Legal Personality of Corporations

- Corporate personality is the creation of law, by fiction of law.

- The theory of corporate personality mainly states that a company has a legal identity
(Separate Legal Personality) different from its members.

-Whenever any company is formed or it is incorporated, it has its separate legal personality &
independent status apart from its members. Means after incorporation members & company
both are separate from each other and become two separate legal entities.

- A corporation is distinguished by reference to different kinds of things which the law selects
for personification. The individuals forming the corpus of the corporation are called its
members. The juristic personality of corporations presupposes the existence of three
conditions :
(1) There must be a group or body of human beings associated with a certain purpose.
(2) There must be organs through which the corporation functions, and
(3) The corporation is attributed to legal fiction. A corporation is distinct from its individual
members.

-It has the legal personality of its own and it can sue and can be sued in its own name. The
creditors of the company can recover their money only from the company and they cannot
sue individual members. In the same way, the company is not in any way liable for the
individual debts of its shareholders/members and the property of the company is only used
for the benefit of the company. It does not come to end with the death of its individual
members and therefore, has a perpetual existence. However, unlike natural persons, a
corporation can act only through its agents.

Types of Corporations

Corporations are of two kinds :

1. Corporation Aggregate : Is an association of human beings united for the purpose of
forwarding their certain interests. A limited Company is one of the best examples. Such a
company is formed by a number of persons who as shareholders of the company contribute or
promise to contribute to the capital of the company for the furtherance of a common object.
Their liability is limited to the extent of their share-holding in the company. A limited
liability company is thus formed by the personification of the shareholders. The property is
not that of the shareholders but its own property and its assets and liabilities are different
from that of its members. The shareholders have a right to receive dividends from the profits
of the company but not the property of the company[4]. The principle of corporate
personality of a company was recognized in the case of Saloman v. Saloman & Co.

2. Corporation Sole : Is an incorporated series of successive persons. It consists of a single

person who is personified and regarded by law as a legal person. In other words, a single
person, who is in exercise of some office or function, deals in legal capacity and has legal
rights and duties. A corporation sole is perpetual. Post – Master- General, Public Trustee,
Comptroller and auditor general of India, the Crown in England etc are some examples of a
corporation sole. Generally, A corporation sole is an illustration of double capacity. The
object of a corporation sole is similar to that of a corporation aggregate. In it a single person
holding a public office holds the office in a series of succession, meaning thereby that with
his death , his property , right and liabilities etc., do not extinguish but they are vested in the
person who succeeds him. Thus on the death of a corporation sole, his natural personality is
destroyed, but legal personality continues to be represented by the successive person. In
consequence , the death of a corporation does not adversely affect the interests of the public
in general.

Difference between Corporation Aggregate and Corporation Sole

Points of Corporation Aggregate Corporation Sole

Difference

Definition Is an association of human beings united  Is an incorporated series of

for the purpose of forwarding their successive persons. It
certain interests, common objective or consists of a single person
goal. who is personified and
regarded by law as a legal
person.

No. of members minimum two or more one natural person only

Double capacity is an illustration of single capacity only- A corporation sole is an

capacity in nature of the bearer of legal illustration of double
rights and duties capacity.

How it is created Creation of law. Not necessarily it should

always be the creation of
law.

Examples Limited Liability Company, Panchayats Master- General, Public

etc. Trustee, Comptroller and
auditor general of India, the
Crown in England etc

Concept of corporate personality

- Salomon v A Salomon & Co Ltd [1897] AC 22.

