Is a Private Company a Juristic Person?

Introduction

A company, in layman terms, is an association of persons who have come together to attain a common economic or social goal. There is no strict legal meaning for this term. The Companies Act, 2013, which regulates companies, describes a company under Section 2(20) as “a company incorporated under this Act or under any previous company law.” Therefore, any company which was either incorporated under the present or the old Act, is termed as a company.

A private company is defined under Section 2(68) of the Companies Act, 2013 as having a minimum paid up share capital as prescribed and which restricts the right to transfer shares through its articles. It cannot have more than 200 members and prohibits public subscription of its securities.

Chief Justice Marshall defined company in Trustees of Darmouth College v. Woodward as “a person, artificial, invisible, intangible and existing only in the eyes of the law. Being a mere creation of law, it possesses only those properties which the charter of creation confers upon it either expressly or as accidental to its very existence.”[1] This definition of a company emphasises upon the juristic persona of the company. Section 9 of the Companies Act, 2013 states that any company incorporated under the Act would be a body corporate having a separate juristic entity. It does not distinguish between a public and private company. Therefore, all private companies are juristic persons.

To demonstrate the meaning of a separate juristic entity, consider the following example. There is a private company named XY Co. Ltd., where the shareholders are X and Y. the property of XY Co. Ltd. is not the property of X and Y. Further, if X or Y gives a secured load to the company, they are valid creditors in the eyes of law.

This paper provides the historical background and the resultant characteristics of a private company due to its juristic persona. A juristic persona and a natural persona are distinct in the sense that a juristic persona can only be in accordance of law, while a natural persona is inherent.

History

It is a well-settled principle of company law that a company is a separate juristic entity from the members. This is because the company has a distinct juristic personality as an artificial person and can sue or be sued. The primary case which laid importance on the concept of separate juristic entity of the company is the case of Salomon v A Salomon and Co Ltd.[2]

Salomon v A Salomon and Co Ltd

Facts-Mr. Salomon incorporated a company with himself and his family members as the only shareholders. He himself gave the company a loan as a secured creditor and took some loans from some other unsecured creditors. When the company was wound up, he claimed the payment as a secured creditor.

Contentions– The unsecured creditors claimed that there is no distinction between the company and Salomon and he is using it to defraud the other creditors. Solomon claimed that the company is a separate juristic entity and therefore, he is liable to claim payment as a secured creditor.

Issue– Whether the company is a separate juristic entity from its shareholders, even if all the shareholders are from the same family?

Held– The Court held that the company is a separate juristic entity from its members and therefore, Salomon’s claim to the company as a secured creditor is valid.

Observation– The Court observed with regards to the doctrine of separate juristic entity-

“According to the law, a company is a different person altogether, it is not an agent of any shareholder or any other person. The company had a legal personality. Once a company is established it must be taken as an independent person with its rights and liabilities.”

Therefore, even if all the shares of the company are in essence held by one person, the company is still separate from its shareholders. This case did not create a separate distinction between private and public companies, and stated that all companies have a separate juristic entity. While Solomon’s case is considered a landmark judgement in most common law countries, the existence of separate juristic entity was recognized in India even before that in Kandoli Tea Co. Ltd., re.[3]

Kandoli Tea Co. Ltd., Re

Facts- some persons transferred their own property of a tea estate to the private company. They claimed that the transfer was made to oneself, as they were the only shareholders and therefore, was exempt from tax.

Issue– whether transfer from the shareholders to the company amount as a taxable transaction?

Case-Laws

The following case-laws demonstrate the separate juristic entity principle in action-

TR Pratt (Bombay) Ltd. v. ED Sasoon & Co. Ltd.[6]

The court held that one person companies also have a separate juristic entity. A one person company is allowed under the Companies Act, 2013 and only has one member or shareholder. The court has consistently held that even such OPCs have a separate juristic entity, even though there is only a single member in the company.

State Trading Corp. of India v. the Commercial Tax Officer [7]

Issue– Whether a company having separate juristic entity be held to have citizenship and consequently fundamental rights under Article 19 of the Indian Constitution?

Held– the court in this case did not imbibe citizenship to a corporation.

Observations– The court observed that while a company has a separate juristic entity as well as a nationality, it cannot be said to have citizenship as it gives the corporation civic rights which are a part of municipal law. The political and fundamental rights cannot be given to a corporation under the wide ambit of Article 19 as it would lead to the misuse of law.

Dhulia Amalner Motor Transport Ltd. v. Raychand Rupsi Dharamsi[8]

Facts– Some partners from a partnership which was in the business of plying buses, opened a company while continuing their partnership business. They sold the buses from the partnership to their company, which led to the minority partners filing a suit for accounts of the company and their share in profits.

Issue– whether the transfer from the partnership firm to the company where the partners and shareholders are the same, constitutes a valid transaction?

Held– the court rejected the contentions of the minority partners and stated that the company is a separate juristic entity and therefore such transaction is valid.

