Company as Separate Legal Entity

The principle has been established very long that a company is a separate legal entity in the case of Salomon and in India it was established in In re Kondoli Tea Estate that a company is a separate legal entity. Later on, in different cases, it has been reiterated that a company is separate from its shareholders and directors. The company cannot be held liable for the wrongdoings of its shareholders and directors. When it is found out that a wrong has been committed then the Court will lift the corporate veil to find that the real offender behind the wrongdoing.
Estimated Reading Time: 13 minutes

Introduction

Law till date has been bifurcated into rights and duties of two entities/types of persons i.e. the natural and artificial person. Natural persons refer to human beings while an artificial person refers to any creation of Law that possesses the same or similar rights to that of a natural person. A company as Separate Legal Entity is a concept in India.

One such creation is the ‘Corporate Personality’. However, just being a creation of law does not entitle the company to have rights similar to that of a natural person.

Theories of Corporate Personality

The majority of these theories follow the principle that a company/corporate body are artificial entities. The legal fiction, purpose, symbolist (bracket) and concession theories propound that they exist merely because the state has wished for it by statute and for fulfillment of certain objectives. This creates friction between the two major theories of corporate personality namely, Realist Theory and Fiction Theory.

The Fiction theory propounds that the corporation is the creation of legal fiction and exists only because the law directs it to exist. However, with the changing times, such theories were slowly put aside. It can be observed that there are instances where a corporate as a juristic entity has enjoyed rights, intended solely for natural persons e.g. human rights, constitutional rights, etc. The Realist view promulgates that law has the power to grant recognition to any entity but it cannot create any such entity.

To understand the essence of the problem and analyze the present legal situation concerning the Juristic personality of a corporation, it becomes essential to familiarize ourselves with the more concepts.

Juristic Personality

Juristic person,[1] also known as a legal person, is an entity created by employing law existing in a particular legal system for a certain purpose. Law does not allow a Juristic Person to ‘be’ a natural person but allows it to ‘act’ as a natural person in furtherance to the objectives entrusted to it. 

Corporations are undoubtedly legal persons [2] and the better view is that registered trade unions and friendly societies are also legal persons, though not registered as corporations.

It is pertinent to state that these entities do possess legal rights and duties. Such a feat is not possible without the attainment of a ‘personality’ trait by them.

The most commonly observed juristic persons include companies, co-operatives, municipalities, partnerships, political parties, sovereigns, states, and ships. However, not all juristic persons have attained the ‘personality’ trait. Ships, for example, cannot be made liable for any wrongs; it is always the Captain of the ship or a particular person that is charged with any offense.

Legal Personality

The predicament was resolved in the case of Salomon v. A. Salomon Co Ltd[3] where the corporation was found to possess a separate legal ‘personality’ than that of its shareholders. Though this decision paved the way and acted as a building block on the principle of separate legal entity; it would not be correct to state that the concept originated from this case itself.

In the case of company law, this principle justifies the various attributes of a company such as perpetual succession, ability to own property, right to sue and be sued and limited liability. It could be said, that the courts employed the fiction theory while deciding Salomon v. A. Salomon Co Ltd[4] to bring out all the salient features of the company into the purview of a juristic person.

Kind Of Corporations

Corporations are of two kinds:

I. Corporation aggregate

II. Corporation sole

Corporation Aggregate

Corporation aggregate is a group of co-existing persons, a combination of persons who are united together to promote their common interest which is generally the business or commercial interest. It has been defined as a collection of individuals united into one body under a special denomination and having perpetual succession under an artificial form vested by the policy of the law. They are also allowed to act out as individuals and do such acts such as of taking and granting property, contracting obligations and suing and being sued, enjoying privileges and immunities and of exercising a variety of political rights, according to the powers conferred upon them, either at the time of its creation or at any subsequent period of its existence.[5]

