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INTRODUCTION

Chapter 1 focuses on the History of Legislation. To understand Corporate Personality it is very important to first have a look at the development in the legislation area in the countries, so that a basic idea of the law of the country could be got and hence it would be easy to know the position of company in that country. Such a strategy is not only important but also desirable taking into account the fact that India was an English colony and has got the superstructure of many laws in legacy. Chapter 2 emphasize the meaning of corporate personality in India, USA & UK and its evolution through ages. Thus to understand Corporate personality it is important that there is a basic concept of doctrine of identification, according to this doctrine corporate personality is looked in criminal matters. In this chapter, the concept and characteristics of corporate personality is discussed. Literally the word company means a group of persons associated for any common object such as business, charity, sports and research etc. Almost every partnership firm having two or more partners may, therefore, style itself as a company. But this company is not a company in the legal sense of the term. We shall be using the word company strictly in legal sense, i.e. a company incorporated or registered under the Companies Act. Chapter 3 lays emphasise on corporate personality according to Indian perspective. Chapter 4 examines corporate personality in accordance to U.S.A. perspective. Chapter 5 looks into the U.K. scenario. Chapter 3, 4 & 5 deal with questions pertaining to the rights and liabilities to which a company and the persons associated with it are subject in the above said countries and position of company in the respective countries. The various circumstances prompting the courts to lift the corporate veil or break the corporate shell to peep inside and to identify the actual persons involved in case of fraud or any improper conduct as these members/directors are the limbs of the company and also look into the advantages and disadvantages of incorporation.

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After learning the concept of corporate personality, its main characteristics and its advantages and disadvantages, there will be a glimpse of the various kinds of company legislation and its working in different countries which help to see the true nature of corporate personality in the various countries and show the working and function in the country by the help of case laws . The origins and development of Company law in India is based on the English Company Law. Whatever Company legislations have been passed in England from time to time has been followed by the Indian law with certain modification. The Companies Act, 1956 is said to follow the U.K. Companies Act, 1948. In UK the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation as an association of persons while the US concept of inequitable incorporation: fraud, undercapitalisation, domination by parent of subsidiary. The corporate personality as determined by the British Legislature and UK courts had a far-reaching bearing on the company laws of the commonwealth countries. According to Robert B., et al (1996), The Australian Government in order to support small businesses followed the corporate personality precedents and so affected many provisions. Thus, these chapters show relation between the countries. Chapter 6 will compromise on the conclusive remark.

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CHAPTER-1 HISTORY OF COMPANY LEGISLATION

1.1. History of Company Legislation in England
The origins and development of Company law in India is based on the English Company Law. Whatever Company legislations have been passed in England from time to time has been followed by the Indian law with certain modification. The Companies Act, 1956 is said to follow the U.K. Companies Act, 1948. In England, the „merchant guilds‟ were the earliest business associations which came up during the 11th to 13th centuries. Charters were granted to the members of the guilds by the Crown which gives them a monopoly in respect of particular trade. These associations were either formed as „Commenda‟ or „Societas‟. „Commenda‟ carries on its operation in the form of partnership where the financier is a sleeping partner and has limited liability, the liability to be borne by the working partners. On the other hand in the „societas‟, all the members took active part in the management of the trade and had unlimited liability. During the 14th century certain merchants adopted the word „Company‟ for their overseas ventures. This „Company was an extension of the merchant guilds in foreign trade. By the close of the 16th century Royal charter were issued which granted monopoly of trade to members of the Company over a certain territory. The Companies were known as regulated Companies, one example of which is East India Company established by charter in 1600. East India Company heals a monopoly of trade in India. Its members had the option to subscribe to the joint stock of the Company or to carry on trade individually. In 1653 permanent subscribed funds was introduced known as joint stock or fund of the Company, hence the name joint stock Company. The members contributed to the joint stock of the Company and were shareholders of the profit that was earned by the use of their capital, to be shared after that after each voyager. By the close of the 17th century all these Companies or merchant guilds had established permanent fixed capitals represented by shares which were freely transferable. The property of the Company was to be controlled by the governors or directors for the purpose of carrying

the English Companies Act was enacted (the Joint Stock Companies Act. This Act empowered the Crown to grant by Letters Patent any of the privileges of incorporation except limited liability. providing that the member‟s liability shall be limited to unpaid part of the shares. The Act of 1856 was . The scheme of the South Sea Company is the best example of the notorious Company floatation at that time. the Trading Companies Act. 1856). there was spurt of many Companies having speculative or even fraudulent schemes. but their liability was to cease three years after they had transferred their shares by registered transfer and creditors has to first proceed against the Company. As a result of the passing of the Bubble Act Companies disappeared like the bursting of the bubble. 1720 was passed. In 1856. 1855 which provides that the Joint Stock Companies registered under the Act of 1844 might limit the liability of its members to the amount unpaid on their shares. In 1885. which repeated both the Acts of 1844 and 1855. parliament enacted Limited Liability Act. The particulars regarding the constitution of a Company. Despite the incorporation of the Company. Though the Bubble Act prohibited the incorporation of a Company without on Act of parliament or Royal charter. it did not legislate against the unincorporated Company. Consequently. Under the Act of 1856. Till then the only method of incorporation a Company was by Royal Charter or by Act of parliament. The methods were quite expensive and time consuming. To check the emergence of the Companies of the Companies with speculative or fraudulent motives the Bubble Act. 1834 was passed. 1837 provided for the first time that personal liability of members might be limited to a specific amount per share through letters Patent. Members could escape personal liability by an agreement to the contrary. members are still personally liable. Thus many Companies came into existence by agreement and without incorporation. The Joint Stock Companies Act was enacted in 1844 providing for the registration of Companies with more than 25 members or with shares which are freely transferable without any consent by the members. seven or more persons could form themselves into an incorporated Company with or without limited liability by signing memorandum of association. The Act prohibited the floating of a corporation unless authorized by an Act of Parliament or Royal charter. By this Act the office of the „Registrar of Companies‟ was created for the first time. The Bubble Act was repealed in the year 1825 and in 1834. The Chartered Companies Act. charges in and annual returns are required to be filed with the Registrar so that there shall be an official record of the Company.4 on the business and was not to be divided between members at intervals of time.

In 1985.„The Indian Companies Act. Some formal amendments were made by the Adaptation of Laws Order. 1930 and 1932.e. the Company legislation in India has closely followed the English Companies Legislation. 26 January 1950. 1913‟ . 1980. At the end of 1950.2. The Act was amended several times in 1882. The Act was extensively amended in 1936 on the lines of the English Companies Act. a Bill was introduced in the parliament in 1953 which later on took the shape of the present Company . 1887. The Indian Company Law originates in the year 1850 when the first Indian Companies Act was enacted on the lines similar to the English Companies Act of 1844. 1915. 1967. 1985 which is the present statute governing Companies in England. 1920. Bhabha to look into the Indian Companies Act and to suggest some measures for improving the Companies Act taking into consideration the development of Indian trade and industry through all these years. 1981 and 1983. The Indian Companies Act.5 repealed by the Act of 1962 The Act was further repealed by the Acts of 1908. The first comprehensive legislation was enacted in the in the year 1866 on the model of the English Companies Act of 1862 and provided for the incorporation. closely following the English Companies Act y 1855. History of Company Legislation in India As discussed earlier. the government appointed a committee under the chairmanship of Sri. In 1857. 1860 was enacted on the lines of the English Companies Act and extends the privilege of „limited liability‟ to Banking and Insurance Companies as well. 1950 on the date on which constitution of India came into force i. 1928. 1929. 1. The Act of 1913 was further amended in the year 1914. 1948.C. 1976. regulation and winding up of Companies. The Bhabha committee submitted its report in April 1952 covering almost all aspects of the Company law. The Act of 1850 provides for the first time in India registration of joint stock Companies. It was by this Act that the institution of „Private Company‟ was for the first time introduced in the Indian Company Law. H. Based on the recommendation of the Committee Report. was passed. the whole of the existing law relating to Companies was consolidated in the Companies Act. another Act.which brought Indian law at par with English Companies Act of 1908. till we had a consolidating Act . 1891. 1926. 1895 and 1910. which extended the privilege of limited liability to joint stock Companies excepting Banking and Insurance Companies.

g. „Advisory commission‟ attached to the „Company Law Board‟ was to be replaced by an „Advisory committee‟ by amending section 410. Restrictions were imposed on the period of currency of blank transfers by adding subsection (1A) to section 108. c. a provision was made for setting up of a „Companies Tribunal‟. 1988. b. 1985. 2000. The Act amends sec.(i) the main objects. 1956 The major amendments in the Act of 1956 came in the years 1960. b. By this amending Act. 1963. 10A. 1957. b. 1969 :- . (2) The Companies (Amendments) Act 1963 :a. 1991. Some restrictions were imposed on management of Companies. Section 10E of the amending Act provides for setting up a „Board of Company Law Administration‟ and under section. 1962. [(Companies Tribunal was abolished in 1967 by the Companies (Tribunal Abolition Act. and (ii) Other objects. 1977. It is necessary here to have brief a look at the amendments. the Companies Act. (1) The Companies (Amendment) Act. 1966. The amending Act was based on the report of the Vivian. 1960 :a. 13 and provided that the objects clause in the Memorandum of Association of any Company may be divided into two sub clauses . 2002 and 2006. managerial remuneration and private Companies. 1965 :a. 1967. c. The amending Act was based on the recommendations of Shastri Committee which was appointed by the government on 15 May. d. (4) The Companies (Amendment) Act. A new class of Companies namely „Deemed to be Public Companies‟ was introduced.Jain group of Companies. 1969. certain changes were incorporated in the Companies Act to improve the efficiency of the Company administration and to prevent abuses of power of management e. 1964. 1974.Bose Commission instituted to inquire into the administration of the Dalmia . 1965. This third major amendment was based on the recommendations of Daphtary-Shastri Committee. (3) The Companies Amendment Act. 1967)].6 Act viz.

b.judicial powers previously exercised by Courts were transferred to the Company Law board. The Act introduce new sections to prevent or regulate „take over‟ of shares in a Company by a „group‟ or „combine‟ having the common intention to acquire control over the Company. d. The limits up to which and the condition subject to which. g. The act prohibited Companies from contributing any amount to any political party or for any political purpose. deposits may be invited or accepted by a Company. h. Provisions regarding Foreign Company. 1974 :This Amended Act came to effectively implement the Contemporary socio-economic policy of the Government. Insertion of new section 58A and 205 A (3) giving more legislative power to the central government in matters of Company affairs.time secretary for the Companies having a paid a up share capital of rupees twenty five lakh or more. Abolished the institution of Managing Agents and Secretaries and Treasures. (6) The Companies (Amendment Act. The Act sought to streamline the Company administration and to promote greater efficiency and social justice in the working of the corporate sector. in consultation with the Reserve Bank of India. Some of the quasi . By amending section 58 of the Companies Act. i. Previously it was two.7 a. Compulsory appointment of a whole. (5) The Companies (Amendment) Act. Prescribing strict disclosure norms before accepting deposits from the public. b. c. 1956 Central Government has been empowered to prescribe. 1977. The important features of the Act are:a. Company Law Board has been given the powers of a Civil Court to enforce the attendance of witness and production of documents etc. a. e. b. Inclusion of the concept of „deemed to be public Companies‟. The central Government has been given the power to appoint as many Directors as it thought necessary on the Board of Directors of a Company in public interest. By amending section 220. it has been made absolutely essential for the management to file copies of the Balance sheet and the Profit and Loss Account with the registrar . f. and to punish for its contempt.

Wide powers have been conferred on the Company Law Board in regard to the execution of orders made by it under various sections. However.000. 1 crore or more or if it accepts deposits from the public through an advertisement. c. For a private Company to be treated as „Deemed public Company‟ its average annual turnover during three preceding years shall be Rs. directly or indirectly. The ceiling for donations for charitable purposes has been raised from Rs. Prior to this Act. even where the Annual General Meeting (AGM) has not been held in time. Companies were permitted to make contributions. the orders of the CLB will be appealable to High Court on question of law. 25.000 to Rs. . Government Companies and Companies which have been in existence for less than three financial years are prohibited from making any political contribution. to make on application to one or more recognized stock exchanges for permission to deal in the shares or debentures of the Company. has been amended. 50. Setting up of an independent Company Law Boards having power to regulate its own procedure. there was a blanket ban on political contribution by all types of Companies. The decisions of the CLB on question of fact to be final.8 of Companies within a presided period. 5 crores or more instead of the existing Rs. d. c. 1985The important changes brought about by that Act are: a. dealing with the Central Government‟s power to order amalgamation of Companies in public interest. (7) The Companies ( Amendment) Act. Their salient features are: a. (8) The Companies ( Amendment Act. It has been made obligatory for every Company intending to offer shores or debentures to the public for subscription by the issue of prospectus. b. b. if a resolution authorizing such contributions are passed at a meeting of the Board of Directors. not exceeding 5% of their average net profits during the three immediately preceding financial years. Section 396. to any political party or for any political purpose to any person. 1988 :This Amendment came as a result of the recommendations made by the sacchar committee. before such issue.