This principle of the independent corporate existence and the principle of corporate
personality of a company was recognized in the case of Saloman v. Saloman & Co.
Facts:
 In this case Salomon was a boot and shoe manufacturer. He incorporated a company named
Salomon & Co Ltd , for the purpose of taking over and carrying on his business. The seven
subscribers to the memorandum were Salomon, his wife, his daughter and four sons and they
remained the only members of the company. The company went into liquidation within a
year. 
The unsecured creditors contended that though incorporated under the Act, the company
never had an independent existence, it was in fact Salomon under another name; he was the
managing director, the other directors being his sons and under his control.
Court held:
Salomon & Co Ltd was a real company fulfilling all the legal requirements . It must be
treated as a company , as an entity consisting of certain corporators , but a distinct and
independent corporation. Thus it was decided in this case that a corporate body has its own
existence or personality separate and distinct from its members and therefore, a shareholder
cannot be held liable for the acts of the company even though he holds virtually the entire
share capital. The case has also recognized the principle of limited liability of a company
The Hon’ble Lord Comments, “................ The company is at law a different person
altogether from the subscribers to the memorandum; and, though it may be that after
incorporation the business is precisely the same as it was before, and the same persons are
managers, and the same hands receive the profits, the company is not in law the agent of the
subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or
form, except to the extent and in the manner provided by the Act.
- The Supreme Court in M/s. Electronics Corporation of India Ltd. v. Secretary, Revenue
Department AIR 1999 SC 1734, Government of Andhra Pradesh, 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.
Characteristics of Corporate Personality

(1) Independent Corporate Existence: A corporate person shall have an independent

corporate existence. It is in law a person . It is a distinct legal persona existing
independent of its members. In case of a company, by incorporation it gains a
corporate personality which is separate or distinct from the members who
compose it. The property of the company belongs to it and not its members ; it
may sue or be sued in its own name ; it may enter into contracts with third parties
independently and even the members themselves can enter into contract with the
company According to Section 34(2) of the Companies Act , upon issue of the
certificate of incorporation , the subscribers to the memorandum and other persons
, who may from time , be the members of the company, shall be a body corporate,
which is capable of exercising all the functions of an incorporated company and
having perpetual succession and a common seal. Thus the company becomes a
 body corporate which is capable immediately of functioning as an incorporated
individual. 

(2) Limited Liability : One of the principal advantages of an incorporated company

is the privilege of limited liability. It is the main feature of registered companies
which provides a special attraction to investors. The principle of limited liability
implies that the liability of a member in the event of the company's winding up, in
respect of the shares held by him, is limited to the extent of the unpaid value on
such shares. Thus the liability does not fluctuate but remains limited to the amount
which, for the time being remains unpaid, whether from the original shareholder
or the transferee of such shares as the case may be. limited liability of members
extends only for the company's debt in the event of its winding up. The company
itself, being a legal persona, is always fully liable and therefore its liability is
unlimited. In other words, it is liable to pay the debts so long as assets are
available. The order of priority for payment of debt shall, however, depend on the
class of creditors as laid down in the Companies Act. No member is bound to
contribute anything more than the nominal value of the shares held by them
Section 34(2) of the Companies Act, 1956 provides that in the event of the
company being wound up, the members shall have liability to contribute to the
assets of the company in accordance with the Act, In the case of limited
companies, no member is bound to contribute anything more than the nominal
value of shares held by him. The privilege of limiting the liability is one of the
main advantages of carrying on business under a corporate organization.

(3) Perpetual Succession : An incorporated company has perpetual succession, that
is notwithstanding any change in its members, the company shall retain as the
same entity with the same privileges and immunities, estate and possessions. the
death or insolvency of individual member does not in any way, affect its corporate
existence and the company shall continue its existence as usual until it is wound
up in accordance with the provisions of the Companies Act, The perpetual
existence of an incorporated company is well illustrated by proverbial saying,
"members may come and members may go, but the company can go on forever."

In Gopalpur Tea Co. Ltd. v. Penhok Tea Co, Ltd.[(1982) 52 Comp. Out. 238], the
court while applying the doctrine of company's perpetual succession observed that
though the whole undertaking of a company was taken over under an Act which
purported to extinguish all rights of action against the company, neither the
company was thereby extinguished nor any body's claim against it.

