A Company’s legal existence

Estimated Reading Time: 8 minutes

A corporation is a legal body that exists independently of its owners and has its own legal existence. An organisation can have a nationality, domicile, and residence, but it cannot demand the enforcement of constitutional rights that are only applicable to residents of the country. The company’s nationality, on the other hand, is unaffected by the nationality of its owners. A company’s interests and responsibilities are separate from those of its individual members: “Shareholders are not, in the eyes of the constitution, part beneficiaries of the undertaking.” The company’s creditors can only get their money back from the company and the company’s assets.  The company’s rights and obligations are distinct from those of its private members: “Shareholders are not part beneficiaries of the undertaking in the eyes of the constitution.” A organisation is a legal entity that operates in its own right, separate from its shareholders. Creditors of the firm can only get their money back from the company and its properties. They are not allowed to prosecute individual participants. Similarly, the corporation is not responsible for any of its employees’ personal debts.  The profits of the company are to be used for the benefit of the company, It is not for the owners’ monetary gain. Shareholders are not responsible for the company’s mistakes or misdeeds. A participant cannot claim any ownership interests in the company’s assets, either individually or jointly, during the company’s lifespan or during its winding up. 

In the case of Bates v. Standard Land Co[1]., the court had to decide if a person’s personality differed from that of a corporation. A corporation is a fictitious entity. An organisation is a corporate body that exists independently of its owners (shareholders). It has legal existence but it is incapable of acting on its own. It must work by a board of directors that has been elected by the shareholders. As a result, a corporation has its own legal identity. 

An organisation has complete control of the land it owns and can handle it in whatever way it sees fit. It would enter into arrangements, open bank accounts under its own name, and sue and be sued both by its members and by outsiders. It may form a commercial or personal relationship with one or more individuals. It would buy the shares or debentures of another firm. A company’s Memorandum of Association requires it to form other companies by subscribing to it. 

A company may be held liable for fraudulent acts. It may be found guilty of violating the law and fined. A business, on the other hand, cannot be locked up. It may face charges of defrauding others or falsifying documents with the intent to deceive. It will also be held liable for all injuries sustained by its employees while on the job. 

The company is therefore recognised as a separate legal entity having its own legal existence under the Income Tax Act. A company is said to be in this group if it has to pay income tax on its profits. 

In State Trading Corp. of India v. CTO[2], company pleaded that since all of its owners are Indian nationals, the company should be considered as such and receive all of the privileges accorded to Indian citizens.

The Court dismissed the case, concluding that neither the Constitution nor the Citizenship Act apply to the corporation. While a corporation does not have human rights, it is treated like an individual in the eyes of the law. It has the authority to make arrangements with its Board of Directors, shareholders, and outsiders. 

In the case of Oakes v. Turquand and Hording[3] in 1867, the House of Lords acknowledged the idea of the company as a separate legal entity. The year was 1867. It was also determined that, since an organised organisation has a different legal name from its shareholders, a creditor of such a company has only one remedy: to sue the company itself, rather than an individual shareholder. 

A borrower to an incorporated corporation has only one recourse for his debts: the company itself, not all of its owners. Salomon v Salomon & Co.[4] is a well-known case in which the concept of independent legal existence or separate legal entity was clarified and stressed. The below are the specifics of the case: Mr. Salomon was the proprietor of a thriving shoe manufacturing and retail operation. Salomon and Co. Ltd., which consisted of Salomon, his wife, his daughter, and his four sons, bought his company for £40,000. (7 shareholders).  

The final payment of the sales price was made in cash to Mr. Salomon by the firm by the allotment of & 20,007 shares and £ 10,000 debentures. The debentures had a floating fee on the company’s value. Salomon received 20001 shares with a face value of £1 each. The remaining six members of his family each bought one share for £1. Salomon and his two sons were the company’s directors. The executive director was Salomon. Thanks to the downturn in the economy, the corporation was forced to close within a year. 

The state of affairs at the time was as follows: Saloman as a guaranteed borrower and debenture holder has £10,000 in assets, while unsecured creditors have £7,000 in liabilities. As a result, it had £11,000 in savings but £11,000 in liabilities. 

The company’s unsecured creditors said that, after being incorporated under the Act, the company never existed on its own; it was simply Salomon disguised as a corporation.  Salomon and the corporation were indeed the same guy. But the House of Lords maintained that a company’s life is separate and distinct from its owners. Shareholders may also be the company’s creditors. The company’s distinct and autonomous identity was recognised by the judge. 

One claim advanced on behalf of unsecured creditors was that the corporation was merely Mr. Salomon’s employer, and that the firm really belonged to him rather than the company. The Court stated that this is not the case, and that Mr. Salomon was the company’s agent, not the other way around. 