1996 :The major changes brought about by this Act are:a. . by amending section. (9) The Companies (Amendment) Act. having a paid up share capital of Rs. The Amendment Act. c. Mutual fund.9 d. venture capital funds and other SEBI recognized funds have been granted voting rights for shares they hold in other Companies. Amendment to section 17 of the Companies Act enables the Companies to change the objects clause in their Memorandum of Association without seeking approval of the Company Law Board b. 1999 :This Amendment Act is deemed to have come into force with effect from 31st October. “Investor Education and Protection Fund” was established for propagation of knowledge as to matters of investment. e. By inserting section 77A. 10. Earlier Public Trustees alone were allowed to vote. 77AA and 77B the right have been given to the Companies to purchase their own shares or other specified securities under a “buy back” scheme subject to SEBI guidelines in case of listed Companies or Central Government guidelines in case of unlisted Companies and private Companies. Provision has been made for issue of “sweat equity shares” to directors or employees of Companies by inserting section 79A. The main provisions are:a. Companies have been provided with the facility to the file their documents with the Registrar of Companies in computerized format i. Soft copy. d. share holders and debenture holders by amending section 58A and by introducing section 109A and 109B. Nomination facility provided for depositors. 5 crores or more to compulsorily have a managing or whole time director or a manager. 1998. The Companies (Amendment) Act.e. by inserting section 205C. Issuing of preference shares which are irredeemable or redeemable after a period of 10 years. Every public limited Company or a subsidiary thereof. d. is prohibited hereafter. b. c. So has increased the period of redeemable preference shares to 20 years in place of 10 years. the date of promulgation of ordinance by the president in this regard.

(11) The Companies (Amendment) Act.00. e. Further. Shelf Prospects. Postal Ballot . f. (12) Companies (Amendment) Act.section 372A. d.section 292A has been added providing for constitution of audit committees by every public Company having a paid up capital of Rs.00. A new section . Any changes in between can be told by issuing an „information memorandum‟. are permitted to issue a „shelf Prospectus‟ instead of a Prospectus. 1. 2000 :This act came in order to provide certain measures of good corporate governance and for ensuring meaningful share holders‟ democracy in the working of Companies. 5. Non-voting equity shares . 5 crores or more.A new section . Small depositor :.10 e. g.Section 86 was amended to allow issue of non-voting equity shares by public Companies. The Shelf Prospects to have a shelf life of one year. to facilitate inter-corporate capital flows for meeting the demands of liberalization. Audit committees . Requirement of Minimum paid up capital: . which have to make repeated offers of securities in year. whether having a place of business in India or not. The changes brought about by this Act include: a. Information Memorandum as envisaged in section 60B recognizes book building process. Information Memorandum and Red Herring Prospectus: .000.000 and public Companies must have a minimum period up capital of Rs. Indian Depository Receipts . „Red Herring Prospects‟ is an incomplete prospectus.Private Companies to have a minimum paid up capital of not less than Rs. 2001 :- . b. the recommendations of the audit committee on any matter relating to financial management shall be binding on the Board. It does not contain information regarding price and quantum of shares.Sections 58AA and 58AAA were introduced for the protection of small depositors c.In order to get a wider participation of share holders voting through postal ballot on a particular resolution has been allowed. Information Memorandum is a document for eliciting the demand for the securities and to ascertain the price and terms of the issue.Section 605A permits Companies incorporated outside India. was introduced replacing section 370 and 372.Financial institution and banks. to issue Depository Receipts in India and thus raise capital funds from Indian public.

1.11 This Act amended provision of section 77A relating to buy back of shares allowing Board of Directors to buy-back shares upto 10% of the paid-up capital and free reserves provided not more than one such buy-back is made during period of 365 days. 2002. Sick Companies . Prior to this special resolution is required for buy-back of shares. It seeks to establish a National Company Law Tribunal (NCLT) providing it with powers for expediting the winding up process so that the Company‟s resources may be utilized for better purpose rather than blocking them in sick undertakings. 2002 and Companies (Second Amendment) Act. two Companies (Amendment) Acts Viz. providing for etiling of forms. Companies (Amendment) Act. 1956 is said . 2002 :In December 2002. applications.The second amendment act attempts to rationalize the winding up process and to facilitate rehabilitation of sick Companies by repeating SICA and dissolving BIFR.3. Whatever Company legislations have been passed in England from time to time has been followed by the Indian law with certain modification.Setting up and regulation of co-operatives as body corporate under the Companies Act. Directors identification number (DIN) : . (14) Companies (Amendment) Act 2006 :This Act has introduced various provisions relating to:a. b. 1956 and to be known as producer Companies. (13) Companies (Amendments) Act. and no fresh appointment or re-appointment of any individual as director unless such an individual has been allotted DIN. Summary The origins and development of Company law in India is based on the English Company Law. The Companies Act. Producer Companies: . Governance and E-filing – The central government has notified the Companies (Electronic Filing and Authentication of Documents) Rules 2006. The Important provision made through these Acts are :a. documents and declarations in Portable Document Format (PDF) and authentication thereof using digital signature. b.DIN to be issued to Directors. were passed.

1720 was passed. The Act of 1850 provides for the first time in India registration of joint stock Companies.K. Thus many Companies came into existence by agreement and without incorporation. 1980.12 to follow the U. the English Companies Act was enacted (the Joint Stock Companies Act. The property of the Company was to be controlled by the governors or directors for the purpose of carrying on the business and was not to be divided between members at intervals of time. seven or more persons could form themselves into an incorporated Company with or without limited liability by signing memorandum of association. closely . This „Company was an extension of the merchant guilds in foreign trade. As a result of the passing of the Bubble Act Companies disappeared like the bursting of the bubble. These associations were either formed as „Commenda‟ or „Societas‟. The scheme of the South Sea Company is the best example of the notorious Company floatation at that time. 1948. The Indian Company Law originates in the year 1850 when the first Indian Companies Act was enacted on the lines similar to the English Companies Act of 1844. In 1857. 1967. one example of which is East India Company established by charter in 1600. The Act prohibited the floating of a corporation unless authorized by an Act of Parliament or Royal charter. To check the emergence of the Companies of the Companies with speculative or fraudulent motives the Bubble Act. Charters were granted to the members of the guilds by the Crown which gives them a monopoly in respect of particular trade. another Act. Consequently. 1856). Under the Act of 1856. By the close of the 16th century Royal charter were issued which granted monopoly of trade to members of the Company over a certain territory. The Company legislation in India has closely followed the English Companies Legislation. which repeated both the Acts of 1844 and 1855. the whole of the existing law relating to Companies was consolidated in the Companies Act. The Act of 1856 was repealed by the Act of 1962 The Act was further repealed by the Acts of 1908. Till then the only method of incorporation a Company was by Royal Charter or by Act of parliament. The Companies were known as regulated Companies. there was spurt of many Companies having speculative or even fraudulent schemes. 1948. 1928. The methods were quite expensive and time consuming. Companies Act. 1981 and 1983. In 1985. During the 14th century certain merchants adopted the word „Company‟ for their overseas ventures. 1985 which is the present statute governing Companies in England. In 1856. 1976.By the close of the 17th century all these Companies or merchant guilds had established permanent fixed capitals represented by shares which were freely transferable.

„The Indian Companies Act. the government appointed a committee under the chairmanship of Sri. It was by this Act that the institution of „Private Company‟ was for the first time introduced in the Indian Company Law. the Companies Act. The Act was amended several times in 1882. 1967. 1991. 1913‟ . The Act of 1913 was further amended in the year 1914.e. regulation and winding up of Companies. 1966. The Act was extensively amended in 1936 on the lines of the English Companies Act. At the end of 1950. 1977. 1930 and 1932. a Bill was introduced in the parliament in 1953 which later on took the shape of the present Company Act viz. 1915. Some formal amendments were made by the Adaptation of Laws Order. 1920. Based on the recommendation of the Committee Report. 1929. 1988.which brought Indian law at par with English Companies Act of 1908. Bhabha to look into the Indian Companies Act and to suggest some measures for improving the Companies Act taking into consideration the development of Indian trade and industry through all these years. 1963. 1962. 1974. 26 January 1950. 1969. 2002 and 2006. 1950 on the date on which constitution of India came into force i. The first comprehensive legislation was enacted in the in the year 1866 on the model of the English Companies Act of 1862 and provided for the incorporation. 1887. . 1965. 1891. till we had a consolidating Act . 1860 was enacted on the lines of the English Companies Act and extends the privilege of „limited liability‟ to Banking and Insurance Companies as well. 1926. 1895 and 1910. 1964. 1855. 1985.C. H. The Bhabha committee submitted its report in April 1952 covering almost all aspects of the Company law.13 following the English Companies Act. The Indian Companies Act. which extended the privilege of limited liability to joint stock Companies excepting Banking and Insurance Companies. 1956 The major amendments in the Act of 1956 came in the years 1960. was passed. 2000.

the court will pierce the corporate veil or will ignore the corporate veil to reach the person behind the veil or reveal the true form and character of the concerned company.1. In that case the apex court simply laid down that a company is a distinct legal person entirely different from the members of that company. However the courts have not always applied the principal laid down in Solomon v. Solomon & Co. are included within the term „legal personality‟.. The rationale behind this is probably that the law will not allow the corporate form to be misused or for the purposes which is set out in the statute.14 CHAPTER-2 CORPORATE PERSONALITY 2. For instance. 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. Corporations are of two kinds: 1. Corporation Aggregate: Is an association of human beings united for the purpose of forwarding their certain interest. a charitable fund etc. In certain cases. A limited Company is one of the best examples.. In those circumstances in which the court feels that the corporate forms are being misused it will rip through the corporate veil and expose its true character and nature disregarding the Solomon principal as laid down by the House of Lords. Their liability is limited to the extent of their shareholding in the company.Subsequently in 1897 in Solomon v. the corpus of the legal person shall be some fund or estate which reserved certain special uses. In a number of circumstances. Solomon & Company the House of Lords effected these enactments and cemented into English law the twin concepts of corporate entity and limited liability. a trust – estate or the estate of an insolvent. Types of Corporation and basics Incorporation by registration was introduced in 1844 and the doctrine of limited liability followed in 1855. A limited liability company is thus formed by the .

Corporation Sole: Is an incorporated series of successive persons. In other words. Whilley. Post Master General. History of corporate personality in India Corporate legal personality arose from the activities of organizations such as religious orders and local authorities which were granted rights by the government to hold property and sue and be sued in their own right and not to have to rely on the rights of the members behind the organization. the death of a corporation sole does not adversely affect the interests of the public in general. 2. Over time the concept began to be applied to commercial ventures with a public interest element such as rail building ventures and colonial trading businesses. The chief characteristic of a corporation sole is its “continuous entity endowed with a capacity for endless duration”.. Generally. Saloman & Co2. modern company law only began in the mid nineteenth century when a series of Companies 1 2 Colonial Bank v. the Crown in England etc are some examples of a corporation sole. D. The object of a corporation sole is similar to that of a corporation aggregate. A corporation sole is perpetual. The property is not that of the shareholders but its own property and its assets and liabilities are different from that of its members. (1885) 30 Ch.. . a single person. Comptroller and auditor general of India. corporation sole are the holders of a public office which are recognized by law as a corporation. his property. do not extinguish but they are vested in the person who succeeds him. but legal personality continues to be represented by the successive person. who is in exercise of some office or function.15 personification of the shareholders. The shareholders have a right to receive dividends from the profits of the company but not the property of the company1. 261 (1887) AC 22. meaning thereby that with his death. However. Public Trustee. his natural personality is destroyed. In consequence. In it a single person holding a public office holds the office in a series of succession. deals in legal capacity and has legal rights and duties. Thus on the death of a corporation sole. 2. The principle of corporate personality of a company was recognized in the case of Saloman v. right and liabilities etc. It consists of a single person who is personified and regarded by law as a legal person.2. A corporation sole is an illustration of double capacity.