4) Transferability of shares : Section 82 of the Companies Act, 1956,

specifically provides that the shares or other interest of any member in a company
shall be movable property, transferable in the manner provided by the articles of
association of the company. Thus the member of an incorporated company can
dispose of his shares by selling them in the open market and get back the amount
so invested. The transferability of shares has two main advantages, namely it
provides liquidity to investors and at the same time ensures stability of the
company. The transfer of shares of a company does not in any way affect its
existence or management and the shareholder can conveniently get relieved of his
liability by transferring his shares to some other person.
5) Separate Property : 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 no changes of individual membership affect
the title. In the case of a company, 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 the several or joint owners of the
company's property. In Bacha F Guzdar v. CIT Bombay [1955) 1 SCR 876.] 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[1925 AC 619 HL] it was held that “ the property of a company
is not the property of the shareholders ; it is the property of the company”.

6) Corporate Finances : The shares of an incorporated company being

transferable, it can raise maximum capital in minimum possible time. That apart,
an incorporated company has the privilege of raising its capital by public
subscriptions either by way of shares or debentures. The public financial
institutions willingly lend loans to companies as it is generally secured by floating
charge which is an exclusive privilege of a registered company.

In R.T. Perumal v. John Deavin,[AIR 1960 Mad. 43.] It has been observed that a
company is a real person in which all its property is vested, and by which it is
controlled, managed and disposed of. Their Lordships further observed that "no
member can claim himself to be the owner of the company's property during its
existence or in its winding up."

7) Centralized Management : The shareholders have no direct concern with the

management of the company. They exercise only formative control. Thus the
management of the company is altogether different from its ownership.
Independent functioning of managerial personnel attracts talented professional
persons to work for the company in an atmosphere of independence thus enabling
them to achieve highest targets of production and management leading to
company's overall prosperity.

The management of the company generally vests in the directors who decide the
policy matters in the meetings of the Board of Directors. With skilled professional
managers supported by financial resources, companies are able to develop and
carry on their business efficiently. In short, professional form of management of
business disassociates the 'ownership' from control of business and thus helps to
promote efficiency. Besides, it provides flexibility and autonomy to business
undertakings within the framework of company law.

8) Capacity to sue and to be sued : A company being a body corporate can sue
and can be sued in its own name.[Union Bank of India v. Khaders International
Constructions Ltd , [1993] 2Comp Lj 89 Ker.]. A criminal complaint can be filed
by a company , but it should be represented by a natural person. A company has
the right to protect its fair name. It can sue for such defamatory remarks against it
as are likely to damage its business or property etc. A company has the right to
seek damage where a defamatory material published about it affects its business.
In TVS Employees Federation v. TVS & Sons Ltd [(1996) 1 WLR 132 (CA).] It
 was held that the preparation of a video cassette by the workmen of a company
showing their struggle against the company's management and exhibition could be
restrained only on showing that the matter would be defamatory.

In R v. Broadcasting Standards Commission the court of appeal held that a

company can complain under the Broadcasting Act, 1996 about unwarranted
infringement of its privacy. In this case the complaint was about the secret filming
of transactions in shops by the BBC and the allegation was that this constituted an
infringement of the company’s privacy.