Corporate aggregate in India

Under Indian Law, corporation aggregate are all those bodies or associations which are incorporated under a statute of Parliament or State legislature. All trading and non-trading associations which are incorporated under the relevant laws like the state trading corporation, municipal corporation, roadways corporations, the public companies, Reserve Bank of India, the life insurance corporation, the Universities, Panchayats, trade unions, co-operative societies fall under this category

Judicial Precedents on Corporate Aggregate

  1. In Board of Trustees v. State of Delhi[6], the Hon’ble Supreme Court discussed in detail the characteristics of corporate aggregate. In this case, the court ascertained whether the Board of Trustees of Ayurvedic and Unani Tibia College was a corporation aggregate or not. The court held that the Board is not a corporation. Their Lordships observed that the most important point to be noticed in this connection was that in the various provisions of the Societies Registration Act, 1860, there were no sufficient words to indicate an intention to incorporate. On the contrary, the provisions show that such intention was absent. Hence, the Board could not be a corporate aggregate because the essential characteristic of a corporation aggregate, namely, that of an intention to incorporate the society was absent. The court  further observed that a corporation aggregate has one main capacity, namely, its corporate capacity. The corporate aggregate may be a trading corporation or a non-trading corporation.
  • The decision of the Calcutta High Court in Kondoli Tea Co. Ltd., Re[7] seems to be the first on the subject. In this case, certain persons transferred a tea estate to a company and claimed exemptions from ad valorem duty on the ground that they were the shareholders in the company and therefore it was nothing but a transfer from them to themselves under another name. Rejecting their contention, the Court observed that “the company was a separate person a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property as if the shareholders had been different persons.”  In several other cases, this principle has been recognized.

Corporation Sole

Corporation sole is an incorporated series of successive persons. It implies two persons to exist under the same name, the one a human being and the other, the corporation sole, which is a creature of the law and continues to exist through the human being’s changes. “The live official comes and goes”, said Salmond in a passage which has become the classic description of the corporation sole, “but this offspring of the law remains the same forever”. The most outstanding example of Corporation Sole is the Crown (in England). Two persons are deemed to be occupying the throne of England- one the queen in flesh and blood and the other is the Corporation sole which is the creature of law. The Queen never dies though the Queen in flesh and blood may die.

In India, various offices like that of the Governor of the Reserve Bank of India, the Post Master General, the General Manager of Railways, the Registrar of Supreme Court and High Courts, etc. are created under different statute are some example of Corporation sole.

Judicial Precedents on Corporate Sole

In Govind Menon v. Union of India[8], the Supreme Court pointed out the main characteristic of a corporation sole. The court observed the Corporation sole is not endowed with a separate legal personality. It is composed of one person only who is incorporated by law. The same person has a dual character, one as a natural person and the other as a Corporation sole, the latter being created by Statute. In this case the court rejected the contention of the appellant that the commissioner has a separate legal personality as corporation sole under section 80 of the Act. Madras Hindu Religious and Charitable Endowment Act 19 of 1951 states that the commissioner shall be a corporation sole and shall have perpetual succession and a common seal and may be sued in his corporation name. The court observed that he is exempt from disciplinary proceedings for any act or omission committed in his capacity as commissioner. Their lordships observed, “In our opinion, the object of the legislature in enacting section 80 and 81 of the Act was to constitute a separate fund and to provide for the vesting of that fund in the commissioner as a corporation sole and thereby avoid the necessity of periodic conveyance in the transmission of title to that fund.”[9]

The idea of corporation sole originated, according to Maitland, with a piece of land, known as the parson’s globe, which was vested in a person in his official capacity. Difficulties arose as to the conveyance (legal paper transferring ownership of property) of the Seisin[10] to a person for the benefit of the church. The Corporation sole was invented so that the Seisin could be vested in it. Today, under English law, many bodies like a public trustee, bishop, the postmaster General etc. can be said to be examples of Corporation sole.[11]

Company as Separate Legal Entity

A company as separate legal entity and has a distinct identity. It is treated differently from its members.  Generally, in case of liability of the company, the company is held liable and not its individual members, inversely if an individual is liable then the company cannot be held responsible for the actions of the individual member of that company. Any individual cannot claim the title or share on the property totally or jointly during the winding up of the company. The members of the company can enter into a contract on and behalf of the company.