Salomon & Co3. and it was subsequently destroyed in a fire. family companies. and impose liability directly on the individuals behind the company.16 Acts were passed which allowed ordinary individuals to form registered companies with limited liability. Separate legal personality often has unintended consequences. However. he no longer had an “insurable interest” in it and his claim failed. The most commonly cited examples are:    where the company is a mere façade where the company is effectively just the agent of its members or controllers where a representative of the company has taken some personal responsibility for a statement or action 3 4 (1887) AC 22 [1978] Fam 181 5 [1925] AC 619 6 [1990] Ch 433 . The way in which corporate personality and limited liability link together is best expressed by examining the key cases 2. B4 it was held that a discovery order obtained by a wife against her husband was not effective against the husband's company as it was not named in the order and was separate and distinct from him.3. Corporate personality in UK One of the key legal features of corporations is their separate legal personality. In B v. Cape Industries plc6 it was held that victims of asbestos poisoning at the hands of an American subsidiary could not sue the English parent in tort. Northern Assurance Co Ltd5 a claim under an insurance policy failed where the insured had transferred timber from his name into the name of a company wholly owned by him. However. the separate legal personality was not confirmed under English law until 1895 by the House of Lords in Salomon v. particularly in relation to smaller. There are certain specific situations where courts are generally prepared to “pierce the corporate veil”. and also enables multinational companies to manage the liability of their overseas operations. And in Macaura v. separate legal personality does allow corporate groups a great deal of flexibility in relation to tax planning. For instance in Adams v. to look directly at. as the property now belonged to the company and not to him. also known as “personhood” or being “artificial persons”.

For the liability to arise it has to be shown that the director committed the breach of copyright personally procured or induced the breach by the company. A claimant must first establish that there is a direct relationship between the director and the claimant that includes the statements made and the personal conduct of the director in the particular matter. 7 8 [1998] 1 WLR 830 [2001] EWCA Civ 594 . many jurisdictions provide for shareholder liability where a company breaches environmental protection laws)  in many jurisdictions.. the directors can be forced to account for trading losses personally. MCA Records Inc v Charly Records Ltd8. where a company continues to trade despite foreseeable bankruptcy. Liability for negligence requires an assumption of responsibility that must be determined objectively. Designs and Patents Act 1988 UK. however a director and controlling shareholder have been held liable jointly with the company for infringement of copyright. This is separate liability to that of the company. Corporate Personality and Liability: A company‟s corporate personality prevents directors from being held liable in respect of company obligations. Later cases have followed this reasoning. In Williams v Natural Life Health Foods7. Another test to establish personal liability on the part of director is that the claimant must have relied on the statements made and the conduct of the director is examined in the provision of services. the Court restricted the circumstances in which a director of a company would be personally liable to claimants for loss which they suffered as a result of negligent advice given them by the company.17   where the company is engaged in fraud or other criminal wrongdoing where the natural interpretation of a contract or statute is as a reference to the corporate group and not the individual company  where permitted by statute (for example. which is a provision that arises by virtue of the Copyright. but the director will not be held liable if the director does no more that carry out the constitutional role in the governance of the company which is simply to vote at board meetings. The reliance must been seen to have created a special relationship between the director and the claimant in that the director has taken personal responsibility for the matter and is not merely acting in the capacity of a manager of the company.

as the corporate form cannot be used for the purposes of fraud. While respecting the separate legal personality of a company in which there is not a true lifting of the veil of incorporation.In certain cases courts have found that holding companies were in fact carrying on business through the agency of its subsidiary company but only where the activities of the subsidiary company are so closely controlled and directed by the parent company that the latter can be regarded as merely an agent conducting the parent company‟s business. The fundamental principles established in Salomon v Salomon & Co9 are not ignored. courts have treated the conduct or characteristics of its directors. Gilford Motor Co v Horne11. De Beers Consolidated Mining Ltd v Howe13. The court will use its powers to pierce the corporate veil if it is necessary to achieve justice irrespective of the legal efficacy of the company under consideration. Re a Company Ltd14. It is not sufficient that the company has been involved in some impropriety not linked to the use of the company structure to avoid or conceal the liability. In doing this. and ignore the separate legal personality of a company. Smith Stone and Knight Ltd v Birmingham Corporation12. Groups of Companies Courts have been prepared to go some way towards recognizing the economic entity of a tightly controlled group of companies so as to ignore the separate legal entities of the 9 [1897] AC 22 [1911] 1 KB 95 11 [1933] Ch 935 12 [1939] 4 All ER 116 13 [1906] AC 455 14 [1985] BCLC 333 15 [1990] Ch 443 10 . Re Darby10.18 Lifting the Veil of Incorporation There are certain situations where courts are prepared to lift the veil of incorporation. Adams v Cape Industries plc15. or as a device to evade contractual or other legal obligation. managers or shareholders as attributable to the company itself. but rather the director is found liable for the fraud in their personal capacity. Where fraud or deliberate breach of trust can be shown there is a willingness to set aside the corporate form even where this involves a network of interlocking foreign and English companies. they have examined the way the company is actually managed in order to find where the centre or centres of management are in fact located to determine both civil and criminal liability.

The courts will not however ignore the limited liability of a subsidiary so as to allow the creditor of an insolvent subsidiary to seek redress from the holding company. The common factor in the two cases was the liability of the company and the cornerstone of any discussion of whether a parent may be liable for inducing a breach of contract is the decision in Salomon v Salomon & Co21 that protects the corporate personality. 2. limiting or otherwise managing those liabilities the soundness of the previous case is thrown into some doubt requiring special circumstances to lift the corporate veil. Odyssey (London) Ltd v OIC Run-Off Ltd20.19 companies within the group. History of Corporate personality in UK Historically in the United Kingdom. As to what amounts to actionable inducement appears to be one that is outside the operation of independent corporate governance of the subsidiary. In another case. DHN Food Distributors Ltd v Tower Hamlets16. More recently doubt has been thrown onto the ability of the principle in Salomon v Salomon & Co18 to insulate the company‟s legal status in the context of group corporate activity given the principle in Salomon which was developed on the basis of a one man company. the court held a company liable due to an individual's perjury in legal proceedings to which to the company was a party to those proceedings. The degree of domination of the subsidiary by the holding company is not stated with precision in the Companies Acts or elsewhere. Woolfson v Strathclyde Regional Council17. this meant that organizations such as religious orders and local authorities could hold property rights and could sue and be sued in their own right.4. It is difficult to predict with any certainty when the separate legal personality of the companies within the group will be set aside by the courts. In Stocznia Gdanska SA v Latvian Shipping Co19 a parent company was held liable for indirectly inducing the breach of a contract between its subsidiary and a third party using unlawful means through failure to comply with an agreement to fund the subsidiary‟s purchase of goods. However if circumstances exist indicating that there is a mere sham or façade concealing the true facts where a company is incorporated ahead of the crystallization of liabilities as a means of avoiding. 16 17 LBC [1976] 1 WLR 852 [1978] SLT 159 18 [1897] AC 22 19 [2002] EWCA Civ 889 20 [2000] 97 (13) LSG 42 21 [1897] AC 22 .

corporations were recognized as having rights to contract. Constitution. 394 . decided in 1819. that provides a single entity for easier taxation and regulation. however. Southern Pacific Railroad22. a series of mid-nineteenth century Companies Acts were passed. As a result. Others argue that corporations should have the protection of the U.5. Constitution to limit these rights to those provided by state law and state constitutions. In order to remedy this. 22 118 U. U. 2. Corporate personality in USA It refers to the question of which subset. in the case of large corporations. In this view. treating corporations as “persons” is a convenient legal fiction that allows corporations to sue and to be sued. creating a process whereby ordinary individuals could easily form a registered company with limited liability. The notion of corporations as persons: As a matter of interpretation of the word “person” in the fourteenth Amendment. if any. in Dartmouth College v. within a few decades. of rights afforded under the law to natural persons should also be afforded to corporations as legal persons.S. and that these people shouldn't be deprived of their human rights when they join with others to act collectively. In the United States. the company went from being the privileged of a few to being almost a right. the difficulty involved in obtaining a grant of corporate status from parliament forced businesses to utilise the trust instrument to form “deed of settlement” companies.S. Woodward. In the 1886 case Santa Clara County v. and to have those contracts honored the same as contracts entered into by natural persons. Opponents of corporate personhood seek to amend the U. Over time. corporate personality came to be conferred on commercial ventures such as trading companies and roadway construction projects or parastatals (major statutory corporations) in which there was a public interest.S. the Supreme Court recognized that corporations were recognized as persons for purposes of the fourteenth Amendment. and that protects the rights of the shareholders.20 without having to rely on the rights of the members of the organization. that simplified complex transactions that would otherwise involve. thousands of people. By the mid nineteenth century. These companies were extremely complex legal entities that were sometimes used as instruments of fraud.S. pointing out that they are organizations of people. courts have extended certain constitutional protections to corporations.

Challenge Corporate Power. how much power the member states should have over their own affairs. When Hamilton. President Andrew Jackson seeing the Second Bank of the United States as a source of corruption. while Jefferson advocated for a more decentralized. more agrarian nation (Jeffersonian democracy). the Women's International League for Peace and Freedom. . After 20 years in operation. as the first US Treasury Secretary. Plaintiff-appellant. created a national bank for the new country ( First Bank of the United States). Some have argued in court that corporations should be allowed to refuse to hand over any incriminating documents due to the Fifth Amendment right given to people to not have to incriminate themselves. While both Hamilton and Jefferson participated in the creation of the more centralized Federal Government than that in the Articles of Confederation. including claims of a Constitutional right to contribute to political campaigns. S.6. and how much say citizens and citizen organizations should have in public affairs. the bank's charter was not renewed. Gore argues that the 1886 Southern Pacific decision entrenched the 'monopolies in commerce' that Thomas Jefferson had wanted to prohibit.The Leader in Challenging Corporate Personhood.”23 However the court did not agree in that 1975 case. they had very different visions of government. which he believed necessary for an industrialized nation. succeeded in eliminating that institution by refusing to renew its charter thereby eliminating a central bank in the United States.21 including the right of association. Jefferson opposed the idea. in one case “Appellants suggested that the use of the word “taxpayer” several times during the course of the regulations requires a construction that the fifth amendment self-incrimination warning be given to a corporation. v. Their objections focus on constitutional protections granted to corporations. The Green Party. 2. Defendantsappellees 24 WILPF . Historical background of USA The history of corporate law in the United States can be directly tied to the ebb and flow of the debate between Alexander Hamilton and Thomas Jefferson over how centralized the government of the United States should be.24 and former Vice-President Al Gore are among those who have objected to the idea of corporate personhood. Hamilton advocated for a stronger central government. (Later.) 23 United States of America. Steve Sourapas and Crest Beverage Company. Assert the People's Rights .

P. Schwab and Andrew Carnegie. a private attorney and a veteran of the Continental Army.22 The Federal Constitution of 1788 did not mention corporations. although the Federal government has from time to time chartered corporations. especially for capital intensive yet risky projects such as railroads. His main reason for the reorganization was to move the college from a curriculum rooted in theology to a curriculum rooted in science. Corporations had long existed in the new nation. Due to experience as British Colonies and the accompanying corporate colonialism from British corporations chartered by the crown to do business in North America. most directly exercised through government grants of monopoly as part of the chartering process. in litigation that required him to defend that corporation's right to reorganize itself and in the process remove professors. then. steel makers Charles M. Havemeyer. and railroad owners Cornelius Vanderbilt and Jay Gould created corporations that influenced legislation at the local. Businessmen such as Mark Hanna. as the 19th century matured. 573. state. new corporations were greeted with mixed feelings. fine arts. The Rev John Bracken v. represented the board of the College of William and Mary. The notion of corporate personhood. but these were primarily educational corporations or institutions chartered by the British crown which continued to exist after the new nation was created from the Confederation. The Supreme Court of Virginia ruled that the original crown charter provided the authority for the Visitors to make changes including the reorganization.S. The Visitors of Wm & Mary College25 . The degree of permissible government interference in corporate affairs was controversial from the earliest days of the nation. the general chartering of corporations has been left to the states. The Civil War accelerated the growth of manufacturing and the power of the men who owned the large corporations. 25 7 Va. became more complex as the Revolution generated new inventions and business processes. Beginning in the 1870s. Still. sugar trust magnate Henry O. John Marshall. manufacturing in the U. has roots in the early history of the republic. Thomas Jefferson claimed in his autobiography that he had a hand in the reorganization when he was elected a Visitor of William and Mary after being appointed the Governor of the Commonwealth in June of 1779. banker J. In the late 18th and early 19th centuries. Thus. and languages. corporations began to be chartered in greater numbers by the states. The favored form for large businesses became the corporation because the corporation provided a mechanism to raise the large amounts of investment capital large business required. 1790 Supreme Court of Virginia . and federal levels as they built businesses that spanned multiple states and communities. Morgan. In 1790.

