Owner of Property in Case of a Company

INTRODUCTION: OWNER OF PROPERTY IN CASE OF COMPANY

“Ownership” is a bundle of rights attached to a property. It represents the state or fact of exclusive rights and control over property. In case of Company, though the property is brought in by members, but the ownership lies with the Company. It is so because of an essential feature of Company i.e., its “separate legal identity”. thus, a Company being a legal person distinct from its members, is capable of owning, enjoying & disposing of property in its own name. Although its capital and assets are contributed by its shareholders, they are not the private and joint owners of its property. The company though an “artificial judicial person” still enjoys every right of a real person pertaining to its property, thus, company itself is the real owner, in which all its property is vested and is entitled to control, manage and dispose of.

This power of selling, giving on lease or disposing of the whole or substantially the whole of the undertaking of the company is exercised by the board of directors only after the consent of company upon passing special resolution.[1] It can be said that though shareholders are not the actual owners of property belonging to the Company, their consent is mandatorily required to take any decision pertaining to sale, lease or disposing of company’s assets. Thus, shareholders are not the owners and company itself is the owner of its property.

RIGHT OF SHAREHOLDER IN THE PROPERTY OF COMPANY: IS SHAREHOLDER AN OWNER?

The underlying principle of separate entity, outlines the limit of rights that a shareholder can exercise against Company’s Property unless otherwise provided in the Articles of the Company. Accordingly, the ownership of property lies with Company itself but in some exceptional cases, shareholders as well as directors are entitled to challenge the sale, lease or dispose of decision of other members or directors, if they are of view, that the said act amounts to mismanagement or oppression & thus, not in favor of Company’s interests. Some case laws iterating the limits of rights exercisable by shareholders on property of Company are:

Macaura v. Northern Assurance Co. Ltd.[2]

Facts: Macaura was the major shareholder & substantial creditor of a Timber Company. He insured the timber against destruction in his own name rather than the name of Company. One day, fire broke out & the timber were destroyed. When Macaura applied to claim insurance amount from Insurance Company. The Insurance company refused to pay Macaura on the ground that he did not own the property in his own name & is not the real owner of timer, thus, not entitled to claim payment as the owner. While, Macaura argued that he is the majority shareholder in the company, thus, he has insurable interest of the timber.

Issue: Can Macaura, being a member & creditor acquire insurance interest in property of Company?

Judgment: It was observed that the timber is the sole property of the company and no person has the right to interfere in the company’s property, even the shareholders have no right to use the property without company’s consent. The insurable interest in the property lies solely with the Company unless it authorises otherwise as it is ultimately the company that has the right over that property and it is at the disposal of the company either to sell or insure that property.

Chiranjit Lal Chowdhuri v. The Union of India And Others[3]

Facts: The petition was filed by Chiranjit Lal Sahu, a shareholder in Sholapur Spinning and Weaving Company limited (Company), for the issue of writ of mandamus & to declare the ordinances ultra vires. The mills of the Company were closed in August 1949 and the government through the ordinance mentioned the reasons of such closure to be mismanagement & failure to create employment. The ordinance gives power the government to appoint any number of members as the directors of the company and terminate the existing company members and managing directors. The Ordinance was repealed by the Sholapur Spinning and Weaving Company (Emergency Provisions) Act in April, 1950 & the provisions were recreated and validated

Issue: Whether the Ordinance and the Act have infringed Petitioner’s fundamental right to property as a shareholder in the said company?

Judgment: It was observed that, a shareholder cannot complain of any infringement of his own rights, because his personal “property” has not been acquired or taken possession of by the State although he has been deprived of his right to vote and to present a winding up petition of the Company by the law. Further, he cannot complain about infringement of right to property of Company because property’s actual owner i.e., company is not interested in said question. Although there are certain exceptional cases where the company’s property is injured by outsiders & a shareholder may take efforts to induce the persons in charge of the affairs of the company to take steps or file a suit on behalf of himself and other shareholders for redressing the wrong done to the company.

