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2017-18 Final Draft Corporate Law-II “ The status of a corporation as a citizen under constitution
2017-18 Final Draft Corporate Law-II “ The status of a corporation as a citizen under constitution

2017-18

Final Draft

Corporate Law-II

The status of a corporation as a citizen under constitution

Submitted to:

Dr. Manish Singh Associate Professor (Law) Dr. Ram Manohar Lohiya National Law University, Lucknow

Submitted by:

Shobhit Mani Gopal Roll-129 (6 th sem) Sec-B

The Status of a corporation as a citizen under constitution

“ The Status of a corporation as a citizen under constitution ” ACKNOWLEDGEMENT I take this

ACKNOWLEDGEMENT

  • I take this opportunity to express my profound gratitude and deep regards to my guide (Dr. Manish

Singh) for her exemplary guidance, monitoring and constant encouragement throughout the course of this thesis. The blessing, help and guidance given by him time to time shall carry me a long way in the journey of life on which I am about to embark.

  • I would like to express my gratitude towards my parents & members of Dr. Ram Manohar Lohiya National Law University for their kind co-operation and encouragement which help me in

completion of this project.

  • I would like to express my special gratitude and thanks to all those people who gave me attention and their invaluable time.

My thanks and appreciations also go to my friend and classmates in developing the synopsis and people who have willingly helped me out with their abilities.

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The Status of a corporation as a citizen under constitution

“ The Status of a corporation as a citizen under constitution ” TABLE OF CONTENT 1.

TABLE OF CONTENT

  • 1. Synopsis

  • 2. Introduction

  • 3. What a corporation is?

  • 4. Pre-State Trading Corporation case phase

  • 5. Post-State Trading Corporation case phase

  • 6. Conclusion

  • 7. Bibliography

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The Status of a corporation as a citizen under constitution

“ The Status of a corporation as a citizen under constitution ” BACKGROUND : Synopsis Corporation

BACKGROUND:

Synopsis

Corporation in the last century have made vast progress in trade and business sector in a country and if we compare it in terms of economic power, they often outweigh even state. This change is vital in the context of Indian constitution, as it was framed in the mid-twentieth century with a view of state controlled economy and was not drafted in a manner to include corporation in the clear sense. This change and development warranted the rethinking and legal research on the constitutional provisions in State Trading Corporation v. The commercial Tax officer 1 where Supreme Court of India answered a very crucial question i.e. whether a corporation is included in the folds of ‘citizen’ in Part-III of the constitution. Being ultimate protector of Fundamental Rights SC answered this question in a very restrictive manner by excluding a company of being citizen under constitution. Current position according to above ruling prima facie looks rock solid but is very complex when looked through the glass of every right prescribed under constitution.

Author in the final paper argues on the current position and status of a corporation as citizen of India in the light of State trading corporation case 2 and other relevant cases and tries to portray a clear picture of this complex issue.

RESEARCH PROBLEMS:

T

he research problem over here is the status of a company as a citizen and can it claim fundamental

rights under Part-III of constitution. This would be achieved by reading various newspapers, articles,

 
 

books, journals etc.

 

OBJECTIVE:

Objective of this study is to portray the current position of a company or corporation as a citizen of

 

India.

1 1963 AIR 1811, 1964 SCR (4) 89 Id.

2

 

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The Status of a corporation as a citizen under constitution

“ The Status of a corporation as a citizen under constitution ” RESEARCH METHODOLOGY: Doctrinal methodology:

RESEARCH METHODOLOGY:

Doctrinal methodology: It is concerned with analysis of available literature sources on the topic and it has been developed and applied .Various sources such as books, articles, journals and newspaper have helped me for my research.

TENTATIVE CHAPTERISATION:

  • Introduction:This head describes the topic in brief.

  • Statutes Inclusion: This head will chalk out the various legislations including the constitution.

  • Judicial Approach: This Chapter deals with the judicial approach and describes the various cases laws.

  • Conclusion: This head will contain the findings of the author and suggestions.

Introduction:

Final Paper

Corporation in the last century have made vast progress in trade and business sector in a country and if we compare it in terms of economic power, they often outweigh even state. This change is vital in the context of Indian constitution, as it was framed in the mid-twentieth century with a view of state controlled economy and was not drafted in a manner to include corporation in the clear sense. The studies of corporate citizenship only dwelled into the social responsibilities of businesses carried out by the corporations whereas it has somehow neglected their constitutional rights.