The growth of this doctrine has helped in the implication and prosecution of the criminal activities of directors / managers of many companies. 180 (1877)). the Court held that the corporate entity is different from the people who are in the business of running of the company. Manufacturing corporations needed coal. As railroads increased their size. In the late 19th century. Roebuck and Company used railroads to deliver goods to mail order catalogue customers.S.23 corporate lawyers became bolder about using the Webster/Marshall theory of corporations as persons. 2. 94 U. 155. In this case. a number of conflicts between various states and the railroads began to surface. iron ore.S. or any other materials transported and consumer goods business such as Sears. Doctrine of Identification The concept of Doctrine of Identification finds its roots in the English Law. In each case the Court refused to render an opinion as to whether the Fourteenth Amendment applied to corporations. Solomon26.7. 179. 164. This is a widely known principle in law and has its source in the celebrated case of Solomon v. railroads were among the most politically powerful corporations in the country as the corporate officers had to work with federal and state legislatures in order to obtain land grants for rights of way and the legislatures in turn depended on the railroads to provide the low cost transportation needed to open up new territory. 26 [1897] AC 22 . 94 U.S. 94 U. arguing that as such they were entitled to some of the legal protections against arbitrary state action accorded also to natural persons. instead couching their decision on the Interstate Commerce clause. railroads tried to argue that the Fourteenth Amendment prevented states from regulating the maximum rates they could charge. The corporate personality of a company is different and separate from the promoters. Railroads provided a means for most of the nation's farmers to transport agricultural products such as grain and livestock from rural areas into cities such as Chicago.S. directors or owners of the company. In four cases that reached the Supreme Court (94 U. These cases did not rely on just an interpretation of the Fourteenth Amendment as most also tied in the Interstate Commerce clause as well. The misuse of this principle led to “Lifting of the Corporate Veil” wherein the shareholders or creditors of the company are protected if the company is engaged in any fraud or other criminal activities. finished iron.

29 ruled that the corporate personalities could be subjected to criminal action and the companies were held liable for crimes requiring intent (mens rea). He held that: “………The state of mind of these managers is the state of mind of the company and is treated by law as such. under instructions of whom work of the nervous centre is carried out. 691 29 (1944) 2 All E. the Doctrine of Identification was promulgated so as to affix liability of the crimes committed by the people in charge of running the company. They do have a brain and a nervous centre which controls the entire body. which at times is quite minimalistic.L. 624 . ICR Haulage Ltd28. The growth of this doctrine has been in the early 20th century. In criminal cases. Bolton Company v. during the 1940s had in various judgments like DPP v. 515 (KBD) 30 (1944) 1 All ER 119 31 1956) 3 All E. Bresler Ltd.24 A corporate entity can sue and be sued in its own individual name. … So also in the criminal law. R v. The only punishment that can be levied on the company is by way of fine. Graham & Sons31. in cases where the law requires a guilty 27 28 [1897] AC 22 (1944) 1 All E. The Courts in England. The question then raised is whether a company can ever be prosecuted for criminal offences and be punished with more than just a monetary fine.R. The purpose of this paper is to examine the various case laws on this point and the impact and the viability of this doctrine in the Indian legal system. 30 In the case of Director of Public Prosecutions v. This theory states that the liability of a crime committed by a corporate entity is attributed or identified to a person who has a control over the affairs of the company and that person is held liable for the crime or fault committed by the company under his supervision.R.R. and Moore v. where the defence was taken that the company is incapable of forming criminal intent as it did not have the will or a state of mind. the Court held that the company can form its intentions through its human agents and in certain circumstances the knowledge of the agent has to be imputed to the body corporate. the company can be prosecuted against but it is quite ineffectual as the company cannot be punished with imprisonment or death. In light of the above. T. Lord Denning as explained the position and said that the company could in many terms be equated with a human body. over many common law countries. In H. Kent and Sussex Contractors Ltd . They have people as their hands and legs. Kent & Sussex Contractors Ltd27. Lord Denning equated the brain and nervous system to the directors and managers who represent the directing will of the company.J.

v. It must be a question of law whether. Securities Commissioner33. 1968. He is acting as the company and his mind which directs his acts is the mind of the company. 127 (1995) 3 All E. That is not the 32 33 (1971) 2 All E. agent or delegate. the guilty mind of the directors or the managers will render the company themselves guilty. Nattrass32.R. within his appropriate sphere. and his mind is the mind of the company. he hears and speaks through the persona of the company. a person in doing particular things is to be regarded as the company or merely as the company's servant or agent. as advertised. He is not acting as a servant. In Meriden Global Funds Management Asia Ltd. Then the person who acts is not speaking or acting for the company. but the Defendant did not find the packet of washing powder at the reduced price. it was held that the shop manager could not be identified with the company. A corporation has none of these: it must act through living persons. once the facts have been ascertained. though not always one or the same person. He is an embodiment of the company or. the Appellant was marketing a packet of washing powder at a price lower than the market price. 918 .25 mind as a condition of a criminal offence. In that case any liability of the company can only be a statutory or vicarious liability” Lord Reid also discussed which people can be “identified” with the company. One Mr. V. If it is a guilty mind then that guilt is the guilt of the company. the Court in its obiter stated that conviction of a smaller company is easier (on application of this principle) because the relationship between the culprit and the company can be identified with more ease and certainty. The Defendant therefore filed a complaint under the Trade Descriptions Act.” In the celebrated case of Tesco Supermarkets Ltd. There is no question of the company being vicariously liable.R. He stated that the main considerations are the relative position he holds in the company and the extent of control he exercises over its operations or a section of it without effective superior control. Lord Hoffman discussed the principle of identification and stated that if an employee had be considered the ¨directing mind and will¨ of the company.“A living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intentions. Lord Reid discussed the law relating mens rea and the importance of the same in criminal law. In this case. Clemant of the Appellant was in charge of the packets with the reduced price being displayed in the store. one could say. In the same case. representative. the employee should have the authority to act as he did.

It was famously stated that: “ . Asiatic Petroleum Co.” There was a different view taken in Tesco Stores Ltd. In that event to locate a person for this knowledge was hence impossible and the doctrine of identification was hence inapplicable in this case. This may pose to be a problem in the sense that the company may make a division between the senior management and the employees to avoid criminal proceedings against them.R. In Lennard's Carrying Co. The most recent judgment of the Supreme Court in the Reliance Natural Resources Limited v. This case is a dispute over two brothers namely Mukesh Ambani led RIL and Anil Ambani led RNRL. the company cannot be held liable for the same. but who is really the directing mind and will of the corporation. the entire 34 35 1915 AC 705 (HL) (1993) 2 All E.26 case in larger companies.. the very ego and centre of the personality of the corporation. its active and directing will must consequently be sought in the person of somebody who for some purposes maybe called an agent.718 36 (1993) Crim LR 43 . Again in R v. the Court held that where the employees who were not in the decision making level could not be ¨identifiable¨ with the company and therefore were not deemed to be the controlling mind of the company. Reliance Industries Limited. After the death of their father Mr. (Aircraft Division)36 . the senior management could not be expected to know each and every customer and whether the customer was a minor or not. V. could be attributed to him and he be held for the wrongdoings of the company.34. a corporation is an abstraction. The reason for this decision was that in a large company. The House of Lords stated that the default of the managing director who is the “directing mind and will” of the company. discusses the Doctrine of Identification. The question that comes up is that if a person at a lower level commits a crime in the name of the company. v. Scope in India: We are also going to examine the growth and importance of the Doctrine of Identification in Indian Law during the recent years. The Court noted that Doctrine of Identification could not be applied here and the company was hence not liable. It has no mind of its own any more than a body of its own. Dhirubhai Ambani. Viscount Haldane propounded the “alter ego” theory and distinguished that from vicarious liability. Redfern & Dunlop Ltd. Brent London Borough Council35 wherein a store clerk sold a over -18 video to an underage customer.

one person could not be said to have had the knowledge with respect to the company.27 Ambani Group of Companies was divided between the two brothers. The observation of the judges was that in the Identification Doctrine. the employees can be charged with imprisonment or is the company is liable for fine and/or imprisonment. Claims were made by the injured and the relatives of the deceased and after many appeals. Assessment-II. United India Insurance Co. The court discussed the principle of identification or imputation. The Bombay High Court in its judgment held that Mukesh Ambani being the majority shareholder of the company was hence the ¨controlling mind and will¨ of the company. in the present case whether the defendant can plead contributory negligence of the plaintiff or of an employee of the plaintiff where the employee is acting in the course of his business. and others 37 and Assistant Commissioner. with their mother as the mediator. & Ors. The Court held that the director/mangers of the company. the question was whether in the case of criminal misdemeanours. the company having more than a million shareholders. The Supreme Court overruled the judgment of the Bombay High Court in respect of the Identification Doctrine. which knowledge he had in his personal capacity. should be held liable. the case reached the Supreme Court. The question in that scenario was whether the passengers were to be held liable as the driver who was negligent was appointed or retained by them. made certain concessions on behalf of the RIL. Ltd. which RNRL had sought to rely upon in the present case. An arrangement was reached between the parties.38 The first case was about an accident that occurred at an unmanned level railway crossing in Kerala when a hired vehicle was hit by a train passing through and passengers were injured and the driver was also killed. The court discarded this doctrine on the fact that the facts of the case did not fall into their preview. The other Indian cases where the Courts have followed the doctrine of identification are Union of India v. the company was “identified with such key personnel through whom it works”. 37 38 (1997) 8 SCC 683 AIR 2004 SC 86 . It observed that the family arrangement was between three parties namely the mother and the 2 sons. Bangalore and others v. who are the directing will and mind of the company. The legal entity of the company was different than the individual entity and in the present case. Mukesh Ambani had in this family arrangement. In the second case. These “key personnel” were described to be the alter ego of the company and their actions were deemed to be the actions of the company itself. Velliappa Textiles Ltd.

Summary Corporate personality refers to the fact that as far as the law is concerned a company personality really exists apart and different from its owners.” 2. hold its own property and crucially . can own property. As a result of this. It is this concept that enables limited liability for shareholders to occur as the debts belong to the legal entity of the company and not to the shareholders in that company.S.28 The case of U.be liable for its own debts. many offences might go unpunished and acts be committed in violation of law where. to refrain from certain practices. as in the present case. Supreme Court in New York Central & Hudson River Railroad Company v. United States39 stated that “It is true that there are some crimes which. of which rebating under the Federal statutes is one. 613 . cannot be committed by corporation. But there is a class of offences. forbidden in the interest of public policy. What this means is that the company has life of its own. If it were not so. acting within the authority conferred on them. wherein the crime consists in purposely doing the things prohibited by statute. the statute required all persons.8. can sue and be sued in its own name. 39 53 Lawyer’s Edn. in their nature. In that class of crimes we see no good reason why corporations may not be held responsible for and charged with the knowledge and purposes of their agents. corporate and private. has perpetual life and existence to name a few of the benefits of incorporation. a company can sue and be sued in its own name. It is a trite law that a rather hefty veil is drawn between these two that can be lifted only in a limited number of circumstances that seem to be fluctuating according to current judicial thinking.

as may from time to time be members of the company. such of the subscribers of the memorandum and other persons. Its existence is distinct and separate from that of its members.40 raise loans. However.in other words. not against its members. have a bank account. and having perpetual succession and a common seal. A Separate Entity When a company is registered it is clothed in a legal personality and has almost the same rights and powers as a human being." . acquire rights against it or incur liability in respect of it. according to Section 34(2) of the act. A company can: own property. it has perpetual succession.42 Members can even contract with the company.44 40 41 Section 159 and 160 of the Companies Act. be liable for taxes. shall be a body corporate by the name contained in the memorandum capable forthwith of exercising all the functions of an incorporated company. but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is mentioned in this act. on registration of the company the association of persons becomes a body corporate by the name contained in the memorandum.41 incur liabilities. Section 49(1a) and Section 581ZK 42 Section 46 43 Rajendra Nath Dutta v Shibendra Nath Mukherjee (1982) 52 Comp Cas 293 Cal 44 Section 34(2) reads as follows:"From the date of incorporation mentioned in the certificate of incorporation.29 Chapter-3 STUDY OF CORPORATE PERSONALITY IN INDIAN PERSPECTIVE 3. in respect of debts. and enter into contracts.43 In addition. Members may change or die but the company continues to exist until it is wound up on grounds specified by the Companies Act .1. creditors can take legal action only against the company.

