontrolofenemies.thereforeheldthatthecompanywasanenemycompanyforthepurposeoftradingandthereforeitwasbarredfrommaintainingtheaction.

InanAmericancase[18]itwasheldthattheCourtsmayrefusetopiercethecorporateveilwherethereisnodangertopublicinterest.InthiscasecertainlandsweretransferredbyanEnglishmantoanotherperpetuallyrestrainingthetransfereefromsellingthesaidpropertytocolouredpersonsi.e.Negroes.Thetransferee,however,transferredthelandtoacompanywhichwasexclusivelycomposedofNegroes.Thereupon,thepetitionersbroughtanactionagainstthecompanyforannulmentoftheconveyanceonthegroundofbreachofcondition.Rejectingthecontentionofthepetitionersthecourtheldthatmembersindividuallyoremploymentwasterminatedunderanagreement.Thereafterhestartedanewcompanytocarryonthebusinessofsolicitationandsolicitedplaintiffscustomers.Thecourtheldthatthedefendantcompanywasamerecloakorshamandchannelusedbydefendanttoobtainadvantageofthecustomersoftheplaintiffcompanyforhisownbenefitandthereforeitoughttoberestrainedfromcarryingonthebusiness.

TheSupremeCourtinSubhraMukherjee&Anotherv.M/s.BharatCokingCoalLtd.(BCCL)&others[19]hasobservedthattheCourtwillbejustifiedinpiercingtheveilofincorporationinordertoascertainthetruenatureofthetransactionastowhoweretherealpartiestothesaleandwhetheritwasbetweenhusbandsandwivesbehindthefacadeofseparateentityofthecompany.

(b)Forthebenefitofrevenue:Thecourthasthepowertodisregardcorporateentityifitisusedfortaxevasionortocircumventthetaxobligation[20].Inthiscasetheassesseewasawealthyman,enjoyinghugedividendsandinterestincome.Heformedfourprivatecompaniesandagreedwitheachtoholdablockofinvestmentasanagentforit.Incomereceivedwascreditedintheaccountsofthecompany,butthecompanyhandedbacktheamounttohimaspretendedloans.Thecourtheldthatthecompanywasformedbytheassesseepurelyandsimplyasameansofavoidingsupertaxandthecompanywasnothingmorethantheassesseehimself.

(c)Fraudorimproperconduct:Thecourtswillrefusetoupholdtheseparateexistenceofthecompanywhereitisformedtodefeatorcircumventlaw,todefraudcreditorsortoavoidlegalobligations.InGilfordMotorCov.Horne[21],Hornewasappointedasamanagingdirectoroftheplaintiffcompanyontheconditionthatheshallsolociteorenticeawaythecustomersofthecompanyatanypointoftime.Hewasemployedunderanagreement.Shortlyheopenedabusinessinthenameofacompanywhichsolicitedtheplaintiffscustomers.Itwasheldthatthecompanywasmerecloakorshamforthepurposeofenablingthedefendanttocommitabreachofhiscovenantagainstthesolicitation.

InP.N.B.FinanceLtd.v.ShitalPrasadJain,[22]thecourtheldthat"thedoctorineofpiercing

2/2/2015 PrintArticle:CorporatePersonality

http://www.legalservicesindia.com/article/print.php?art_id=173 7/11

thecorporateveilmaybeinvokedwhenevernecessarybythecourtintheinterestofjustice,topreventthecorporateentityfrombeingusedasaninstrumentoffraud,andthefundamentalprincipleofcorporatepersonalityitselfmaybedisregardedhavingregardtotheexigenciesofthesituationandfortheendsofjustice.

(d)GovernmentCompanies:Acompanyattimesloosetheirindividualityinfavourofitsprincipaland,maybetreatedasanagentortrustee.InReF.G.(Films)Ltd.[23],anAmericancompanyproducedafilmcalled'MANSOON'inIndiatechnicallyinthenameofaBritishcompany.ThisBritishcompanyhadacapitalof100outofwhichmajoritywasheldbythePresidentoftheAmericancompanywhichfinancedtheproductionofthefilm.InthesecircumstancestheBoardofTraderefusedtoregisterthefilmasaBritishfilmonthegroundthatintheinstantcasetheBritishcompanyactedmerelyasthenomineeoragentoftheAmericancompany.ThisviewwasupheldbytheCourt.Thecourtmay,insomecircumstances,treataholdingcompanyanditssubsidiaryasasingleentity.Thisinferencedoesnotflowautomaticallyfromtherelationshipofholdingandsubsidiarycompany.Theremustbeevidencethatthebusinessofthetwoiscombined.