Meaning & Definition Of Corporation Veil

-  clear difference between the company and its members, this is commonly called a
Corporate Veil 
A corporate veil is a legal concept that separates the acts done by the companies and
organizations from the actions of the shareholders.
-  It protects the shareholders from being liable for the actions done by the company.
This is not an absolute right the court depending on the facts of the case can take the
decision whether the shareholder is liable or not.
According to this principle, when a company has been formed and registered under the
Companies Act, all dealing with the company will be in the name of the company and the
person behind the company will be disregarded however important they may be.
 -corporation is cloth with a distinct personality by fiction of law, yet in reality it is an
association of persons who are in fact , in a way , the beneficial owners of the property of the
body corporate. A company being an artificial person, cannot act on its own, it can act only
through natural persons. The whole theory of incorporation is based on the theory of
corporate entity but the separate personality of the company and its statutory privileges
should be used for legitimate purposes only.
 Where the legal entity of the company is being used for fraudulent and dishonest
purpose, the individuals concerned will not be allowed to take the shelter behind the
corporate personality. The court in such cases shall break through the corporate shell
and apply the principle of what is known as “lifting or piercing the corporate veil”. The
corporate veil of a company may be lifted to ascertain the true character and economic
realities behind the legal personality of the company.
Lifting of Corporate Veil
-“a company is a legal person distinct from its members. This principle is regarded as a
veil/curtain/shield but not a wall between the company and its members. The effect of this
principle is that there is a fictional veil and is permitted to look at the person behind the
veil.”
 According to the definition of Black Law Dictionary, “piercing the corporate veil is the
judiciary act of imposing liability on otherwise immune corporate officers, Directors and
shareholders for the corporation’s wrongful acts.”
In New Horizons Ltd. v. Union of India and others,[(1995) 1 SCC 478] the appellant
company when seen through the veil covering the face of New Horizons Ltd. was found to be
a joint venture created as a result of reorganization in 1992. Sixty per cent of its share capital
was owned by an Indian group of companies and forty per cent share capital was owned by a
Singapore based foreign company. The Government had invited tenders for distribution of
State largesse. The appellant's tender was not considered on the ground that the experience of
its constituents was not the same as that of the appellant and because of inadequate
experience, the respondent's tender was accepted as they had long experience and had also
offered a much lower amount of royalty. The appellants pleaded the experience of
constituents of the joint venture company should be treated as its own experience and
corporate veil should be seen through for this purpose. Allowing the appeal, the Supreme
Court ruled that the action of the State Government in determining the eligibility of tender’s
was not in consonance with the standards or norms and was arbitrary and irrational. The
Court further observed that in case of a joint venture corporation, the Court can see through
the corporate veil to ascertain the true nature of a company. The doctrine of lifting the
corporate veil is invoked when the corporate personality is found to be opposed to justice,
convenience or interest of revenue.

The principle of 'lifting the corporate veil' has found statutory recognition in certain
provisions like Sections 45, 147, 212, 247 and 542 of the Companies Act. Corporate veil is
said to be lifted when the court ignores the company and concerns itself directly with the
members or managers. The courts have found it necessary to disregard the separate
personality of a company,4 in the following situations :—

(a) Determination of Real character of a company

At the time of war, it may become necessary to lift the corporate veil of a company to
determine whether the company has an enemy character. In such a case the courts may in
their discretion examine the character of persons who are in real control of the corporate
affairs of the company.

In a case[Daimler Co. Ltd. v. Continental Tyre & Rubber Co., (1916)2 AC 307.] a company
was incorporated in England for the purpose of selling tyres manufactured in Germany by a
German company, all the shares except one were held by the German subjects residing in
Germany. The remaining one share was held by a British subject who was the Secretary of
the company. Thus the real control of the English company was in German hands. During
World War I, the company commenced an action to recover trade debts. The question
therefore was whether the company had become an enemy company consequent to World
War I. The House of Lords, inter alia observed :

“But it can assume enemy character when persons in de facto control of its affairs are
residents in any enemy country or, wherever resident, are acting under the control of enemies.
therefore held that the company was an enemy company for the purpose of trading and
therefore it was barred from maintaining the action.”
In an American case [People's Pleasure Park Co. v. Rohleder, (1908) 109 Va 439] it was held
that the Courts may refuse to pierce the corporate veil where there is no danger to public
interest. In this case certain lands were transferred by an Englishman to another perpetually
restraining the transferee from selling the said property to coloured persons i.e. Negroes. The
transferee, however, transferred the land to a company which was exclusively composed of
Negroes. Thereupon, the petitioners brought an action against the company for annulment of
the conveyance on the ground of breach of condition. Rejecting the contention of the
petitioners the court held that members individually or employment was terminated under an
agreement. Thereafter he started a new company to carry on the business of solicitation and
solicited plaintiffs' customers. The court held that the defendant company was a mere cloak
or sham and channel used by the defendant to obtain advantage of the customers of the
plaintiff company for his own benefit and therefore it ought to be restrained from carrying on
the business.