Jupiter General Ins Co v Rajagopalan (AIR 1952 Punj 9). whether it may be protected under Part III of the Constitution. agricultural income is exempt from payment of income tax. In Bacha F Guzdar v The Commissioner of Income Tax. State of Bombay v Chamarbaugwalia (AIR 1956 Bom 1).47 the plaintiff. Nature of Corporate Identity In certain cases a company can be used as a façade or alias in order to carry on illegal activity. 46 47 48 AIR 1955 SC 74 On the one hand. It was held by the apex court that although the income in the hands of the company was partly agricultural. received certain amounts as dividends in respect of shares held by her in a tea company. the High Courts of Rajasthan. but rather has certain rights in law to vote. This judgment followed the principle that in the eyes of the law shareholders are not part holders of the undertaking . the same income when received by Guzdar as dividends could not be regarded as agricultural income. The word „person‟. On the other hand. whether the company is a citizen and. on the grounds that dividends received by the shareholders represented the income of the company. Mrs Guzdar.48 the terms „person‟ and „citizen‟ must first be understood. Assam and Kerala in M K Mills v State of Rajasthan (AIR 1953 Raj 88). only 40% of the company‟s income is treated as income from manufacture and sale and is therefore liable to tax. Under the Income Tax Act. As the income of a tea company is partly agricultural. Punjab. attend meetings or receive dividends. if so. The plaintiff argued that the dividend income in her hands should be treated as agricultural income up to 60%.a shareholder is not the part owner of the company. . In order fully to understand and appreciate this much-debated issue.Assam Company v State of Assam (AIR 1953 Ass 177) and Reserve Bank of India v Palai Central Bank (AIR 1961 Ker 268) have held that a company is a citizen. AB Patrika Ltd v Board of H S & IE (AIR 1955 All 595) and Cherry Hosiery Mill v S K Ghose (AIR 1959 Cal 397). the High Courts of Madras. The question now arises as to whether a company is a legal person.30 The concept of the separate personality of a corporate body is illustrated in the celebrated case of Salomon v Salomon & Co Ltd45 and was further upheld in Lee v Lee Air Farming Limited46. while not defined in the Companies 45 (1897) AC 22 (1960) 3 All ER 420 PC. Allahbad and Calcutta have categorically held that a company cannot be deemed a citizen in Narasaraopeta Electric Corporation v State of Madras (AIR 1951 Mad 979). Bombay. Bombay.

lifting the corporate veil would be of no use. In pursuance of that power.53The majority judgment. whether citizens or not.55 However. where it is not defined. it was held in Heavy Engineering Mazdoor Union v State of Bihar that a company was not a citizen under the Constitution of India. held that the word „citizen‟ is intended to refer only to natural persons and that a legal body such as a corporation cannot claim the status of a citizen for the purpose of invoking fundamental rights under Part II of the Constitution. in which Chief Justice Gajendragadkar held that were Part III of the Constitution to apply to companies. This was also the opinion of the apex court in Tata E & L Co Ltd v State of Bihar. Thus. a company may claim the protection of the fundamental rights that are available to all persons.” 50 Articles 5 to 10 of the Constitution deal with citizenship at the commencement of the Constitution 51 The Citizenship Act is an act to provide for the acquisition and determination of Indian citizenship 52 Section 2(1f) of the act reads as follows: Person’ does not include any company or association or body of individuals. whether incorporated or not. is mentioned in the General Clauses Act 189749 and the Penal Code as including corporate bodies: it is a legal entity that is recognized by law as the subject of rights and duties. since the members of the company would be able to do indirectly what they could not have done directly. Article 11 empowers Parliament to regulate by legislation questions relating to the acquisition and termination of citizenship and all related matters. their rights as 49 Section 3(42) of the General Clauses Act and Section 11 of the Penal Code state that: “‘Person’ shall include any company or association or body of individuals.52the leading case on this issue is State Trading Corporation v Commercial Tax Officer. 54 In addition. whether incorporated or not. it is well established that a company is held to be a „person‟ in every sense of the term.51 While the Citizenship Act denies the status of natural personality to artificial persons such as companies. delivered by Chief Justice Sinha. Although the Constitution determines which persons are Indian citizens50. The fundamental rights of shareholders as citizens are not lost when they associate to form a company.31 Act. Parliament has enacted the Citizenship Act. When their fundamental rights are impaired by state action. The answer to the question of whether a legal person such as a company is a citizen depends upon the meaning of the word „citizen‟ in Part III of the Constitution. 53 (1964) 4 SCR 99 54 AIR 1965 SC 40 55 AIR 1970 SC 82 .

The veil of corporate personality.2. R C Cooper v Union of India. But it must depend primarily upon the realities of the situation. DCM Ltd v Union of India. However. its frontiers are unlimited. Lifting the Corporate Veil The advantages of incorporation are extended only to those wishing to make honest use of a company. Generally and broadly speaking. disregarding the corporate entity and paying regard instead. 806. In the expanding horizon of modern jurisprudence.56 Hence.”58 Similarly. to the realities behind the legal façade”. the corporate veil is permissible. so that they are exempt from liability for the actions of the corporation.. 58 AIR 1991 SC 351 59 (1986) 59 Comp Cas 548 SC . a company is a „person‟ in the general sense of the term and should be treated as such. [1983] Comp LJ 281. (1972) SCC 788...59 The court observed that:“While it was firmly established by Salomon v Salomon & Co Ltd that a company has an independent and legal personality distinct from the individuals who are its members. it has since been held that the corporate veil may be ignored and the individual members recognized for who they are in certain exceptional circumstances. the debate seems well settled: an artificial person cannot claim the protection of fundamental rights under Part III of the Constitution. the Supreme Court in State of Uttar Pradesh v Renusagar Power Co observed that: “The concept of lifting the corporate veil is a changing concept. even though not lifted sometimes. the corporate veil may be lifted where a statute itself contemplates lifting the veil. (1970) SCR 530 57 The term ‘corporate veil’ has been defined as the assumption of law that the actions of the corporation are not the actions of the owners of the corporation. fraud or improper conduct is 56 Bennett Coleman and Co v Union of India. As to when the corporate veil may be lifted. is becoming more and more transparent in modern jurisprudence. in Life Insurance Corporation of India v Escorts Ltd the apex court identified the circumstances under which the corporate veil may be lifted. the law lifts the corporate veil and identifies the persons (i.32 shareholders are protected because such rights are equally and necessarily affected if the rights of the company are affected. In the case of dishonest and fraudulent use of the facility of incorporation. members) who are behind the scenes and responsible for the perpetration of fraud..57 The term „lifting the corporate veil‟ has been defined as “looking behind the company as a legal person. lifting. that is. 3.e.

though it may cause an injury to the rights of third persons . For the protection of revenue: The court may not recognize the separate existence of the company where the sole purpose for which it appears to have been formed is tax evasion or circumvention of tax. The companies made investments and whenever interest and dividends were received by the companies. It was held that the corporate veils of all these companies were to be lifted and the incomes of the companies to be treated as belonging to Maneckjee. the involvement of the element of public interest and the effect on parties who may be interested. the employer is liable to indemnify the agent against the consequences of that act. a taxing or beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be. For this purpose.” There are some circumstances in which a company is not deemed as having a separate legal personality from its members. Where the company has been formed in order to avoid valid contractual obligations: In some cases the company has been formed in order to avoid valid contractual obligations. since that must necessarily depend upon the relevant statutory or other provisions. part of one concern. There may be an express agreement to this effect or such an agreement may be implied from the facts of the particular case. This position is based on Sections 22262and 22363of the Contract Act 1872. Where the company is acting as an agent of the shareholders: In a case where the company is acting as an agent of the shareholders. the impugned conduct. Juggilal v Commissioner of Income Tax AIR (1969) SC 932 61 In re Dinshaw Maneckjee Petit Bart (1927) 29 Bom LR 447 62 Section 222 of the Contract Act reads as follows: "The employer of an agent is bound to indemnify him against the consequences of all lawful act done by such agent in exercise of the authority conferred upon him” 63 Section 223 of the act reads as follows: Where one person employs another to do an act and the agent does the act in good faith. in reality. he formed four private companies. the object sought to be achieved. in all of which he was the majority shareholder. 60 In the case of In re Dinshaw Maneckjee Petit Mr Maneckjee was a wealthy person with dividend and interest income61 who wanted to avoid surtax. he would apply for loans which were immediately granted and never repaid. 60 S Beresden Ltd v Commissioner of Inland Revenue [1953] 1 Ex Ch 132. It is neither desirable nor necessary to enumerate the classes of case where lifting of the veil is permissible.33 intended to be prevented. the shareholders will be liable for the company‟s acts.

below two and the company carries on business for more than six months while the number is so reduced. Where the number of members falls below the statutory minimum: If the number of members of a company falls below the minimum laid down in Section 45 of the Companies Act and the company carries on its business for a period of more than six months while the number is reduced.67 The privileges of both limited liability and separate entity are lost 64 65 [1933] 1 Ex Ch 935 [1996] 4 SCALE 202. it must be established that the holding company was created only for that purpose. It was held that the transfer of the shareholding between the father and sons must be treated as a sham. in Gilford Motor Co v Horne the defendant sold his business to the plaintiff and agreed not to compete with him for a given number of years within reasonable local limits. In addition. the corporate veil may be ignored. every person who is a member of the company during the time that it so carries on business after those six months and is cognizant of the fact that it .34 For example. The fact that the director and members of his family had created several corporate bodies did not prevent the court from treating all of them as one entity belonging to and controlled by the director and his family. construction was started and space sold to various persons. wishing to re-enter business. However. The court granted an injunction restraining the defendant and his company from continuing on with the business. The plaintiff initiated legal proceedings against him and the private company. in the case of public company. individual members may be open to legal action by the creditors of the company. below seven or in the case of a private company. formed a private company with majority shareholdings in violation of the contractual obligation.64 Where the company has been formed for a fraudulent purpose or is a sham: In Delhi Development Authority v Skipper Construction Company Pvt Ltd the company failed to pay the full purchase price of a plot to the Delhi Development Authority65. The two sons of the director who had businesses in their own names claimed that they had separated from their father's business and the companies which they were running had nothing to do with his properties. they could not produce satisfactory proof in support of their claim. 66 (1991) 70 Comp Cas 127 SC 67 Section 45 of the act reads as follows: If at any time the number of members of a company is reduced.66 However. Where the holding company holds all the shares in a subsidiary company: In State of Uttar Pradesh v Renusagar Power Co it was held that in cases where the holding company holds all the shares in a subsidiary company. The defendant.

as the case may be.35 and the creditors are permitted to look beyond the company to the shareholders for the satisfaction of their claims. where a prospectus invites persons to subscribe for shares in or debentures of a company. 71 Section 147(4c) of the act reads as follows: If an officer of a company or any person on its behalf signs or authorizes to be signed on behalf of the company. but does not include any person by reason of acting in a professional capacity for persons engaged in procuring the formation of the company. has authorized himself to be named and is named in the prospectus either as a director..71 is carrying on business with fewer than seven members or two members.. under Section 147(4) (c) the officer who signed the instrument is liable to the holder of the instrument. and did up to the time of the issue of the prospectus believe.. 70 Under Section 62(6a) of the act the term ‘promoter’ means a promoter who was a party to the preparation of the prospectus or of the portion thereof containing the untrue statement.. 68 Section 62 of the act states that: Subject to the provisions of this section... or as having agreed to become a director..000.. hundi. any bill of exchange.. endorsement. Where a negotiable instrument is signed on behalf of the company without mentioning the name of the company: In such a case where a negotiable instrument is signed on behalf of the company without mentioning the name of the company. or with a fine which may extend to Rs5. that the statement was true. for any loss or damage he may have sustained by reason of any untrue statement included therein. Section 6268and 6369 of the Companies Act make the promoters70 and directors personally liable not only in terms of damages but also in terms of prosecution by a fine of up to Rs5. cheque or order for money or goods wherein its name is not mentioned in the manner aforesaid. unless the company had already made the payment to that effect on the instrument.. such officer . and may be severally sued therefore. 69 Section 63 of the act reads as follows: Where a prospectus issued after the commencement of this act includes any untrue statement. is a promoter of the company. and. promissory note.. Where the prospectus of the company includes a fraudulent misrepresentation: In the case of a prospectus containing fraudulent misrepresentation of a material fact. or with both. that is to say: every person who is a director of the company at the time of the issue of the prospectus. every person who authorized the issue of the prospectus shall be punishable with imprisonment for a term which may extend to two years. shall be severally liable for the payment of the whole debts of the company contracted during that time. either immediately or after an interval of time.000 or two years' imprisonment or both.. unless he proves either that the statement was immaterial or that he had reasonable grounds to believe. the following persons shall be liable to pay compensation . has authorized the issue of the prospectus.