Bacha F. Guzdar v. CIT Bombay[4]

Facts: The Assessee held shares in two tea companies. He received the dividend from the shares aggregating to 2750/- rupees. The business that these tea companies carried on was of growing and manufacturing tea. On account of that according to Rule 24 of the Indian Income tax Rules, 1922, the 40% of the income of the company was taxed only, while on the other hand, the remainder of the 60% of the income was exempted from being taxed on account of being agricultural income. The Assessee argued that since the 60% of the income was exempted, thus the same should also apply to the income earned by her as dividends from the shares that she held in the companies. On the other hand, the Income tax department concurred that the whole income received in form of dividend is liable to be taxed.

Issues: Whether shareholder can exercise right over the property of the company to the extent of his proportion of investments?

Judgment: The said issue was contested but court found it important to observe that there is nothing in the Indian law to warrant the assumption that a shareholder who buys shares buys any interest in the property of the company which is a “juristic person” entirely distinct from the shareholders. It is the company which owns the property and not the shareholders thus, the right to enjoy dividends or share in profit does make shareholders entitled to hold any right in Company’s Property. Further, the sum received by shareholder towards the share in profit is fully taxable without any exemption.

R.F. Perumal v. H. John Deavin & Anr.[5]

Facts: Nilgiri Neergundi Estates Co. Ltd (Company) was engaged in business of growing and selling of tea and coffee with a paid-up capital of Rs. 3,67,076, consisting of 2000 seven per cent preference shares of Rs. 75 each, and 108,538 ordinary shares of Rs. 2 each. The Company passed a special resolution stating that the Company should be voluntary wound up & business be transferred to kali Kotagiri Tea and Coffee Estates Co. Ltd upon certain conditions. The consideration for the sale and transfer was the allotment by the purchasing company i.e., the Neergundi Company’s one ordinary share of Rs. 2 each in purchasing company credited as fully paid up for or in respect of every two fully paid ordinary shares in the selling company, in addition to cash payment for consumable of previous financial year. Liquidators were appointed for the same. Both the appellants, Mr. Perumal & Mr. Mahajan, sent notices to liquidator requiring them to purchase their interest respectively at 20 rupees & 24.80 rupees. Due to non-agreement, the application was filed to fix price before arbitrator & later before Court.

Issue: What is the interest of a shareholder by virtue of his holding the shares in a company?

Judgement: Though the said issue was not being contested,it was observed by Madras High Court that a shareholder cannot claim himself to be the owner of the company’s property during its existence or in its winding-up. It is the share which forms the interest of shareholder in the company in the first place. In the eye of law undertaking is different from shareholding, thus, shareholders are not the owners of undertaking. Further, Its true that the net assets are made available for distribution to shareholder at the time of winding up, but it does not mean that the share is an arithmetical fraction of the market value of the said assets.

CONCLUSION

It can be concluded that due to application of doctrine of “separate entity”, the ownership of property lies with the Company & not its members. The members or shareholders can be given such rights in the property as prescribed by the Articles of Association of the Company. The property of Company can only be used for business purposes & not for personal benefits of its member. The property of a company shall, on its winding up, be applied in satisfaction of its liabilities, pari-passu and unless the articles provide otherwise, be distributed among the members according to their rights and interests in the company.

There are certain exceptions to this position which is when a member can proceed before tribunal or any other authority (as the case may be) against other members or directors, if he is of opinion that the property is not being used for business purposes or in the interests of Company or is mismanaged. Hence, though exclusive ownership rights are not enjoyed by the members, right to protect the interest of Company is sufficient to initiate legal proceedings.

References:

[1] The Companies Act, 2013, §180.

[2] (1925) AC 619.

[3] AIR 1951 SC 41.

[4] 1955 AIR 740.

[5] AIR 1960 Mad 43.