The Supreme Court in Subhra Mukherjee & Another v. M/s. Bharat Coking Coal Ltd. (BCCL)
& others[AIR 2000 SC 1203.] has observed that the Court will be justified in piercing the
veil of incorporation in order to ascertain the true nature of the transaction as to who were the
real parties to the sale and whether it was between husbands and wives behind the facade of a
separate entity of the company.

(b) For the benefit of revenue : The court has the power to disregard corporate entity if it is
used for tax evasion or to circumvent the tax obligation. In this case the assessee was a
wealthy man , enjoying huge dividends and interest income. He formed four private
companies and agreed with each to hold a block of investment as an agent for it. Income
received was credited in the accounts of the company, but the company handed back the
amount to him as pretended loans. The court held that the company was formed by the
assessee purely and simply as a means of avoiding super – tax and the company was nothing
more than the assessee himself.

(c) Fraud or improper conduct : The courts will refuse to uphold the separate existence of
the company where it is formed to defeat or circumvent law, to defraud creditors or to avoid
legal obligations. In Gilford Motor Co v. Horne [1944] 1 Ch 935.] Horne was appointed as a
managing director of the plaintiff company on the condition that he shall solicit or entice
away the customers of the company at any point of time. He was employed under an
agreement. Shortly he opened a business in the name of a company which solicited the
plaintiff’s customers. It was held that the company was a mere cloak or sham for the purpose
of enabling the defendant to commit a breach of his covenant against the solicitation.

In P.N.B. Finance Ltd. v. Shital Prasad Jain,[(1983)53Comp. Cas.66.] the court held that "the
doctrine of piercing the corporate veil may be invoked whenever necessary by the court in the
interest of justice, to prevent the corporate entity from being used as an instrument of fraud,
and the fundamental principle of corporate personality itself may be disregarded having
regard to the exigencies of the situation and for the ends of justice.

(d) Government Companies : A company at times lose their individuality in favour of its
principal and ,may be treated as an agent or trustee. In Re F.G. (Films) Ltd.[(1953) All ER
615], an American company produced a film called 'MANSOON' in India technically in the
name of a British company. This British company had a capital of £ 100 out of which
majority was held by the President of the American company which financed the production
of the film. In these circumstances the Board of Trade refused to register the film as a British
film on the ground that in the instant case the British company acted merely as the nominee
or agent of the American company. This view was upheld by the Court. The court may, in
some circumstances, treat a holding company and its subsidiary as a single entity. This
inference does not flow automatically from the relationship of holding and subsidiary
company. There must be evidence that the business of the two is combined.

In Smith Stone & Knight Ltd. v. Birmingham Corporation, it was observed that the courts find
it difficult to go behind the corporate entity of a company to determine whether it is really
independent or is being used as an agent or trustee. If a parent company and a subsidiary
company are distinct legal entities under the ordinary rules of law and in the absence of an
agency contract between the two companies one cannot be said to be the agent of the other. If
one company is held liable as a principal for the acts of another company, the relationship of
agency should be substantially established, as was the case in the instant decision.

In India, a large number of private Companies have a tendency to register themselves as

Government companies under the Companies Act with the President and few other officers as
the shareholders. They do so with a view to availing certain advantages in their commercial
ventures. The Courts are, therefore, confronted with the problem of deciding the true nature
of a Government company in a number of cases. The Supreme Court has decided once for all
that a Government company is neither an extension of the State, nor its agent.

The Supreme Court has ruled that Life Insurance Corporation cannot be treated as an
instrumentality of the State when it is exercising its ordinary right as a majority shareholder
in a company for removing the existing management and reconstituting the Board of
Directors of that company[Life Insurance Corporation v. Escorts Ltd., (1986) 1 SCC 264].

(e) To punish the real persons in Quasi-Criminal cases against the Company
The courts have sometimes applied the doctrine of lifting the corporate veil in quasi-criminal
cases relating to companies in order to look behind the legal person and punish the real
persons who have violated the law.