Investigation into related companies: Section 239 of the Companies Act provides that for the satisfactory completion of the investigation into the affairs of a company it is necessary for the inspector appointed to the investigation to look into the affairs of another related company in the same management or group. the central government may. but also those of the subsidiaries and a set of group accounts showing the profit or loss of the holding company and its subsidiaries collectively.74 or person shall be punishable with a fine which may extend to Rs500. based on the facts of the case. or a holding company of its subsidiary. direct that in the case of that company. and their combined state of affairs at the end of the year. treats the subsidiary company as merely a branch or department of a larger undertaking owned by the holding company. the holding of an annual general meeting or the making of an annual return. shall not be required to be submitted. or has at any relevant time been. held or made. or has at any relevant time been the company’s subsidiary or holding company.72  the central government deems it necessary to direct the holding and subsidiary companies to synchronize their financial years. on the application or with the consent of the board of directors of the company whose financial year is to be extended.. either the managing director or the manager of the company. which is. a subsidiary company may lose its separate identity to a certain extent if:  at the end of its financial year. who is. or has at any relevant time been. managed by the company or whose board . managed by any person as managing director or as manager. notwithstanding anything to the contrary in this act or in any other act for the time being in force. 74 Section 239 of the act states that: If an inspector appointed under Section 235 or 237 to investigate the affairs of a company thinks it necessary for the purposes of his investigation to investigate also the affairs of any other body corporate.73 or  A court. or any other body corporate which is. any other body corporate.36 Holding and subsidiary companies: In the eyes of the law the holding company and its subsidiaries are separate legal entities. However. and shall further be personally liable to the holder of the bill of exchange [etc]. for the amount thereof. the submission of accounts to a general meeting. the holding company lays down before its members in a general meeting not only the accounts of the holding company. which is. and for that purpose to postpone the submission of the relevant accounts to a general meeting.. unless it is duly paid by the company 72 Section 212 of the act lays down the particulars that are to be followed during the preparation of the holding and subsidiary companies’ accounts 73 ) Section 213 of the act states that: Where it appears to the central government desirable for a holding company or a holding company’s subsidiary to extend its financial year so that the subsidiary’s financial year may end with that of the holding company. or a subsidiary of its holding company. earlier than the dates specified in the direction. or was at the relevant time.

Winding-up of a company: Where in the course of the winding-up of a company it appears that any aspect of its business has been carried on with intent to defraud creditors or any other persons. for the purpose of determining the true persons who are or have been financially interested in the success or failure. or for any other fraudulent purpose. the court. any of whose directorships is held by the employees or nominees of those having the control and management of the first mentioned company.77 Where the company is used as a medium to avoid welfare legislation: of directors comprises of nominees of the company or is accustomed to act in accordance with the directions or instructions of the company. concealment or wilful misstatement. 75 This section authorizes the central government to appoint one or more inspectors to investigate and report on the membership of a company for the purpose of determining the persons with a financial interest in the company and control or material influence over its policy. of the company. 75 Section 247 of the act states that: Where it appears to the central government that there is good reason to do so. on the application by the liquidator or any creditor or contributory. or who are or have been able to control or materially influence the policy of the company. or any of the directors of the company. it may appoint one or more inspectors to investigate and report on the membership of any company and other matters relating to the company. suppression of facts or contravention by the provisions of the act or rules made thereunder. whether real or apparent. or any person who is or has at any relevant time been the company’s managing director or manager.37 Investigation of ownership of company: The separate legal entity may be disregarded under Section 247 of the Companies Act. 76 Section 542 of the Companies Act 77 (1989) 65 Comp Cas 196 (Del). . the individual directors could be served notices to show cause so that the adjudicating authorities could determine which of the directors was involved in evasion of the excise duty by fraud.76 Economic offences: In Santanu Ray v Union of India the Delhi High Court held that where a company had failed to pay proper excise duty. may declare that any persons who were knowingly party to the fraudulent action shall be personally responsible and liable without limit for any debts or liabilities of the company as the court may direct. or any company.

particularly where controlling interest is at issue. with his or her knowledge. In the law relating to exchange control. wholly owned subsidiary company.38 The leading case on the exception of where the company is used as a medium to avoid welfare legislation is Workmen of Associated Rubber Industry Limited v Associated Rubber Industry Limited. The Delhi High Court restrained the respondent from alienating. transferring.5 million by the company to purchase properties in Delhi.    In certain matters pertaining to tax law.80 Thus. where a shareholder has lost the privilege of limited liability and has become directly liable to certain creditors of the company on the grounds that. the corporate veil could be ignored. disposing of or encumbering the properties in question. the workers would not benefit and hence. 78 79 (1986) 59 Comp Cas 134 SC: AIR 1986 SC 1 (1983) 54 Comp Cas 66 (Del) 80 (1995) 1 SCC 478 . where the test of actual control is adopted. Determination of technical competence of a company: In New Horizons Ltd v Union of India the Supreme Court held that the experience of the promoters could be considered the experience of the company in determining technical competence. The company transferred part of its shareholding to a newly formed. namely:   where companies are related as holding and subsidiary (or sub-subsidiary) companies. and In the law relating to trading with the enemy. The respondent diverted the amount to three companies floated by him and his son. It was held that since the new company was incorporated only for the purpose of reducing the annual gross profits for the holding company. the company continued to carry on business for at least six months after the number of members had fallen below the legal minimum. thus reducing its own profits on paper. The companies used the money to purchase the properties.78 The annual bonus paid to the company's workmen depended on the amount of gross profit in that particular year. the doctrine of lifting of the corporate veil can be applied in five kinds of situation. Where a device of incorporation is used for an illegal or improper purpose: In PNB Finance Ltd v Shital Prasad Jain79 the respondent was a financial adviser to the public limited appellant company and was given a loan of Rs1.

It is s distinct legal persona existing independent of its members. his daughter and four sons and they remained the only members of the company. who may from time . the company never had an independent existence.39 Thus. by incorporation it gains a corporate personality which is separate or distinct from the members who compose it. which is capable of exercising all the functions of an incorporated company and having perpetual succession and a common seal. The unsecured creditors contended that though incorporated under the Act. With the incorporation. It is in law a person. it was in fact Salomon under another name. He incorporated a company named Salomon & Co Ltd. Saloman & Co.3. the subscribers to the memorandum and other persons . The seven subscribers to the memorandum were Salomon. the entity of the company becomes institutionalized. a shareholder cannot be held liable for the acts of the company even though he . his wife. This principle of the independent corporate existence and the principle of corporate personality of a company was recognized in the case of Saloman v. as an entity consisting of certain corporators. It must be treated as a company. there are also a number of exceptions to the rule whereby individual members of the company may be held liable for its actions. The company went into liquidation within a year. be the members of the company. 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. In case of a company. the other directors being his sons and under his control. it may sue or be sued in its own name . shall be a body corporate. The property of the company belongs to it and not its members . 3. 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 . despite the concept of a corporate body having a separate personality. In this case Salomon was a boot and shoe manufacturer. for the purpose of taking over and carrying on his business. upon issue of the certificate of incorporation . It was held that Salomon & Co Ltd was a real company fulfilling all the legal requirements. Thus the company becomes a body corporate which is capable immediately of functioning as an incorporated individual. he was the managing director. Advantages of Incorporation 1) Independent Corporate Existence: A corporate person shall have an independent corporate existence.

rejected their contention and ruled that in the eyes of law the company was a distinct independent person. The company itself. different from its shareholders and therefore the transfer was as much a conveyance. separate from its shareholders.. The principle of distinct and independent existence of company consequent to its incorporation was recognized in India even before the decision in Salomon case. It is the main feature of registered companies which provides a special attraction to investors. v.e. Limited liability of members extends only for company's debt in the event of its winding up. inter-alia observed that a clear distinction must be drawn between a company and its shareholders. it was in fact a transfer to themselves in another name. being a legal persona. a company registered under the Companies Act is a distinct legal entity other than the legal entity or entities that hold its shares. as if the shareholders had been totally different persons81. however. Ltd. The Court. 43 AIR 1999 SC 1734 . even though that shareholder may be only one i. for the time being remains unpaid. Electronics Corporation of India Ltd. whether from the original shareholder or the transferee of such shares as the case may be. is always fully liable and therefore its liability is unlimited. the members transferred a Tea Estate to a company and claimed exemption from ad valorem duty on the ground that they themselves being the shareholders in the company. Government of Andhra Pradesh. In the eyes of the law. The High Court of Calcutta in a case observed that the company was altogether a separate person. Secretary. The Supreme Court in M/s. In this case. The principle of limited liability implies that the liability of a member in the event of the company's winding up.40 holds virtually the entire share capital. the Central or a State Government. No member is bound to contribute anything more than the nominal value of 81 82 Re Kondoli Tea Co. (1886) ILR 13Cai. In other words. a transfer of the property. Thus the liability does not fluctuate but remains limited to the amount which. 2) Limited Liability: One of the principal advantages of an incorporated company is the privilege of limited liability. however. it is liable to pay the debts so long as assets are available. in respect of the shares held by him is limited to the extent of the unpaid value on such shares. The case has also recognized the principle of limited liability of a company. Revenue Department82. The order of priority for payment of debt shall. depend on the class of creditors as laid down in the Companies Act.

1956 provides that in the event of the company being wound up. 5) Separate Property: Incorporation helps the property of the company to be clearly distinguished from that of its members. namely it provides liquidity to investors and at the same time ensures stability of the company. no member is bound to contribute anything more than the nominal value of shares held by him. "members may come and members may go. Penhok Tea Co Ltd.41 the shares held by them. Ltd. The property is vested in the company as a body 83 (1982) 52 Comp.83. The privilege of limiting the liability is one of the main advantages of carrying on business under a corporate organization. Section 34(2) of the Companies Act. v. 3) Perpetual Succession: An incorporated company has perpetual succession that is notwithstanding any change in its members. 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. Out. transferable in the manner provided by the articles of association of the company. 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. In Gopalpur Tea Co. the company shall retain as the same entity with the same privileges and immunities. Thus the member of an incorporated company can dispose of his share by selling them in the open market and get back the amount so invested. specifically provides that the shares or other interest of any member in a company shall be movable property. the death or insolvency of individual member does not in any way. 4) Transferability of shares: Section 82 of the Companies Act. neither the company was thereby extinguished nor any body's claim against it. but the company can go on forever. the members shall have liability to contribute to the assets of the company in accordance with the Act. The perpetual existence of an incorporated company is well illustrated by proverbial saying. 1956. estate and possessions. In the case of limited companies. 238 . The transferability of shares has two main advantages. 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.

Perumal v. Thus the management of the company is altogether different from its ownership. and by which it is controlled . managed and disposed of”. it being a legal person is capable of owning. no member can claim himself to be the owner of the company's property during its existence or in its winding up. and by which it is controlled. The company becomes the owner of its capital and assets. it provides flexibility and autonomy to business undertakings within the framework of company law. it is the property of the company”.T. 43 . The management of the company generally vests in the directors who decide the policy matters in the meetings of the Board of Directors. professional form of management of business disassociates the „ownership‟ from control of business and thus helps to promote efficiency. In Bacha F Guzdar v. Northern Assurance Co Ltd85 it was held that “the property of a company is not the property of the shareholders. an incorporated company has the privilege of raising its capital by public subscriptions either by way of shares or debentures. and no changes of individual membership affect the title. In short. That apart. Besides. only a formative control. The shareholders are not the several or joint owners of company‟s property. John Deavin. With skilled professional managers supported by financial resources. In R.42 corporate. companies are able to develop and carry on their business efficiently. The public financial institutions willingly lend loan to companies as it is generally secured by floating charge which is an exclusive privilege of a registered company.86 it has been observed that a company is a real person in which all its property is vested. 7) Centralized Management: The shareholders have no direct concern with the management of the company. CIT Bombay84 it was held that the company is a real person in which all its property is vested. In case of a company. They exercise. Their Lordships further observed that. 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. 6) Corporate Finances: The shares of an incorporated company being transferable. managed and disposed of. 84 85 (1955) 1 SCR 876 1925 AC 619 HL 86 AIR 1960 Mad. it can raise maximum capital in minimum possible time. enjoying and disposing of property in its own name. In Macaura v.

the theory of corporate entity of a company is still 87 88 Union Bank of India v. Lifting or Piercing the Corporate Veil: A corporation is cloth with a distinct personality by fiction of law. [1993] 2Comp Lj 89 Ker (1996) 1 WLR 132 (CA) . A company has the right to seek damage where a defamatory material published about it affects its business. Khaders International Constructions Ltd . the beneficial owners of the property of the body corporate. in a way.43 8) Capacity to sue and to be sued: A company being a body corporate can sue and can be sued in its own name. 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. cannot act on its own. TVS & Sons Ltd88 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 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. It can sue for such defamatory remarks against it as are likely to damage its business or property etc. Disadvantages of Incorporation 1. Undoubtedly.87.4. 1996 about unwarranted infringement of its privacy. Where the legal entity of the company is being used for fraudulent and dishonest purpose. Broadcasting Standards Commission the court of appeal held that a company can complain under the Broadcasting Act. A criminal complaint can be filed by a company. A company has the right to protect its fair name. but it should be represented by a natural person. 3. In R v. A company being an artificial person. In TVS Employees Federation v. the individuals concerned will not be allowed to take the shelter behind the corporate personality. yet in reality it is an association of persons who are in fact. The corporate veil of a company may be lifted to ascertain the true character and economic realities behind the legal personality of the company. it can act only through natural persons. 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”.

v. In such a case the courts may in their discretion examine the character of 89 (1995) 1 SCC 478 . convenience or interest of revenue. 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. That is. Allowing the appeal. In such cases. 147. In New Horizons Ltd. The principle of „lifting the corporate veil‟ has found statutory recognition in certain provisions like Sections 45. being a statutory privilege. the Supreme Court ruled that the action of the State Government in determining the eligibility of tender‟s been not in consonance with the standards or norms and was arbitrary and irrational. Where the legal entity of a corporate body is misused for fraudulent and dishonest purposes. 247 and 542 of the Companies Act. it must always be used for legitimate business purposes only. 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. But the separate personality of the company. The doctrine of lifting the corporate veil is invoked when the corporate personality is found to be opposed to justice. The Government had invited tenders for distribution of State largesse. the court will break through the corporate shell and apply the principle of what is known as lifting or piercing the corporate veil. 212. was found to be a joint venture created as a result of reorganization in 1992. the individuals concerned will not be allowed to take shelter behind the corporate personality. The courts have found it necessary to disregard the separate personality of a company. the Court can see through the corporate veil to ascertain the true nature of a company.44 the basic principle on which the whole law of corporations is based. Corporate veil is said to be lifted when the court ignores the company and concerns itself directly with the members or managers. the court will look behind the corporate entity. in the following situations:(a) Determination of Real character of a company: At the time of war. the respondent's tender was accepted as they had long experience and had also offered a much lower amount of royalty. The Court further observed that in case of a joint venture corporation. it may become necessary to lift the corporate veil of a company to determine whether the company has an enemy character. Union of India and others89 the appellant company when seen through the veil covering the face of New Horizons Ltd. 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.

