Re: The Kondoli Tea Co. Ltd. (1886) ILR 13 Cal. 43

Introduction – Re: The Kondoli Tea Co. Ltd. (1886) ILR 13 Cal. 43

This Re : Kondoli Tea case law is based on the principle that a company is a legal entity or body separate from and capable of surviving beyond the lives of its members. It was also established that whoever the shareholders in the Kondoli Tea Company Ltd were, the company was a separate person, a separate body, and a conveyance to the Company of property which was the property of the sharers in their individual capacity, was just as much a conveyance, a transfer of the property as if the shareholders in the Company had been totally different persons.

Facts

A certain Tea Estate was transferred to a company by a group of 8 people who were the sole shareholders of the company. These eight gentlemen were also the only shareholders of this transfereecompany. The consideration was payable in shares and debentures of the transferee-company. It was contended that this was not really a conveyance or transfer by way of sale, but a mere handing over of the property from one name to one’s own self under another name. The consideration for this exchange was $43,320, the said consideration being payable in shares and debentures of the company taken at par. However, the shareholders of the company refused to pay the ad valorem duty payable on every conveyance on such transfer of the property and hence this case. They tried to avoid the ad valorem duty stating that they were themselves the shareholder of the company. The shareholders’ reason for not paying the tax was that since they were the only shareholders of the company, therefore the transfer of the property was from them to themselves under another name.

Issues

• Whether a document carrying out a particular transaction is a conveyance within the meaning of the definition contained in Clause 9 of Section 3 of the Stamp Act, and within the meaning of Article 21 of Schedule I of that Act?

Judgement – Re: The Kondoli Tea Co. Ltd.

The Calcutta High Court held that Kondoli Tea Company Ltd was a legal entity or body separate from and capable of surviving beyond the lives of its members. Whoever the shareholders in the Kondoli Tea Company Ltd were, the company was a separate person, a separate body, and a conveyance to the Company of property which was the property of the sharers in their individual capacity, was just as much a conveyance, a transfer of the property as if the shareholders in the Company had been totally different persons. The impugned document is a conveyance and the proper stamp to be put upon this document is the ad valorem stamp mentioned in Article 21 of Schedule I of the Stamp Act, and that it must be calculated on the amount of the consideration mentioned in the instrument.

Analysis

The Calcutta High Court observed that that company was a separate person, and a separate body altogether from its shareholders and that the transfer was a transfer in property, as if the shareholders had been totally different persons. The duty is to be paid by the shareholders to the company that itself is a separate legal entity.

This principle is used all over India even before the Salomon vs. Salomon Co. Ltd[1]case had come into existence. This principle was later prescribed in many statutes including the companies’ act 1956. It was recognized as the principle of “Lifting of the corporate veil.” According to this principle the company is a separate legal entity which confers its own rights and duties. The members of the company have limited liability in the normal course of business but can be held liable in extraordinary circumstances where the court feels that there is a misuse of the Principle.

Let us take an example, if “A” who is a member of the company commits any fraud or illegal act on behalf of the company. Then the court has the authority to set aside the barrier of the corporate veil and identify “A” as the true guilty person who will be responsible for the illegal act. Hence this principle is known as lifting of the corporate veil, it is also called as “disregarding the corporate veil”

The Bombay High Court, with reference to one-man companies, observed:[2]

“Under the law, an incorporated company is a distinct entity, and although all the shares may be practically controlled by one person, in law a company is a distinct entity and it is not permissible or relevant to enquire whether the directors belonged to the same family or whether it is, a compendiously described a ‘one-man company’.”

Hence, one-man companies exist with the backing of the legislature, and “the great majority of them are as bona fide and genuine as in a business sense they are convenient and suitable media for provision and application of capital to industry.”[3]

The House of Lords laid down the following basic principles of a company:

• Artificial Person

The company is a juristic person; however, it is not regarded as a natural person. It exists only under law. It is represented by natural persons, such as, Directors, Managers, Officers and Shareholders to name a few. These persons are responsible for the day-to-day management of the company. Nevertheless, these individuals only represent the company and behave within the scope of authority conferred on them by the company.

• Limited Liability

In case of a limited liability company, the members/ shareholders are only liable to contribute towards payments of its debts to a limited extent. The liability of the shareholders is measured with respect to the value of shares they hold in the company and nothing more than that. However, in the case of unlimited liability, the members are held liable till the whole amount has been paid off. If a company is unable to pay the debts, the creditors may choose to wind up the company.

These principles have been endorsed in the case of Lee v. Lee’s Air Farming Ltd.,[4]where a certain man called Lee was the managing director of a company he incorporated. In that capacity he appointed himself as the pilot, making him an employee of the Company at the same time. While flying the plane, he died in an accident. His widow asked for compensation under the Workman’s Compensation Act.

“In effect the magic of corporate personality enabled him to be master and servant at the same time.”[5]

Where the total number of directors and shareholders consent to the misuse of the company’s money, they can be prosecuted for theft because the consent of the whole number may not be the consent of the company.[6]In the case of R v. Phillippou,[7] a director’s personal telephone was not allowed to be disconnected for the company’s default in payment. In another case, it was held that the Managing Director cannot be compelled in his personal capacity to produce books of which he has custody in official capacity.[8]

Much of the criticism has been based on the fact that the concept of ‘corporate veil’ may at times lead to injustice. For instance, Kahn-Freund described the decision made in Kondoli’s case as “calamitous”. He further called for the abolition of private companies.

Disapproval is also mounted against Kondoli’s case on the basis that priority is given to the separate identity principle over the economic reality of a one-person company. In the article, The Law Quarterly Review, Goulding elucidates that criticism rested against Kondoli’s case is two-fold. First, the unanimous ruling made by the House of Lords in this case gives incorporators the benefit of limited liability even in situations where it may be deemed unnecessary. Second, this decision affords unscrupulous promoters’ opportunities to abuse the privileges provided for under the Corporations Act.

Conclusion

Kondoli Tea Company Limited was a separate person, a separate body and a conveyance to the Kondoli Tea Company Limited of Property which was the property of the shares in their individual capacity was just as much as a conveyance a transfer of the property as if the shareholders in the company had been totally different persons. The Kondoli Tea Company is a separate body although the conveying parties here were the shareholders of the company, there was just as much a sale and transfer of the property and a change of ownership as there would have been if the shareholders had been different persons.  The Register of Shareholders to ascertain who the shareholders were and, consequently, although the conveying parties here were the shareholders of the Company. That is not what the real transaction is; because the only shareholders in the Kondoli Tea Company are the eight gentlemen who conveyed the estate, and that therefore it was not really a conveyance or transfer by way of sale, but a mere handing over of the property from them in one name to themselves under another name.

The Court held that the Kondoli Tea Company was a separate legal entity and therefore ordered the shareholders to pay the ad valorem duty on the said transfer of property from them to the company.

[1][1896] UKHL 1

[2]T R Pratt (Bombay) Ltd. v. ED Sasoon & Co. Ltd. AIR 1936 Bom 62; Praga Tools Corp v. CA Imanual AIR 1969 SC 1306.

[3]Comm of Inland Revenue v. Sansom, (1921) 2 KB 492.

[4] 1961 AC 12: (1960) 3 WLR 758.

[5] Gower, General Principles of Modern Company Law, 202 (3rd ed., 1969).

[6] Attorney-General’s Reference (No. 2 of 1983), 1984 QB 456: (1984) WLR 465 (CA).

[7] (1989) 5 BCC 665.

[8] SAK Chinnathambi Chettiar v. GS Murugan, (1968) 38 Comp Case772: (1968) 2 Comp LJ 260 (Mad).