The separate legal entity of the company is also recognized by the Income Tax Act. Where a company is required to pay Income-tax on its profits and these profits are distributed to shareholders in the form of dividends, the shareholders have to pay income tax on their dividend income. This proves that a company and its shareholders are two separate entities.

Judicial Precedents on the principle of separation of legal entity

  1. The principle of separation of legal entity was explained and emphasized in the famous case of Salomon v Salomon & Co. Ltd.[12] The facts of the case were as follows: Salomon had, for some years, carried on a prosperous business as a leather merchant and boot manufacturer. He formed a limited company consisting of himself, his wife, his daughter and his four sons as the shareholders, all of whom subscribed to 1 share each so that the actual cash paid as capital was £7. Salomon sold his business (which was perfectly solvent at that time), to the Company formed by him for the sum of £38,782. The company’s nominal capital was £40,000 in £1 shares. In part payment of the purchase money for the business sold to the company, debentures of the amount of £10,000 secured by a floating charge on the company’s assets were issued to Salomon, who also applied for and received an allotment of 20,000 £ 1 fully paid shares. The remaining amount of £8,782 was paid to Salomon in cash. Salomon was the managing director and two of his sons were other directors. The company soon ran into difficulties and the debenture holders appointed a receiver and the company went into liquidation. The total assets of the company amounted to £6050, its liabilities were £10,000 secured by debentures, £8,000 owing to unsecured trade creditors, who claimed the whole of the company’s assets, viz., £6,050, on the ground that, as the company was a mere ‘alias’ or agent for Salomon, they were entitled to payment of their debts in priority to debentures. They further pleaded that Salomon, as a principal beneficiary, was ultimately responsible for the debts incurred by his agent or trustee on his behalf. Salmon was the owner of a boot company in which he made himself and his family members preferential shareholders. Their Lordships of the House of Lords observed: “…the company is a different person altogether from the subscribers of the memorandum; and though it may be that after incorporation the business is precisely the same as before, the same persons are managers, and the same hands receive the profits, the company is not, in law, their agent or trustee. The statute enacts nothing as to the extent or degree of interest, which may, be held by each of the seven or as to the proportion of interest, or influence possessed by one or majority of the shareholders over others. There is nothing in the Act requiring that the subscribers to the memorandum should be independent or unconnected, or that they or any of them should take a substantial interest in the undertakings, or that they should have a mind or will of their own, or that there should be anything like a balance of power in the constitution of company.
  2. Lee v. Lee’s Airfarming Ltd.[13]  of the 3000 shares in Lee’s Air Forming Ltd., Lee held 2999 shares. He voted himself the managing Director and also became Chief Pilot of the company on a salary. He died in an air crash while working for the company. His wife was granted compensation for the husband in the course of employment. Court held that Lee was a separate person from the company he formed, and compensation was due to the widow. Thus, the rule of corporate personality enabled Lee to be the master and servant at the same time.
  3. The principal was earlier recognized in the Indian case In Re Kondoi Tea Co Ltd.[14] in which members of tea estate claimed themselves to be company to evade from loan. The Court held that the company is a separate legal entity and the directors are liable for the acts done by them.
  4. In the case of Gilford Motor Co. Ltd v. Horne[15], the Managing Director of a company agreed not to petition customers from his employers. When he was leaving employment he set up his own company and began to implore customers but the courts ruled that this was purely to hide his own mismanagement in the old company and held him liable for fraud. Legislation may also highlight fraudulent trading, reckless trading, and the existence of a group of companies. Highlighting the effects of fraudulent or wrongful trading the court held “The directors will be personally liable to contribute towards paying the company’s debts. The distinction between them and the company as a separate persona is disregarded.”
  5. When an English subsidiary was formed by an American company so that they could make and sell tyres in the European market in the case of Firestone Tyre & Rubber Co. v. Llewellyn,[16] the courts held the American company was liable to pay tax on the profits of the subsidiary. Even though the subsidiary was independent in its day to day business, it would transfer profits to the American company after deducting a specific sum. The courts ruled that the subsidiary was an agent for the American company and it was, therefore, liable to pay tax on the English profits.
  6. The courts have the power to lift the corporate veil of a company. In Holdsworth & Co. v. Caddies[17] Caddies was the managing director of the Holdsworth parent company. It was argued that he could not be disciplined to dedicate all his time to the subsidiaries given they all had their own board of directors. Lord Reid at pg 367 emphasized that “an agreement in re moratoria and must be construed in light of the facts and realities of the situation”
  7. The Supreme Court in M/s. Electronics Corporation of India Ltd. v. Secretary, Revenue Department[18], inter-alia observed that a clear distinction must be drawn between a company and its shareholders, even though that shareholder may be only one i.e. the Central or a State Government. In the eyes of the law, a company registered under the Companies Act is a distinct legal entity other than the legal entity or entities that hold its shares.

