Can Companies Be Sued by Public in India?

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A company refers to a group of people working towards achieving a common objective. In legal terms Section 2(20) of the Companies Act 2013 defines company as, “a company incorporated under this Act or under any previous company law”. In other words, it can be said that a company is a legal entity formed by a group of individuals incorporated by fulfilling the legal requirements as given in the Company Act 2013 or any previous act. The article will deal the status of company as a separate legal entity and simultaneously try to find the whether a company can be sued.

Company as an artificial person

A company is considered as an artificial person because it is considered as a separate legal entity in the eyes of law. On breaking down the statement word by word, it may be inferred that the company is artificial as it is created by a due process and not by natural birth. It is a legal entity as by following the due procedure it gets recognised in the eyes of law and it is a separate entity different from its members.

Doctrine of Corporate personality

The incorporation of a company is an artificial entity recognized by the law as a legal person that exists independently with rights and liability. Therefore, it is treated as a separate person from its members. This feature of the company is based the principle of corporate personality, which means that the company is recognized as a separate legal entity, an artificial personality which has certain rights and duties. The doctrine of Corporate Personality was approved for the first time in the leading case of Soloman vs Soloman & Co. Ltd[1].

A corporation has a personality of its own which is different from the personalities of the members of the company. A corporation can sue and be sued. A Corporation can enter into contracts and can possess properties. This separate legal personality has the consequence that a company has perpetual succession. However, unlike a natural person, a company can act only through its agents. The life of the company is not affected by the death, disability, insolvency, or disagreement of a shareholder. Its existence ends when it is wound up pursuant to the Companies Act. The shareholders may come or go the life of the company like an artificial person is least affected by these changes. Law provides special procedure for winding up of a corporation.

The liability of the shareholders is limited to the value of the shares held by them, it means if a company fails to pay its obligations, the personal properties of the shareholders cannot be sold for the settlement of business debts. Hence a company is an artificial or fictitious person created by the personification of a group or a series of individuals. The individuals forming the corpus of the corporation are called its members. In simple words, it is an organized the body of coexisting or successive persons, which by a legal fiction is regarded and treated as itself a person.

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Offences and Penalties under Companies Act

According to a report[2] the Companies Act, 1956 provides the legal basis for various corporate governance norms that are considered essential for proper corporate operation and protecting the rights of stakeholders. The violations of such norms are defined as offences with associated penalties. Essentially, law should be such that all subject entities should comply with it in their own interest. Nevertheless, it would be unrealistic to expect that all companies would voluntarily comply with the framework. There would be some entities that would seek gains at the cost of legitimate rights of others, sometimes by fraudulent behaviour or through violation of the legal regime.

However, law must provide clear definition with respect to the constitution of an offence and provide penalties that act as deterrent to companies from taking such action. Simultaneously, it should provide for procedure that enables application of penalties promptly and effectively. There is also a need to provide for a regime of penalties commensurate with the offence. Actions violative of governance provisions in a manner that deprive the shareholders of their rights need to be treated seriously. According to the Committee all fraudulent behaviour should be addressed through stringent penalties, so that they may not be repeated in the future. Inadequate, wrong, or fraudulent disclosures, or actions that do not allow shareholders democracy or a competitive market for corporate control to operate also need to be addressed through suitably deterrent provisions.

Need to protect the rights of stakeholders

The violations of a procedural nature do not irretrievably damage the stakeholders’ rights need to be treated differently. A person committing an offence referred to in the Second schedule of the Companies Act 2013 i.e., offences punishable with imprisonment or with imprisonment along with penalty may be proceeded against in the criminal Court but only with the previous approval of the Central Government or any other authority specified by the Central Government. The prosecution is launched unless the offender is provided with a reasonable opportunity of being heard in the matter.

A suitable mechanism should exist in the amended Act for transfer of proceedings pending in the Court to the proposed in-house structure of dealing with the first schedule offences. The Committee also deliberated upon the problem arising from the directors/management of a company acting in a manner that is deliberately detrimental to the company and then resuming operations again under a separate name or guise.  It is understood that this phenomenon is noticed in other economies and is   termed as the “phoenix problem”. This problem results from continuance of the activities of a failed company by those responsible for the failure, using the vehicle of a new company.

The new company, often trades under the same or a similar name, uses the old company’s assets, often acquired at undervalue and exploits its goodwill and business opportunities. Meanwhile the creditors of the old company are left to prove their debts against a valueless cell and the management to conceal their previous failure from the public.

However, it is to be recognized that not all legitimate businesses succeed at the first attempt and there may be occasions where honest individuals may, through misfortune or lack of expertise find that they cannot make the business run successfully. In such cases, it would be appropriate for them to seek rehabilitation or place their company in liquidation on voluntary basis. The Committee feels that this issue should be addressed through a combination of disclosures, insolvency processes and disqualifications of delinquent directors. Law should recognize the “Whistle Blower Concept” by enabling protection to individuals who expose offences by companies, particularly those involving fraud. Such protection should extend to normal terms and conditions of service and from harassment. Further, if such employees are themselves implicated, their cooperation should lead to mitigation of penalties to which they may otherwise be liable.

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A company is an artificial person which has a separate legal entity and accrues certain rights and liabilities. This implies that it can sue and be sued. Therefore, in India, when a company commits a fraud, or fails to provide the services or quality of the product as promised by it, the consumers of that service or product can file a complaint against that company and sue it for not promising the promised product or the service. Adding to this, a company can also be sued by public in a class-based action suit under section 245[3] of the Company Act, 2013.

Therefore, it can be concluded that a company has a separate personality of its own as stated given under the doctrine of corporate personality and it can sue and be sued by the public.

[1] Soloman vs Soloman & Co. Ltd (1897) A.C 22 (1895-99) All E.R. 33 (H.L).  

[2] Offences and penalties, Reports of the Expert Committee on Company Law, Ministry of Corporate Affairs, Government of India.

[3] Companies Act, 2013, Section 245