Thereupon.. The House of Lords. (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 obligation93. Rejecting the contention of the petitioners the court held that members individually or employment was terminated under an agreement. 92 AIR 2000 SC 1203 93 Juggilal v. are acting under the control of enemies. CIT . however. (1916)2 AC 307 People's Pleasure Park Co. In this case the assessee was a 90 91 Daimler Co. (BCCL) & others92 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 separate entity of the company. Negroes. The court held that the defendant company was a mere cloak or sham and channel used by 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 remaining one share was held by a British subject who was the Secretary of the company. Rohleder. The transferee. During World War I. Therefore held that the company was an enemy company for the purpose of trading and therefore it was barred from maintaining the action. transferred the land to a company which was exclusively composed of Negroes. The Supreme Court in Subhra Mukherjee & Another v. Continental Tyre & Rubber Co. Ltd. wherever resident. Thereafter he started a new company to carry on the business of solicitation and solicited plaintiff‟s customers.e. 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. (1969) 2 SCC 376 . (1908) 109 Va 439. v.45 persons who are in real control of the corporate affairs of the company.” In an American case91 it was held that the Courts may refuse to pierce the corporate veil where there is no danger to public interest. Thus the real control of the English company was in German hands. Bharat Coking Coal Ltd. the company commenced an action to recover trade debts. 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. In a case90 a company was incorporated in England for the purpose of selling tyres manufactured in Germany by a German company. the petitioners brought an action against the company for annulment of the conveyance on the ground of breach of condition. all the shares except one were held by the German subjects residing in Germany. M/s. v. The question therefore was whether company had become an enemy company consequent to World War I.

(1983)53Comp. v. Shital Prasad Jain. In Gilford Motor Co v. (Films) Ltd. This inference does not flow automatically from the relationship of holding and subsidiary company. He formed four private companies and agreed with each to hold a block of investment as an agent for it. Horne94 .G. enjoying huge dividends and interest income. Cas.N. 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.96. 94 95 [1944] 1 Ch 935. but the company handed back the amount to him as pretended loans.46 wealthy man. It was held that the company was mere cloak or sham for the purpose of enabling the defendant to commit a breach of his covenant against the solicitation. v. The court may. an American company produced a film called „MANSOON‟ in India technically in the name of a British company. in some circumstances. 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. 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. He was employed under an agreement. Income received was credited in the accounts of the company.95 the court held that the doctrine of piercing the corporate veil may be invoked whenever necessary by the court in the interest of justice. Shortly he opened a business in the name of a company which solicited the plaintiff‟s customers.B. In Smith Stone & Knight Ltd. (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. 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. Horne was appointed as a managing director of the plaintiff company on the condition that he shall solocite or entice away the customers of the company at any point of time. treat a holding company and its subsidiary as a single entity. There must be evidence that the business of the two is combined. may be treated as an agent or trustee. (d) Government Companies: companies at times loose their individuality in favour of its principal and. to defraud creditors or to avoid legal obligations. to prevent the corporate entity from being used as an instrument of fraud. In P. This view was upheld by the Court. In Re F. Finance Ltd.66 96 (1953) All ER 615 .

. (b) the object sought to be achieved.98 the Court observed that although broadly speaking the principle of lifting the corporate veil will be available in the statute like Companies Act. 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. 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. (d) the involvement of the element of public interest. the relationship of agency should be substantially established. nor its agent. They do so with a view to availing certain advantages in their commercial ventures. (107) . (c) the impugned conduct. It. confronted with the problem of deciding the true nature of a Government company in a number of cases. therefore. and other financial and taxing statutes etc. as was the case in the instant decision. In India. If one company is held liable as a principal for the acts of another company. The Supreme Court has decided once for all that a Government company is neither an extension of the State. a large number of private Companies have a tendency to register themselves as Government companies under the Companies Act with President and few other officers as the shareholders.47 Birmingham Corporation. The Courts are. (1986) 1 SCC 264 AIR 1999 Cal. (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. Escorts Ltd. (e) the effect on parties who may be affected. Thus in Bijay Kumar Agarwal & others v. logically follows that the doctrine of lifting the 97 98 Life Insurance Corporation v. Ratanlal Bagaria & others. therefore. 106. 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. 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 company97 (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.

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‟.. For this purpose. There are certain statutory provisions.) Ltd99 has observed that the lifting or piercing 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. Thus the „Lifting of corporate veil‟ or principle analogous thereto cannot be monopoly of any particular statute. The Court may also order forfeiture/attachment of the properties acquired by the illegal and corrupt means by the real men behind the corporate as also the properties of their family members. apart from the liability of the company as an independent legal person.48 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. 1956. The Supreme Court in Delhi Development Authority v. in the Companies Act. shall be severally liable 99 AIR 1996 SC 2005 . It can well be used by the judiciary or the Court to prevent the abuse of process of Court of Law. the company was defrauding others in deliberate disobedience of Supreme Court's orders which amounted to contempt of Court. and the company carries on business for more than six months while the number is so reduced. Disposing of the appeal. 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 contemnors.e. seven in case of a public company and two in the case of a private company. 1956 specifically provides that if at any time the number of members of a company falls below the statutory minimum i. That apart. the Court can lift the corporate veil of the company to took into the misdeeds of its officials and punish them i. those cloaked behind it are also made liable.e. Personal Liability of Directors or Members: Secondly. 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. (P. Skipper Construction Co. Such cases are :- (a) Reduction of membership (Section 45) : Section 45 of the Companies Act. In the instant case. 2. 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.

cheque or an order for money goods. (e) Failure to Return Application Money (Section 69(5)): The provision contained in clause (5) of Section 69 of the Companies Act. in such cases. those who were knowingly parties to this business shall be personally held liable for all or any of the debts of the company. and (2) where the control and conduct of business of a subsidiary company rests solely in the nominees of the holding company. Thus. Bill of exchange. or for any fraudulent purpose. and every other person who authorizes . the court may not treat the subsidiary company as an independent entity in a particular situation. (f) Misrepresentation in Prospectus (Section 62): In case of misrepresentation in the prospectus of a company. There may be two situations when a subsidiary company may lose its independent identity to a certain extent. the accounts of its subsidiaries. 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 . it may be inferred that the subsidiary company is merely a branch of holding company and has no separate identity of its own. the privilege of limited liability is denied to the shareholders. promoter. (c) Fraudulent conduct of business (Section 542): This section imposes liability for fraudulent conduct of a company‟s business. (b) Misdescription of name (Section 147): Where an officer of a company signs on behalf of the company any contract. promissory note. namely. creditors and shareholders . a holding company has to disclose to its members.49 for the payment of company's debts contracted during that time. (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. hundi. such person shall be personally liable to the holder if the name of the company is not fully or properly mentioned in the instrument. every director. 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. (d) Subsidiary company (Sections 212 and 214): As required by Sections 212 and 214 of the Act. Though in the eyes of law a subsidiary company is a separate legal entity under certain circumstances.

The question whether a corporation is a citizen was decided by the Supreme Court in State Trading Corporation of India v. Since a company is not treated as a citizen. 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. Besides. 100 101 AIR 1963 SC 1811 AIR 1965 SC 40 . it cannot claim protection of fundamental rights although all its members are Indian citizens. 3. Commercial Tax Officer100. Expenses and formalism: Incorporation of a company is an expensive affair. it cannot claim protection of such fundamental rights as are expressly guaranteed to citizens. every person who was director of that company at any time during the relevant previous year. State of Bihar101 it was held that since the legal personality of a company is altogether different from that of its members and shareholders. it has been held that for the purposes of income tax law. domicile and residence. In Tata Engineering Company v. 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. Company is not a citizen: Though a company is a legal person. Though a company is not a citizen. but it can certainly claim the protection of such fundamental rights as are guaranteed to all persons whether citizens or not. In case of residence of a company. (h) Non-payment of Tax: In the event of winding up of a private company. it involves completion of a number of formalities. 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. 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. it is not a citizen under the constitutional law of India or the Citizenship Act. it does have a nationality. 1955. shall be jointly and severally liable for payment of such tax. incurs liability towards those who subscribe for shares on the faith of untrue statement.50 issue of such prospectus. (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. 4. Moreover.

They are financially independent. electricity etc. They are mostly invested with extensive powers. The . rules and regulations governing its employees and its relationship with the government department. There may or may not be other members. 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. the Industrial Finance Corporation of India established by the Industrial Finance Corporation Act. The Act would define its powers and functions.5. 1953. The examples of statutory corporations are the Reserve Bank of India established by the Reserve Bank of India Act. Summary As soon as a company is incorporated. docks. relatives or nominees. whether public or private limited. The central person shall have the full control over the company. It has its own name and property. 1948. It is a separate legal entity distinct from its members who incorporate it. A company does its business through its Directors. 1934. it becomes a juristic person.51 Statutory Corporations or Companies Companies and undertakings concerned with public utility such as railways. Therefore a statutory corporation is a public enterprise which comes into existence by a special Act of Parliament. the Life Insurance Corporation of India created by the Life Insurance Corporation of India Act. The other members shall be acquaintances like friends. roadways. The concept of one Man Company was accepted in Saloman’s case 3. One Man Company: A one man company means a single person owns the whole or practically the whole of share capital. 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. 1956 and so on. are usually incorporated by special Acts of the Legislature. They also have a legal status. Air India incorporated under the Air Corporation Act. These types of company enjoy a corporate status and have limited liability of the company.

The directors of a company are in fiduciary position. eyes and hands of the company. Any action done by the directors in the ordinary course of business are treated as done by the Company. On the one hand they run the company as its owner (Policy maker) and on the other hand they are merely a servant of the company and take remuneration. . There are certain items for which Board is not empowered to do. what a company can do in ordinary course of business. Such items are done by the company in general meeting.52 directors are also called the ears. But wrong done by the Directors (criminal action) are the responsibility of the Directors and not the responsibility of the Company. They are entitled to do any work on behalf of the company.

” For non-binding external actions or transactions. corporations “should be erected with caution.from state to state. Because of these differences. corporate lawyers are often consulted in an effort to determine the most appropriate or advantageous state in which to incorporate.” The actions of corporations were clearly circumscribed: “To every corporation a name must be assigned. education.53 Chapter-4 STUDY OF CORPORATE PERSONALITY IN USA PERSPECTIVE 4. Wilson believed that.in some cases significantly . are Delaware corporations. US companies law In the United States. including those of commerce. As the law of corporations was articulated by the Supreme Court under Chief Justice Marshall. the central or local government cannot be expected to regulate toward the peculiar circumstances . in all cases. under the laws of a particular state. to endure in perpetual succession. and by that name alone it can perform legal acts. The corporate law of a corporation's state of incorporation generally governs that corporation's internal governance (even if the corporation's operations take place outside of that state). and inspected with care. The corporate laws of the various states differ . corporations enjoyed the same latitude as private individuals. Americans in the 1790s knew of a variety of corporations established for various purposes. emphasis fell.” While they must not directly contradict the overarching laws of the land. and a majority of public companies in the U. Nonetheless.S.1. The federal laws of the United States and local law may also be applicable sources of corporate law. The power of making by-laws was “tacitly annexed to corporations by the very act of their establishment. over the first several decades of the new American state. but it was with an eye to internal affairs that many saw principal advantage in incorporation. or organized. and religion. upon commercial corporations. corporations are generally incorporated. in a way which seems natural to us today. Company law theory A corporation is described to be a person in a political capacity created by the law.