InSmithStone&KnightLtd.v.BirminghamCorporation,itwasobservedthatthecourtsfinditdifficulttogobehindthecorporateentityofacompanytodeterminewhetheritisreallyindependentorisbeingusedasanagentortrustee.Ifaparentcompanyandasubsidiarycompanyaredistinctlegalentitiesundertheordinaryrulesoflawandintheabsenceofanagencycontractbetweenthetwocompaniesonecannotbesaidtobetheagentoftheother.Ifonecompanyisheldliableasaprincipalfortheactsofanothercompany,therelationshipofagencyshouldbesubstantiallyestablished,aswasthecaseintheinstantdecision.

InIndia,alargenumberofprivateCompanieshaveatendencytoregisterthemselvesasGovernmentcompaniesundertheCompaniesActwithPresidentandfewotherofficersastheshareholders.Theydosowithaviewtoavailingcertainadvantagesintheircommercialventures.TheCourtsare,therefore,confrontedwiththeproblemofdecidingthetruenatureofaGovernmentcompanyinanumberofcases.TheSupremeCourthasdecidedonceforallthataGovernmentcompanyisneitheranextensionoftheState,noritsagent.

TheSupremeCourthasruledthatLifeInsuranceCorporationcannotbetreatedasaninstrumentalityoftheStatewhenitisexercisingitsordinaryrightasamajorityshareholderinacompanyforremovingtheexistingmanagementandreconstitutingtheBoardofDirectorsofthatcompany[24]

(e)TopunishtherealpersonsinQuasiCriminalcasesagainsttheCompanyThecourtshavesometimesappliedthedoctrineofliftingthecorporateveilinquasicriminalcasesrelatingtocompaniesinordertolookbehindthelegalpersonandpunishtherealpersonswhohaveviolatedthelaw.

(f)TopreventabuseofProcessofLawThedoctrineofliftingthecorporateveilcanalsobeusedtopreventabuseofprocessofCourt.ThusinBijayKumarAgarwal&othersv.RatanlalBagaria&others,[25]theCourtobservedthatalthoughbroadlyspeakingtheprincipleofliftingthecorporateveilwillbeavailableinthestatutelikeCompaniesAct,andotherfinancialandtaxingstatutesetc.butadmittedlyonecannotruleouttheapplicabilityoftheprincipleelsewhereifthesituationsarefallingunderthefollowingcategories:(a)dependupontherelevantstatutoryorotherprovisions(b)theobjectsoughttobeachieved(c)theimpugnedconduct(d)theinvolvementoftheelementof

2/2/2015 PrintArticle:CorporatePersonality

http://www.legalservicesindia.com/article/print.php?art_id=173 8/11

publicinterest(e)theeffectonpartieswhomaybeaffected.It,therefore,logicallyfollowsthatthedoctrineofliftingthecorporateveilorprincipleanalogoustheretocannotberuledoutfrombeingusedasatoolofjudiciaryinadjudicatingoverthedisputebetweentwoparties.Thusthe"Liftingofcorporateveil'orprincipleanalogoustheretocannotbemonopolyofanyparticularstatute.ItcanwellbeusedbythejudiciaryortheCourttopreventtheabuseofprocessofCourtofLaw.

TheSupremeCourtinDelhiDevelopmentAuthorityv.SkipperConstructionCo.(P.)Ltd[26]hasobservedthattheliftingorpiercingthecorporateveilcanbeundertakenbyCourttoseetherealmenbehindtheveilwhoareinvolvedindefraudingothersbycorruptandillegalmeansindeliberatedefianceofCourt'sorder.Intheinstantcase,thecompanywasdefraudingothersindeliberatedisobedienceofSupremeCourt'sorderswhichamountedtocontemptofCourt.Disposingoftheappeal,theSupremeCourtobservedthatimpositionofpunishmentforcontemptwouldnotdenudetheCourtofitspowertoissuedirectionsandmakeappropriateorderstograntrelieftothepersonsaggrievedinordertodocompletejustice.Forthispurpose,theCourtcanliftthecorporateveilofthecompanytotookintothemisdeedsofitsofficialsandpunishthemi.e.thecontemnors.Thatapart,theCourtmayalsoorderthecontemnorstorestoretheillegallyderivedbenefittothepersonswhoaredefraudedsothatthecontemnorsarenotabletoretainthefruitsofthecontempt.TheCourtmayalsoorderforfeiture/attachmentofthepropertiesacquiredbytheillegalandcorruptmeansbytherealmenbehindthecorporateasalsothepropertiesoftheirfamilymembers.