(f) To prevent abuse of Process of Law

The doctrine of lifting the corporate veil can also be used to prevent abuse of process of
Court. Thus in Bijay Kumar Agarwal & others v. Ratanlal Bagaria & others,[AIR 1999 Cal.
106, (107).] the Court observed that although broadly speaking the principle of lifting the
corporate veil will be available in the statute like Companies Act, and other financial and
taxing statutes etc. but admittedly one cannot rule out the applicability of the principle
elsewhere if the situations are falling under the following categories : (a) depend upon the
relevant statutory or other provisions; (b) the object sought to be achieved; (c) the impugned
conduct; (d) the involvement of the element of public interest; (e) the effect on parties who
may be affected. It, therefore, logically follows that the doctrine of lifting the corporate veil
or principle analogous thereto cannot be ruled out from being used as a tool of judiciary in
adjudicating over the dispute between two parties. Thus the "Lifting of corporate veil' or
principle analogous thereto cannot be monopoly of any particular statute. It can well be used
by the judiciary or the Court to prevent the abuse of the process of Court of Law.

The Supreme Court in Delhi Development Authority v. Skipper Construction Co. (P.) Ltd has
observed that the lifting or piercing of the corporate veil can be undertaken by Court to see
the real men behind the veil who are involved in defrauding others by corrupt and illegal
means in deliberate defiance of Court's order. In the instant case, the company was
defrauding others in deliberate disobedience of Supreme Court's orders which amounted to
contempt of Court. Disposing of the appeal, the Supreme Court observed that imposition of
punishment for contempt would not denude the Court of its power to issue directions and
make appropriate orders to grant relief to the persons aggrieved in order to do complete
justice. For this purpose, the Court can lift the corporate veil of the company to take into
account the misdeeds of its officials and punish them i.e. the contemptors. That apart, the
Court may also order the contemnors to restore the illegally derived benefit to the persons
who are defrauded so that the contemnors are not able to retain the fruits of the contempt. The
Court may also order forfeiture/attachment of the properties acquired by the illegal and
corrupt means by the real men behind the corporation as also the properties of their family
members.

2. Personal Liability of Directors or Members

Secondly, the company law imposes personal liability on the directors or members of a
company in certain cases notwithstanding the cardinal principles of 'separate personality' and
'limited liability'. There are certain statutory provisions, in the Companies Act, 1956 , apart
from the liability of the company as an independent legal person, those cloaked behind it are
also made liable. Such cases are :—

(a) Reduction of membership (Section 45)

Section 45 of the Companies Act, 1956 specifically provides that if at any time the number of
members of a company falls below the statutory minimum i.e.. seven in case of a public
company and two in the case of a private company, and the company carries on business for
more than six months while the number is so reduced, every person who is a member of that
company during the time the company so carries on business after those six months and is
aware of that fact, shall be severally liable for the payment of company's debts contracted
during that time. Thus, in such cases, the privilege of limited liability is denied to the
shareholders.

(b) Misdescription of name (Section 147)

Where an officer of a company signs on behalf of the company any contract, Bill of
exchange, hundi, promissory note, cheque or an order for money goods, such person shall be
personally liable to the holder if the name of the company is not fully or properly mentioned
in the instrument.

(c) Fraudulent conduct of business (Section 542): This section imp[ose liability for
fraudulent conduct of a company’s business. According to the section if it is found that a
business is found to be carried on with the intent to defraud the creditors of the company or
any other person , or for any fraudulent purpose, those who were knowingly parties to this
business shall be personally held liable for all or any of the debts of the company.

(d) Subsidiary company (Sections 212 and 214)

As required by Sections 212 and 214 of the Act, a holding company has to disclose to its
members the accounts of its subsidiaries. Though in the eyes of law a subsidiary company is
a separate legal entity under certain circumstances, the court may not treat the subsidiary
company as an independent entity in a particular situation. There may be two situations when
a subsidiary company may lose its independent identity to a certain extent, namely, (1) the
law may brush aside the legal forms and require companies in a group to present a joint
picture in order to give better information of the financial position of the group as a whole to
the public, creditors and shareholders ; and (2) where the control and conduct of business of a
subsidiary company rests solely in the nominees of the holding company, it may be inferred
that the subsidiary company is merely a branch of holding company and has no separate
identity of its own.