This change and development warranted the rethinking and legal research on the constitutional provisions in State Trading Corporation v. The commercial Tax officer 3 where Supreme Court of

India answered a very crucial question i.e. whether a corporation is included in the folds of ‘citizen’

in Part-III of the constitution. Being ultimate protector of Fundamental Rights SC answered this question in a very restrictive manner by excluding a company of being citizen under constitution, which is according to me is inconsistent with the F.R’s in Indian Constitution. Current position

  • 3 1963 AIR 1811, 1964 SCR (4) 89

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The Status of a corporation as a citizen under constitution

“ The Status of a corporation as a citizen under constitution ” according to above ruling

according to above ruling prima facie looks rock solid but is very complex when looked through the glass of every right prescribed under constitution. State Trading Corporation case 4 was ruled by nine judges and after this case when similar questions were asked to S.C, its approach was more as a protector of Fundamental Rights but the bench ruling the same has to work around as the above case had largest bench till now. This resulted in the confusion of the correct understanding of the status of a corporation as citizen.

Author in the paper argues on the current position and status of a corporation as citizen of India in the light of State trading corporation case 5 and other relevant cases and tries to portray a clear picture of this complex issue. The discussion basically revolves around the post-state trading corporation case 6 .

What a corporation is?

Word Corporation is derived from a Latin word ‘corpus’ which means a ‘body’ or ‘body of people’. Under the Roman Law we can find certain entities under ‘universitas, corpus or collegium’, which possess some rights and liabilities such as right to own property and perhaps make contract, sue and be sued. The somehow same is being carried under the old companies Act 7 as well as the new one 8 . Sec. 2(20) of the Companies Act, 2013 defines a company which says “company means a company which is incorporated under this act or under any previous law”, but the section does not give any technical meaning, therefore one can conclude that the reason of it being open-ended is that a company is not just a group of people or a legal or juristic personality.

A much better or clear definition of company is given by Lord Justice Lindley“as an incorporated association which is an artificial person, having a separate legal entity, with a perpetual succession, a common seal, a common capital comprised of transferable shares and carrying limited liability. It is called an artificial person because of its very nature that law alone can give birth to a company and law alone can put it to an end.” 9 Which clearly states it as an artificial entity and going by this will surely exclude a corporation from Part III of the constitution as it is only available to citizens who are generally perceived as natural person. The same reasoning was applied in the state trading case 10 .

Pre-State Trading Corporation case phase:

  • 4 State Trading Corporation v. The commercial Tax officer, 1963 AIR 1811, 1964 SCR (4) 89

  • 5 Id.

  • 6 Id.

  • 7 Companies Act, 1956

  • 8 Companies Act, 2013

  • 9 State Trading Corporation (n 2)

    • 10 Id.

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The Status of a corporation as a citizen under constitution

“ The Status of a corporation as a citizen under constitution ” One of the important

One of the important cases decided before state trading corporation case is ChiranjitLalChowdhuri v. The Union of India 11 where judges took the view of including corporations under part III of the constitution, court held that ‘The fundamental rights guaranteed by the Constitution are available not

merely to individual citizens but to corporate bodies as well except where the language of the provision or the nature of the right compels the inference that they are applicable only to natural persons. An incorporated, company, therefore, can come this Court for enforcement of its fundamental rights and so may the individual shareholders to enforce their own; but it would not be open to an individual shareholder to complain of an Act which affects the fundamental rights of the company except to the extent that it constitutes an infraction of his own rights as well’.

If court in State Trading corporation case had followed the similar reasoning and looked on the impact or effect of judgement rather than at the form of the corporation, the result would have been more desirable. As if the corporations fundamental rights are infringed it will surely affect its shareholders who are citizen and whose right should be protected under constitution of India. What it

did was it left the shareholders whose FR’s are infringed remediless.

Next head discusses the Post State trading Corporation case, but before it author explains in brief what was ruled in this particular case.

State Trading Corporation v. The commercial Tax officer 12 :

The facts of the case in brief are that the government of Andhra Pradesh and Bihar levied sales tax on the State Trading Corp. for its commercial activities and served notices demanding the payment. State trading Corporation is a corporation of Central Government incorporated under Companies Act, 1956. The Petitioner moved to S.C under article 32 to quash the notices on the ground that the assessment orders and notices are voilative of fundamental rights guaranteed under article 19(1)(f) 13 and (g) 14 of the constitution.