2.PersonalLiabilityofDirectorsorMembersSecondly,thecompanylawimposespersonalliabilityonthedirectorsormembersofacompanyincertaincasesnotwithstandingthecardinalprinciplesof'separatepersonality'and'limitedliability'.Therearecertainstatutoryprovisions,intheCompaniesAct,1956,apartfromtheliabilityofthecompanyasanindependentlegalperson,thosecloakedbehinditarealsomadeliable.Suchcasesare:

(a)Reductionofmembership(Section45)Section45oftheCompaniesAct,1956specificallyprovidesthatifatanytimethenumberofmembersofacompanyfallsbelowthestatutoryminimumi.e..sevenincaseofapubliccompanyandtwointhecaseofaprivatecompany,andthecompanycarriesonbusinessformorethansixmonthswhilethenumberissoreduced,everypersonwhoisamemberofthatcompanyduringthetimethecompanysocarriesonbusinessafterthosesixmonthsandisawareofthatfact,shallbeseverallyliableforthepaymentofcompany'sdebtscontractedduringthattime.Thus,insuchcases,theprivilegeoflimitedliabilityisdeniedtotheshareholders.

(b)Misdescriptionofname(Section147)Whereanofficerofacompanysignsonbehalfofthecompanyanycontract,Billofexchange,hundi,promissorynote,chequeoranorderformoneygoods,suchpersonshallbepersonallyliabletotheholderifthenameofthecompanyisnotfullyorproperlymentionedintheinstrument.

(c)Fraudulentconductofbusiness(Section542):Thissectionimp[oseliabilityforfraudulentconductofacompanysbusiness.Accordingtothesectionifitisfoundthatabusinessisfoundtobecarriedonwiththeintenttodefraudthecreditorsofthecompanyoranyotherperson,orforanyfraudulentpurpose,thosewhowereknowinglypartiestothisbusinessshallbepersonallyheldliableforalloranyofthedebtsofthecompany.

2/2/2015 PrintArticle:CorporatePersonality

http://www.legalservicesindia.com/article/print.php?art_id=173 9/11

(d)Subsidiarycompany(Sections212and214)AsrequiredbySections212and214oftheAct,aholdingcompanyhastodisclosetoitsmembers,theaccountsofitssubsidiaries.Thoughintheeyesoflawasubsidiarycompanyisaseparatelegalentityundercertaincircumstances,thecourtmaynottreatthesubsidiarycompanyasanindependententityinaparticularsituation.Theremaybetwosituationswhenasubsidiarycompanymayloseitsindependentidentitytoacertainextent,namely,(1)thelawmaybrushasidethelegalformsandrequirecompaniesinagrouptopresentajointpictureinordertogivebetterinformationofthefinancialpositionofthegroupasawholetothepublic,creditorsandshareholdersand(2)wherethecontrolandconductofbusinessofasubsidiarycompanyrestssolelyinthenomineesoftheholdingcompany,itmaybeinferredthatthesubsidiarycompanyismerelyabranchofholdingcompanyandhasnoseparateidentityofitsown.

(e)FailuretoReturnApplicationMoney(Section69(5)Theprovisioncontainedinclause(5)ofSection69oftheCompaniesAct,1956makesthedirectorofapubliccompanypersonallyliabletopaythemoneywithinterestiftheapplicationmoneyisnotrepaidwithinthirtydaysintheeventofminimumsubscriptionnothavingbeenreceivedorcompanynothavingobtainedcertificateofcommencementofbusinessbythecompany.

(f)MisrepresentationinProspectus(Section62)Incaseofmisrepresentationintheprospectusofacompany,everydirector,promoter,andeveryotherpersonwhoauthorizesissueofsuchprospectus,incursliabilitytowardsthosewhosubscribeforsharesonthefaithofuntruestatement.

(g)UltraviresactsThedirectorsofacompanyshallbepersonallyliableforallthoseactsdonebythemonbehalfofthecompanyiftheyareultraviresthecompany.

(h)NonpaymentofTaxIntheeventofwindingupofaprivatecompany,ifanytaxassessedonthecompanywhetherbeforeorincourseofliquidationinrespectofanyincomeofanypreviousyearcannotberecovered,everypersonwhowasdirectorofthatcompanyatanytimeduringtherelevantpreviousyear,shallbejointlyandseverallyliableforpaymentofsuchtax.

3.Expensesandformalism:Incorporationofacompanyisanexpensiveaffair.Besides,itinvolvescompletionofanumberofformalities.Moreover,theadministrationofacompanyhastobecarriedonstrictlyinaccordancewiththeprovisionsofthecompanylawandactivitiesarelimitedbyitsmemorandumwhichattimescreatesproblemsinitsprogress.