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 any change in it does not affect any individual membership. A company 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 several or joint owners of the company’s property.

  • In Bacha F Guzdar v. CIT Bombay[19] it was held that the company is a real person in which all its property is vested, and by which it is controlled, managed and disposed of”.
  • In Macaura v. Northern Assurance Co Ltd[20] it was held that “the property of a company is not the property of the shareholders; it is the property of the company”.

Conclusion

The principle that a company as separate legal entity is well established in the case of Salomon and Kondoli Tea Estate. The courts have also reiterated that a company is separate from its shareholders and directors and it cannot be held liable for the wrongdoings of its shareholders and directors. When it is found that a wrong has been committed, the Courts have the power to lift the corporate veil.

Read about Lehman Brothers’ Bankruptcy of 2008


[1] Prof. Aggrawal Nomita, on Jurisprudence, Page 177-1, Central Law Publication. 8th Ed., (2010).

[2] State Trading Corporation of India v. Commercial Tax Officer, AIR 1963 SC 1811.

[3] Salomon v A Salomon and Co Ltd, [1897] AC 22.

[4] Ibid.

[5] Halsbury‟s Laws of England, (3rd Ed.) Vol. 9 P.4.

[6] Board of Trustees v. State of Delhi, AIR 1962 SC 458.

[7] Kondoli Tea Co. Ltd., Re, (1886) ILR 13 Cal 43.

[8] Govind Menon v. Union of India, AIR 1967 SC 1274.

[9] Prof. Aggrawal Nomita on Jurisprudence 8th Ed. (2010) Page 177-178.

[10] Means Feudal Possession.

[11] Supra note 9.

[12] Salomon v. Salomon & Co. Ltd ,[1896] UKHL 1, [1897] AC 22.

[13] Lee v. Lee’s Air farming Ltd., (1961) A.C. 12.

[14]In Re Kondoi Tea Co Ltd, (1886) ILR 13 Cal 43.

[15] Gilford Motor Co. Ltd v Horne (1933) Ch 935 CA.

[16] Firestone Tyre & Rubber Co. v. Llewllin (1957) 1 All ER 561.

[17] Holdsworth & Co. v. Caddies (1955) W.L.R. 352, H.L.

[18] M/s. Electronics Corporation of India Ltd. v. Secretary, Revenue Department, AIR 1999 SC 1734.

[19] Bacha F Guzdar v. CIT Bombay, (1955) 1 SCR 876.

[20] Macaura v. Northern Assurance Co Ltd, 1925 AC 619 HL.

Hey there!

come here often?

Login To Come In