Features of a private company

Once a private company is incorporated, it achieves the juristic personality and along with the juristic personality, comes other characteristics which are defining for the company. These features are as follows-

Separate juristic identity- on the incorporation of a company, it in envisaged with a separate juristic entity which segregates the company from its members.
Limited liability- a company is either limited by shares or by guarantee. In a company limited by shares, the shareholder is liable only upto the value of unpaid share capital. For example, if the share price is Rs. 100 and a person holds one share with paid up capital of Rs. 80, he is only liable to pay the remaining Rs. 20 and not more than that. For a company that is limited by guarantee, a member’s liability is only that which such member undertakes to pay during the time of its winding up.
Common seal- a common seal is like the official signature of the company. Any transactions entered into by the agents of the company have to have this common seal of the company.
Perpetual succession- A company has perpetual succession, meaning that even if the members of the company no longer survive, the company would still survive. Therefore, the company is separate from its members, and even in the event of the death of all members, the company’s identity would still stay intact. In the case of K/9 Meat Supplies (Guildford) Ltd. Re,[9] due to a hydrogen bomb, all the members of a private company died. However, the court held that the company would still survive as it has perpetual succession. The only way to end the existence of the company is by way of winding up under the relevant provisions and not otherwise.
Transferability of shares- the shares or the segregated capital units of the company are freely transferable, subject to the restrictions in the memorandum and articles of association of the company. These restrictions differ greatly for private and public companies. In essence, the company’s shares are freely transferable and a shareholder, can leave the company be selling his shares (subject to the restrictions). This has also been provided in Section 44 of the Companies Act, 2013.
Separate property- the company’s property is separate from its members. Any civil liabilities or assets are of the company and not its members. The company has the power to buy and sell property in its own name. In Macaura v. Northern Assurance Co. Ltd.,[10] a single person held all of the shares in the company except one. He got insurance for the timber in his own name, which was destroyed in a fire. The court held that the insurance company is not liable to the company, as the company’s property is separate.
Capacity to sue and be sued- a company is liable to sue and be sued in its own name due to the principle of separate juristic entity. Under Order 33 Rule 3 of the Civil Procedure Code, 1908, a company is allowed to sue in forma pauperis. Even a criminal complaint can be filed by a company, as long as the representation is made by a natural person.
Professional management- one of the primary features of a company is the distinct between ownership and governance of the company. The ownership is held by the shareholders, whereas the governance is carried out by the Board of Directors. A company’s shareholder can hire professional management to take the primary decisions in the company and further its growth and development.

Disadvantages of incorporation and separate juristic entity

Loss of privacy- a company which is incorporated under the Companies Act, 2013, has to make a lot of disclosures and file all material documents to the Registrar of Companies. This leads to a loss of privacy for the company as this information is disseminated in the public and anyone can gain access to it with a nominal fee.
Divorce of control from ownership- A significant feature of an Indian company is the segregation of ownership and control. So while the money is invested by one person, the majority of decisions are taken by the Board of Directors and the Management of the company. This may lead to abuse of power by the governing and managing body, leading to problems in corporate governance.
Difficult winding up procedure- the winding up procedure for a company is elaborate and requires a plethora of compliances and disclosures. This creates a lot of hassle in the winding up and abolition of company’s activities.
High rate of taxation- A company has to bear a much higher rate of taxation, i.e. 30% as compared to individuals.
Red tapism- the compliances that a company has to obey comes with a high cost. There are costs involved in incorporation as well as following the formal procedure.
Frauds- a company can indulge in greater frauds and wrongful acts as the control is only in the hands of the few and the power to subscribe capital from the public is higher. This can also lead to a downfall in the economy or a certain industry.

Also Read Can a Government Employee be a Director in a Private Company?

Conclusion

The incorporation of the private company, while provides it with various benefits like a separate juristic entity, common seal, capacity to sue and be sued, limited liability, etc., there are also several disadvantages that should be considered like the loss of privacy and red tapism. It is also pertinent to note that even though the company is separate from its members, its work is done by directors who have the power to control the company’s actions. This corporate veil can be lifted in various cases of criminal liability like fraud, misrepresentation, etc.

References:

[1] Trustees of Darmouth College v. Woodward, (1819) 17 U.S. 518.

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

[3] Kandoli Tea Co. Ltd., re, ILR (1886) 13 Cal 43.

[4] Lee v. Lee’s Air Farming Ltd [1961] AC 12.

[5] Macaura v. Northern Assurance Co. Ltd. [1925] AC 619.

[6] TR Pratt (Bombay) Ltd. v. ED Sasoon & Co. Ltd., AIR 1936 Bom 62.

[7] State Trading Corp. of India v. the Commercial Tax Officer, 1963 AIR 1811.

[8] Dhulia Amalner Motor Transport Ltd. v. Raychand Rupsi Dharamsi, AIR 1952 Bom 337.

[9] K/9 Meat Supplies (Guildford) Ltd. Re, (1966) 3 All. E.R. 320.

[10] Macaura v. Northern Assurance Co. Ltd. [1925] AC 619.