Question before SC’s nine judge bench was whether the State Trading Corporation, a company registered under Indian Companies, Act 1956, is a citizen within the meaning of Art. 19 of the constitution and can ask for the enforcement of fundamental rights granted to citizens under constitution and can they claim F.R under part III of the constitution.

11 ChiranjitLalChowdhuri v. The Union of India,1951 AIR 41, 1950 SCR 869 12 State Trading Corporation (n 2) 13 To acquire, hold and dispose of property 14 To practice any profession, or to carry on any occupation, trade or business

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The Status of a corporation as a citizen under constitution

“ The Status of a corporation as a citizen under constitution ” Majority judgement was delivered

Majority judgement was delivered by Sinha, C.J, held that word ‘citizen’ intended to refer only to natural persons and therefore a juristic person like corporation cannot claim the status of citizen under Part III of the constitution. His reasoning was that Part II and Indian Citizenship Act, 1955 both are exhaustive on the question of citizenship in India and according to them only natural persons can be citizens. He further said that in Part III certain F.R’s are available only to citizens 15 , whereas certain to any person 16 .The expression ‘person’ has been defined to include corporate bodies also 17 . These findings compelled him to conclude that constitution makers were careful enough to use word “citizen” whenever they felt that particular right was to be enjoyed exclusively by citizens. Justice Hidayatullah in his concurrent opinion held the same with an additional reasoning. He cited several articles where expression ‘citizen’ and ‘citizenship’ was used and pointed out that those articles cover only natural persons 18 .

One behalf of minority, Justice Das Gupta rejected the preliminary objection and stated that the shareholders carrying business as a corporations are citizens and natural persons therefore can’t be

denied rights under Art. 19. He also said that framers of the constitution were aware of developments in U.S.A i.e. piercing the corporate veil and granting remedy to citizen shareholders. Therefore it

can’t be said when the provisions does not expressly exclude corporations from claiming F.R’s.

Justice Shah supported minority opinion and concluded if restrictive interpretation of citizen is adopted, corporations would have rights such as right to equality, right against compulsory acquisition of property without compensation etc., but the most important right for a corporation i.e.

right to trade would be denied. On these grounds he held in the favour of a liberal construction of the

word ‘citizen’ in Art. 19. This landmark judgement didn’t discussed about piercing the corporate veil in detail otherwise the conclusion of majority would have been different, as the effect of judgement is ultimately on the shareholders considering the question on their point of view would have not resulted in curbing FR’s. Post-State Trading Corporation case phase:

If going through the literal and strict interpretation of meaning of corporation as above mentioned 19 it

can be easily concluded that as the F.R’s are only for natural persons or citizens and corporations or

companies are excluded from the ambit of challenging any law or order on the grounds of being

15 Articles 15,16,19 and 29, See State Trading Corporation (n 2), page 3,4 16 Articles 14,20,21,22,25,27 and 31 (n 13) 17 The general Clauses Act, 1897 “person ” as inclusive of “any company or association or body of individuals whether incorporated or not” 18 State Trading Corporation (n 2)See, page 15 19 Under head what a corporation is?

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The Status of a corporation as a citizen under constitution

“ The Status of a corporation as a citizen under constitution ” violative of part III

violative of part III of the constitution as they are nor the natural person or citizen of India, same was the ruling in state trading corporation case, but problem arose when the judgements dealing with the similar questions answered the same in a modified way. Few decisions after state trading corporation case are Telco 20 , Bank Nationalisation 21 , and Bennetcoleman case 22 .

In Tata Engineering and Locomotive Co. v. State of Bhiar 23 or “Telco case” petitioners challenged a levy of sales tax imposed on them under Art. 32. As the bench in this case comprised of five judges, therefore was bound by Supreme Court’s previous decision in State Trading Corporation 24 . Therefore respondent side argued to follow the same but they argued that in State Trading Corp. case court was not asked to dwell on the question of piercing the corporate veil and this ought to be considered in Telco case. SC applied the doctrine of lifting the veil and held that shareholders can file for their infringement of right protected under constitution.

Next was the R.C. Cooper v. Union of India 25 (Bank nationalization case) which was decided by eleven judge bench. In this case constitutional validity of Banking Companies (Acquisition and Transfer of Undertakings) Ordinance was challenged by a shareholder, the director and current account holder of the bank. Court ruled that the State Trading Corporation will have no application in this case as the petitioners are claiming their own rights rather than of company. Court granted remedy in this case which was independent or the harm or violation of rights of that company. Impact of this judgment was that now SC protected the rights of individuals but they have to prove the violation of their fundamental right which has to independent of the detrimental caused to the company.