(e) Failure to Return Application Money (Section 69(5 )

The provision contained in clause (5) of Section 69 of the Companies Act, 1956 makes the
director of a public company personally liable to pay the money with interest if the
application money is not repaid within thirty days in the event of minimum subscription not
having been received or company not having obtained certificate of commencement of
business by the company.

(f) Misrepresentation in Prospectus (Section 62)

In case of misrepresentation in the prospectus of a company, every director, promoter, and
every other person who authorizes the issue of such prospectus, incurs liability towards those
who subscribe for shares on the faith of an untrue statement.

(g) Ultra vires acts

The directors of a company shall be personally liable for all those acts done by them on
behalf of the company if they are ultra vires the company.

(h) Non-payment of Tax

In the event of winding up of a private company, if any tax assessed on the company whether
before or in course of liquidation in respect of any income of any previous year cannot be
recovered, every person who was director of that company at any time during the relevant
previous year, shall be jointly and severally liable for payment of such tax.

3. Expenses and formalism : Incorporation of a company is an expensive affair. Besides, it

involves completion of a number of formalities. Moreover, the administration of a company
has to be carried on strictly in accordance with the provisions of the company law and
activities are limited by its memorandum which at times creates problems in its progress.

4.Company is not a citizen

Though a company is a legal person, it is not a citizen under the constitutional law of India or
the Citizenship Act, 1955. The reason as to why a company cannot be treated as a citizen is
that citizenship is available to individuals or natural persons only and not to juristic persons.
The question whether a corporation is a citizen was decided by the Supreme Court in State
Trading Corporation of India v. Commercial Tax Officer[AIR 1963 SC 1811]. Since a
company is not treated as a citizen, it cannot claim protection of such fundamental rights as
are expressly guaranteed to citizens, but it can certainly claim the protection of such
fundamental rights as are guaranteed to all persons whether citizens or not. In Tata
Engineering Company v. State of Bihar It was held that since the legal personality of a
company is altogether different from that of its members and shareholders, it cannot claim
protection of fundamental rights although all its members are Indian citizens. Though a
company is not a citizen, it does have a nationality, domicile and residence. In case of
residence of a company, it has been held that for the purposes of income tax law, a company
resides where its real business is carried on and the real business of a company shall be
deemed to be carried on where its Central management and control is actually located.

Statutory Corporations or Companies

Companies and undertakings concerned with public utility such as railways, roadways, docks,
electricity etc. are usually incorporated by special Acts of the Legislature. They are mostly
invested with extensive powers. The examples of statutory corporations are the Reserve Bank
of India established by the Reserve Bank of India Act, 1934, the Industrial Finance
Corporation of India established by the Industrial Finance Corporation Act, 1948, Air India
incorporated under the Air Corporation Act, 1953, the Life Insurance Corporation of India
created by the Life Insurance Corporation of India Act, 1956 and so on.

Therefore a statutory corporation is a public enterprise which comes into existence by a

special Act of Parliament. The Act would define its p[owers and functions, rules and
regulations governing its employees and its relationship with the government department.
They are financially independent.

Though the Parliament and the State Legislatures have power to create statutory trading or
non-trading corporations for even private purposes as per Entry 44 of List I and Entry 32 of
List II of Seventh Schedule of the Constitution of India, any group or association desiring to
seek incorporation for other than public purposes is generally expected to get itself
incorporated by registration under the Companies Act.

One Man Company

A one man company means a single person owns the whole or practically the whole of share
capital. There may or may not be other members. The other members shall be acquaintances
like friends, relatives or nominees. The central person shall have full control over the
company. These types of companies enjoy a corporate status and have limited liability of the
company. They also have a legal status. The concept of one man company was accepted in
Saloman’s case.