4.CompanyisnotacitizenThoughacompanyisalegalperson,itisnotacitizenundertheconstitutionallawofIndiaortheCitizenshipAct,1955.Thereasonastowhyacompanycannotbetreatedasacitizenisthatcitizenshipisavailabletoindividualsornaturalpersonsonlyandnottojuristicpersons.ThequestionwhetheracorporationisacitizenwasdecidedbytheSupremeCourtinStateTradingCorporationofIndiav.CommercialTaxOfficer[27].Sinceacompanyisnottreatedasacitizen,itcannotclaimprotectionofsuchfundamentalrightsasareexpresslyguaranteedtocitizens,butitcancertainlyclaimtheprotectionofsuchfundamentalrightsasare

2/2/2015 PrintArticle:CorporatePersonality

http://www.legalservicesindia.com/article/print.php?art_id=173 10/11

guaranteedtoallpersonswhethercitizensornot.InTataEngineeringCompanyv.StateofBihar[28]itwasheldthatsincethelegalpersonalityofacompanyisaltogetherdifferentfromthatofitsmembersandshareholders,itcannotclaimprotectionoffundamentalrightsalthoughallitsmembersareIndiancitizens.Thoughacompanyisnotacitizen,itdoeshaveanationality,domicileandresidence.Incaseofresidenceofacompany,ithasbeenheldthatforthepurposesofincometaxlaw,acompanyresideswhereitsrealbusinessiscarriedonandtherealbusinessofacompanyshallbedeemedtobecarriedonwhereitsCentralmanagementandcontrolisactuallylocated.

StatutoryCorporationsorCompaniesCompaniesandundertakingsconcernedwithpublicutilitysuchasrailways,roadways,docks,electricityetc.areusuallyincorporatedbyspecialActsoftheLegislature.Theyaremostlyinvestedwithextensivepowers.TheexamplesofstatutorycorporationsaretheReserveBankofIndiaestablishedbytheReserveBankofIndiaAct,1934,theIndustrialFinanceCorporationofIndiaestablishedbytheIndustrialFinanceCorporationAct,1948,AirIndiaincorporatedundertheAirCorporationAct,1953,theLifeInsuranceCorporationofIndiacreatedbytheLifeInsuranceCorporationofIndiaAct,1956andsoon.

ThereforeastatutorycorporationisapublicenterprisewhichcomesintoexistencebyaspecialActofParliament.TheActwoulddefineitsp[owersandfunctions,rulesandregulationsgoverningitsemployeesanditsrelationshipwiththegovernmentdepartment.Theyarefinanciallyindependent.

ThoughtheParliamentandtheStateLegislatureshavepowertocreatestatutorytradingornontradingcorporationsforevenprivatepurposesasperEntry44ofListIandEntry32ofListIIofSeventhScheduleoftheConstitutionofIndia,anygrouporassociationdesiringtoseekincorporationforotherthanpublicpurposesisgenerallyexpectedtogetitselfincorporatedbyregistrationundertheCompaniesAct.

OneManCompanyAonemancompanymeansasinglepersonownsthewholeorpracticallythewholeofsharecapital.Theremayormaynotbeothermembers.Theothermembersshallbeacquaintanceslikefriends,relativesornominees.Thecentralpersonshallhavethefullcontroloverthecompany.Thesetypesofcompanyenjoyacorporatestatusandhaslimitedliabilityofthecompany.Theyalsohavealegalstatus.TheconceptofonemancompanywasacceptedinSalomanscase[1]Section34ofCompaniesAct,1956.[2]Section433to526ofCompanieAct,1956.[3]Art300ofConstitutionofIndia.[4]ColonialBankv.Whilley,(1885)30Ch.D.261.[5](1887)AC22.[6][189599]AllERRep33.[7]ReKondoliTeaCo.Ltd,(1886)ILR13Cai.43.[8]AIR1999SC1734.[9]J.H.RaynerLtdv.DepttofTradeandIndustry,(1989)3WLR969HL.[10](1982)52Comp.Out.238,[11](1955)1SCR876.[12]1925AC619HL.[13]AIR1960Mad.43.

2/2/2015 PrintArticle:CorporatePersonality

http://www.legalservicesindia.com/article/print.php?art_id=173 11/11

[14]UnionBankofIndiav.KhadersInternationalConstructionsLtd,[1993]2CompLj89Ker.[15](1996)1WLR132(CA).[16](1995)1SCC478[17]DaimlerCo.Ltd.v.ContinentalTyre&RubberCo.,(1916)2AC307.[18]People'sPleasureParkCo.v.Rohleder,(1908)109Va439.[19]AIR2000SC1203.[20]Juggilalv.CIT,(1969)2SCC376.[21][1944]1Ch935.[22](1983)53Comp.Cas.66.[23](1953)AllER615,[24]LifeInsuranceCorporationv.EscortsLtd.,(1986)1SCC264.[25]AIR1999Cal.106,(107).[26]AIR1996SC2005.[27]AIR1963SC1811.[28]AIR1965SC40.

Theauthorcanbereachedat:aarsha@legalserviceindia.com