Last case which I will be discussing in detail this head is Bennett Coleman v. Union of India 26 (Bennett Coleman case). It is a five judge bench decision which reveals new dimension of Indian position regarding protection of FRs of a company and its shareholders. In this case writ petition was filed by the newspaper company, a shareholder, a reader and three editors of the newspaper against restrictions on the newspaper. SC recognized that the individual rights to freedom of speech and expression of editors, directors and shareholders are being exercised by means of printing and spreading newspaper. Therefore court concluded that restriction on newspaper would impact fundamental rights of the shareholders of the company and that hence that remedy could be denied. It

20 Tata Engineering and Locomotive Co. v. State of Bihar, AIR 1965 SC 40 21 R.C. Cooper v. Union of India, AIR 1970 SC 564 22 Bennett Coleman v. Union of India, AIR 1973 SC 106 23 Tata Engineering and Locomotive Co. (n 18) 24 State Trading Corporation (n 2) 25 R.C. Cooper (n 19) 26 Bennett Coleman (n 20)

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The Status of a corporation as a citizen under constitution

“ The Status of a corporation as a citizen under constitution ” was held that even

was held that even though a company was a petitioner in this case but this will not prevent the court from giving relief to the shareholders, editors, printers, whose rights are at stake.

It appears that court have treated restriction imposed on newspapers as a separate class and have not applied State trading Corporation 27 , Telco 28 and Bank Nationalization 29 cases in these cases. As in Express Newspapers 30 and Sakal Newspapers 31 court granted relief to shareholders and editors though restrictions were imposed on the newspaper companies.

Conclusion:

Law relating to corporate citizenship in India is not in existence yet, the major act 32 also does not talk about the same, whereas the constitution of India is also silent or i may say does not provide any express provision which would have helped in settling the position. Before State Trading Corporation 33 SC in ChiranjitLalChowdhuri 34 dealt with the question which was only related to the infringement of FR and court included corporation within the folds of FR, but this case did not discussed about the citizenship of a corporation, which was finally decided by the nine judges in State Trading Corporation case. Questions answered in STC 35 case no doubt was of great constitution importance which were not addressed in any previous decisions. But as suggested above court’s approach was conservative and while applying the provisions strictly SC refused to lift the corporate veil and left the individuals without remedy. Further paper discusses the post-State Trading Corporation phase wherein Telco 36 , Bank Nationalisation 37 , and Bennetcoleman 38 were discussed which depicts the confusion regarding the position of corporation as a citizen under constitution.

Although STC 39 was binding on Telco 40 but it virtually did not accepted its reasoning and lifted the veil for providing remedy to petitioners. Next is R.C. Cooper 41 andBennett Coleman case 42 where SC provided remedy only because the petitioners were individuals. Overall examination shows that after

27 Tata Engineering and Locomotive Co. (n 18) 28 Tata Engineering and Locomotive Co. (n 18) 29 R.C. Cooper (n 19) 30 Express Newspapers Pvt. Ltd. V. Union of India, AIR 1958 SC 578 31 Sakal Papers Pvt. Ltd. v. Union of India, AIR 1962 SC 305 32 The Companies Act, 2013 33 State Trading Corporation (n 2) 34 ChiranjitLalChowdhuri (n 9) 35 State Trading Corporation (n 2) 36 Tata Engineering and Locomotive Co. (n18) 37 R.C. Cooper (n 19) 38 Bennetcoleman (n 20) 39 State Trading Corporation (n 2) 40 Tata Engineering and Locomotive Co. (n18) 41 R.C. Cooper (n 19) 42 Bennett Coleman (n 20)

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The Status of a corporation as a citizen under constitution

“ The Status of a corporation as a citizen under constitution ” STC court somehow reacted

STC 43 court somehow reacted as protector of fundamental rights but the conformity is not achieved which is why still one cannot chalk out the clear image of corporation as a citizen. The need of hour is of legislatures to address these questions in parliament and come up with an Act which may solidify this position and may protect the corporations who is ultimately the citizens of India.

Bibliography:

Books:

  • Taxmann’s Company Law ,Dr. G.K Kapoor(Nineteenth Edition)

  • Indian Constitutional Law, M.P. Jain (Seventh edition)

  • Constitutional Law of India, Dr. J. N Pandey (Fifty One Edition)

Online Sources:

  • Manupatra

  • SCC Online

43 State Trading Corporation (n 2)

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