Salomon’s case proved without a shadow of a doubt that, under law, a licenced corporation is a separate legal body from its members, even though the individual owns any of the company’s shares, i.e. a company has separate legal presence. In theory, no difference lies between a corporation of just two owners and a company of two hundred members. The corporation is a different legal body in any case. 

In Lee V. Lee’s Air farming Ltd.[5] the concept developed in Saloman’s case was also applied. Lee incorporated a corporation with a share capital of £ 3000 for the purpose of carrying out his own aerial top-dressing firm. Lee bought £ 2999 worth of stock. He was also the beneficial owner of the stock and the company’s only “governing officer.” He also had himself hired as the company’s chief pilot, and he forced the company to protect him from liability to pay penalties under the Workmen’s Compensation Act, as required by law. 

A flying accident claimed his life. His widow was awarded money for the husband’s death while on the job. The court decided that Lee was a different entity from the corporation he established, and that the widow was entitled to compensation. As a result of the corporate personality rule, Lee was able to be both the master and the servant at the same time. 

As a result, a corporation and its shareholders are two distinct legal entities with separate legal lives. 

The theory of a company’s independent legal entity was upheld by the Calcutta High Court years before the famous Salomon case. Any people owned a tea estate in Re. Kondoi Tea Co Ltd.[6] They handed it over to a company. They said they were free from ad valorem obligation because it was merely a switch from them to themselves under a different name.

“The Company was a distinct entity entirely from the owners, and the sale was as much a conveyance, a transfer of land, as the shareholders had been entirely different persons,” the court said. i.e. a corporation has its own legal existence. 

Abdul Haq was a business employee in the case of Abdul Haq v. Das Mai[7]. He hadn’t received his pay in a long time. He filed a lawsuit against Das Mai, a company owner, to reclaim the money owed to him. He will not survive, because “the solution rests against the corporation, not against the directors or members of the company,” according to the ruling. 

The Court characterised company in the case of Trustees of Darmouth College v Woodward[8] as “a entity, artificial, unseen, intangible, and existing only in the eyes of the law.” Being a mere construct of law, it only has the properties that the charter of its creation bestows on it, either explicitly or by mistake of its very existence.” 

The Bombay High Court said in T. R. Pratt (Bombay) Ltd. v. E. D. Sasson & Co. Ltd.[9], that “under the constitution, an incorporated corporation is a distinct entity, and while all the shares can be practically owned by one individual, a company is a distinct entity in law.” i.e., a corporation has its own legal existence. 

A landlady did not obtain custody of tenanted property for her own business in Turnstall v. Steigman[10], since the premises belonged to her in her own capacity, while the business was run by her in the form of a corporation. 

In the case of Dhulia – Amalner Motor Transport Ltd. v. R. R. Dharamsi[11], a number of partners in a partnership formed a private corporation and leased buses to the company that were already used by their partnership business. When the firm’s other partners filed a lawsuit over accounts and their share of the bus income. It was decided that such a suit could not be maintained. The buses are the company’s property, not its shareholders; as a company is created, it becomes a separate and distinct body from its shareholders. i.e. a corporation has its own legal existence. 

A individual who owned all of the shares of a timber company, except one, protected timber belonging to the company in his own name in Macaura v. Northen Assurance Co. Ltd.[12] When the wood was burned by the fire, it was determined that he was not entitled to claim from the insurance companies because he had no insurable stake in the land, which belonged to the company rather than him. 


[1] Bates v. Standard Land Co, 602 F.2d 990 (5th Cir. 1979).

[2] State Trading Corp. of India v. CTO, 1963 SCJ 705 .

[3] Oakes v. Turquand and Hording, (1867) LR 2 HL 325.

[4] Salomon v Salomon & Co., (1897) AC 22.

[5] Lee v. Lee’s Air farming Ltd., (1961) AC 12 .

[6] Re. Kondoi Tea Co Ltd., 1886 ILR 13 Cal 43 .

[7] Abdul Haq v. Das Mai, (1910) 19 IC 595.

[8] Trustees of Darmouth College v Woodward, (1819) 17 US 518.

[9] T. R. Pratt (Bombay) Ltd. v. E. D. Sasson & Co. Ltd., AIR 1936 Bom 62 .

[10] Turnstall v. Steigman, (1962) 2 WLR 1045 .

[11] Dhulia – Amalner Motor Transport Ltd. v. R. R. Dharamsi, AIR 1952 BOM 337 .

[12] Macaura v. Northen Assurance Co. Ltd., (1925) AC 619 .

Leave a Reply

Your email address will not be published. Required fields are marked *