Types of conventional corporations exist in the United States. .. in which Chief Justice Marshall of the United States Supreme Court stated that “A corporation is an artificial being. and so forth . Business organizations originated with agency law.towards a venture which will prove profitable to all contributors.e. knowledge. Each is meant to facilitate the contribution of specific resources . is not a sole proprietorship or a partnership) is a corporation. distinct and separate from the individuals who create and operate it. which permits an agent to act on behalf of a principal. invisible. any business entity that is recognized as distinct from the people who own it (i. A corporation was defined in the Dartmouth College case of 1819. intangible. As legal entity the corporation can acquire. organization and limited liability Company. Only a company that has been formally incorporated according to the laws of a particular state is called „corporation. A corporation is a legal entity. land and equipment. This generic label includes entities that are known by such legal labels as association. all partners in a typical general partnership may be held liable for the wrongs committed by one partner. and existing only in contemplation of the law”. as well as corporations proper. For this reason. after the section of the Internal Revenue Code that addresses the tax exemption for many of them. relationships.54 of a given body. The state provides these forms because it has an interest in the strength of the companies that provide jobs and services therein. and so “they are invested with authority to make regulations for the management of their own interests and affairs. American corporations can be either profit-making companies or non-profit entities. and dispose of property in its own name like buildings. in exchange for the principal assuming equal liability for the wrongful acts committed by the agent. all business organizations represent an attempt to avoid certain costs associated with doing business. all business forms are designed to provide limited liability to both members of the organization and external investors.investment capital. It can also incur liabilities and enter into contracts like franchising and leasing. Tax-exempt non-profit corporations are often called “501(c) 3 corporation”. Those forms that provide limited liability are able to do so because the state provides a mechanism by which businesses that follow certain guidelines will be able to escape the full liability imposed under agency law. Except for the partnership. but also has an interest in monitoring and regulating their behaviour. own.” As theorists such as Ronald Coase have pointed out. Generically.

for example. „corpus‟ being the Latin word for „body‟). so it has power to operate the United States Postal Service. including banks. or “corporating” it. virtually all corporations in the U. Only certain corporations.S. A corporation is legally a citizen of the state (or other jurisdiction) in which it is incorporated (except when circumstances direct the corporation be classified as a citizen of the state in which it has its head office. without being . Delaware. or the state in which it does the majority of its business). For example. Once incorporated. Kansas. in California. and in Illinois. are incorporated under the laws of a particular state. Many states have separate.” This label also applies to corporations incorporated outside of the United States. Corporations are created by filing the requisite documents with a particular state government. Foreign corporations must usually register with the secretary of state‟s office in each state to lawfully conduct business in that state.55 The federal government can only create corporate entities pursuant to relevant powers in the U. Nevada and Ohio actually use that exact name) which authorizes the formation of private corporations without having to obtain a charter for each one from the state legislature (as was formerly the case in the 19th century). Congress has constitutional power to provide postal services. Thus. are chartered. For example. a corporation has artificial personhood everywhere it may operate. nonprofit corporations are incorporated under the Non-profit Corporation Law. Many large corporations are incorporated in Delaware. it has chosen not to do so.S. Although the federal government could theoretically pre-empt all state corporate law under the courts' current expansive interpretation of the Commerce Clause. Constitution. As a result. Corporate business law differs dramatically from state to state. much of American corporate law continues to be a matter of state law under the Tenth Amendment to the United States Constitution.” referring to the abstract concept of clothing the entity with a veil of artificial personhood (embodying. insurers are incorporated under the Illinois Insurance Code. All states have some kind of “general corporation law” (California. self-contained laws authorizing the formation and operation of certain specific types of corporations that are wholly independent of the state general corporation law. Many prospective corporations choose to incorporate in a state whose laws are most favorable to its business interests. until such time as the corporation may be dissolved. Others simply file their articles of incorporation with the state government as part of a registration process. The process is called “incorporation. A corporation that operates in one state while being incorporated in another is a “foreign corporation.

only human beings. Corporate law in Saudi Arabia. Harvard College (a component of Harvard University). Massachusetts itself was a corporate colony at that time owned and operated by the Massachusetts Bay Company (until it lost its charter in 1684) so Harvard College is a corporation created by a corporation. not business entities. but they are few and far between compared to the rights of natural persons. a corporation has the personal right to bring a lawsuit (as well as the capacity to be sued) and. Significantly. have modelled their corporate statutes after the Model Business Corporation Act. In addition to the 12 regional corporations. the second of Harvard‟s two governing boards was incorporated by the Great and General Court of Massachusetts in 1650. The vast majority of them attach to corporations under state law. in 1971 passed the Alaska Native Claims Settlement Act (ANCSA). like a natural person. As juristic persons. . particularly smaller ones. especially the law of the state in which the company is incorporated . which authorized the creation of 12 regional native corporations for Alaska Natives and over 200 village corporations that were entitled to a settlement of land and cash.since the corporations very existence is predicated on the laws of that state. corporations have certain rights that attach to natural persons. formally the President and Fellows of Harvard College (also known as the Harvard Corporation). Many states. for example. Many nations have modelled their own corporate laws on American business law. Founded in 1636. one of many model sets of law prepared and published by the Association. In addition to typical corporations in the United States. follows the model of New York State corporate law. is the oldest corporation in the western hemisphere. the legislation permitted a 13th regional corporation without a land settlement for those Alaska Natives living out of the State of Alaska at the time of passage of ANCSA. which does not require disclosure of share ownership.56 physically located there because that state has very favorable corporate tax and disclosure laws. a corporation can be libelled. That is. Companies set up for privacy or asset protection often incorporate in Nevada. But a corporation has no constitutional right to freely exercise its religion because religious exercise is something that only “natural” persons can do. have the necessary faculties of belief and spirituality that enable them to possess and exercise religious beliefs. A few rights also attach by federal constitutional and statutory law. the federal government. For example.

All corporations have one specific state (their home state) to which they are incorporated as a domestic corporation. thus. different theories.namely unity of interest and ownership. they would apply for authority to do business in those other states as a foreign corporation. the owner of a corporation operating in California would be subject to different potential for the corporation's veil to be pierced if the corporation was to be sued. . Mostly. wrongful conduct and proximate cause. the plaintiff has to prove that the incorporation was merely a formality and that the corporation neglected corporate formalities and protocols. This issue can be significant. courts struggle with the proof of each prong and rather analyze all given factors. no bright-line rule exists and the ruling is based on common law precedents. There is also the matter of what jurisdiction the corporation is incorporated in if the corporation is authorized to do business in more than one state. It also happens with single person corporations that are managed in a haphazard manner. Although courts are reluctant to hold a director or active shareholder liable for actions that are legally the responsibility of the corporation. Thus. the rules for allowing a corporate veil to be pierced are much more liberal in California than they are in Nevada. even if the corporation has a single shareholder. In the US. such as voting to approve major corporate actions in the context of a duly authorized corporate meeting. or if holding only the corporation liable would be singularly unfair to the plaintiff. As such. they will often do so if the corporation was markedly noncompliant. In most jurisdictions. the theories failed to articulate a real-world approach which courts could directly apply to their cases.2. However. the veil can be pierced in both civil cases and where regulatory proceedings are taken against a shell corporation. and if they operate in other states. Generally. most important alter ego or instrumentality rule. In determining whether or not the corporate veil may be pierced. This is known as totality of circumstances. depending on whether the corporation was a California domestic corporation or was a Nevada foreign corporation operating in California.57 4. the courts are required to use the laws of the corporation's home state. attempted to create a piercing standard. United State and corporate veil piercing In the United States. This is quite often the case when a corporation facing legal liability transfers its assets and business to another corporation with the same management and shareholders. corporate veil piercing is the most litigated issue in corporate law. they rest upon three basic prongs . for example.

Intermingling of assets of the corporation and of the shareholder. Further. Manipulation of assets or liabilities to concentrate the assets or liabilities. Minton's daughter drowned in the public swimming pool owned by Mr. 914 (1927) 974 F. Treatment by an individual of the assets of corporation as his/her own. where a corporation in a real estate building partnership could not pay its share of a lawsuit bill   Fletcher v. 1992) . Then-Associate Justice Roger J. 602.2d 545 (4th Cir. Significant undercapitalization of the business entity (capitalization requirements vary based on industry. Inc. Failure to pay dividends. It is important to note that not all of these factors need to be met in order for the court to pierce the corporate veil. some courts might find that one factor is so compelling in a particular case that it will find the shareholders personally liable. Non-functioning corporate officers and/or directors. Atex. Failure to maintain arm‟s length relationships with related entities. Inc103. Was the corporation being used as a “facade” for dominant shareholder personal dealings. Mr. Cavaney104. v. Cavaney. Benjamin Cardozo decided there was no right to pierce the veil for a personal injury victim.58 Factors for courts to consider          Absence or inaccuracy of corporate records.102. Inc.E.  Berkey v. Undercapitalization Minton v. Perpetual Real Estate Services.Y. location. Michaelson Properties. Concealment or misrepresentation of members. Traynor (later Chief Justice) of the 102 103 244 N. The Fourth Circuit held that no piercing could take place merely to prevent “unfairness” or “injustice”. 155 N. and specific company circumstances).    Siphoning of corporate funds by the dominant shareholder. Third Avenue Railway. alter ego theory. Failure to observe corporate formalities in terms of behaviour and documentation.

for example. estate. particularly from business entities created primarily for estate planning purposes. 1991) 106 17 U. writing for the court. and Bongard. 518 (1819) 107 (1823) . . 4. the Internal Revenue Service in the United States has made use of corporate veil piercing arguments and logic as a means of recapturing income.2d 209 (4th Cir. Here a corporation was undercapitalized and was only used to shield a shareholder's other company from debts. and declared that state governments had an absolute right to amend or repeal a corporate charter. are personally liable .. Since owners of US business entities created for asset protection and estate purposes often fail to maintain proper corporate compliance. after mature deliberation. the IRS has achieved multiple high-profile court victories. when they provide inadequate capitalization and actively participate in the conduct of corporate affairs. Woodward. is that this corporate charter is a contract. A public outcry ensued. sought to protect its rights to that land under colonial-era grants against an effort by the state of Vermont to revoke the grants. supported by many of their constituents.106 making the following statement in their decision: The opinion of the Court. Hackl. Kinney Shoe Corp. explicitly extended the same 104 105 56 Cal.3.S. Seven years after the Dartmouth College opinion. show the IRS's use of veil piercing arguments. State courts and legislatures. Polan105.59 Supreme Court of California held: The equitable owners of a corporation. 2d 576 (1961) 939 F. The veil was pierced where its enforcement would not have matched the purpose of limited liability. with land in the U.S. such as Strangi. Shepherd. Case law In 1818. . the Supreme Court decided Society for the Propagation of the Gospel in Foreign Parts v. Internal Revenue Service In recent years. Town of Pawlet. the United States Supreme Court heard the case Dartmouth College v. Justice Joseph Story.107 in which an English corporation dedicated to missionary work. or gift tax revenue. and by the former decisions of this Court. v. This opinion appears to us to be equally supported by reason. the obligation of which cannot be impaired without violating the Constitution of the United States. A number of US Tax Court cases involving family limited partnerships.

“The great object of incorporation is to bestow the character and properties of individuality on a collective and changing body of men. In the 1886 case Santa Clara v. both could be constrained by law In fact the corporations had been called artificial persons by courts in England as early as the 16th century because lawyers for the corporations had asserted they could not be convicted under the English laws of the time because the laws were worded “No person shall.S. in Munn v. Miller delivered the majority opinion and discussed the Thirteenth Amendment and the Fifteenth Amendment as well as the Fourteenth as follows: The most cursory glance at these articles discloses a unity of purpose. Samuel F. Billings. had considered the purpose of the Amendment in 1872.” In the Slaughterhouse Cases 110. The court‟s decision was that it could. when the court was “called upon for the first time to give construction to these articles. Illinois109 . Southern Pacific. the decision focused on the question of whether or not a private company could be regulated in the public interest. both could be taxed. Artificial person was used because there were certain resemblances. 113 (1876)) 110 (83 U.S. Seven years later.”108 It should be understood that the term „artificial person‟ was in long use. which cannot fail to have an important bearing on any question of doubt concerning their true meaning. in law. prior to the Dartmouth College decision.”. be safely and rationally solved 108 109 Providence Bank v. if the private company could be seen as a utility operating in the public interest. when any reasonably exist. Miller. only six years after the Amendment had become law. Chief Justice Marshall stated that.S. One of the 1886 judges..60 protections to corporate-owned property as it would have to property owned by natural persons. between a natural person and corporations. Similarly.. the Supreme Court ruled that the Fourteenth Amendment equal protection clause guarantees constitutional protections to corporations in addition to natural persons.[11] The primary purpose of the 14th Amendment was to protect freed slaves. Nor can such doubts. the Supreme Court decided that the Fourteenth Amendment (because Munn asserted his due process right to property was being violated) did not prevent the State of Illinois from regulating charges for use of a business grain elevators. 514 (1830) (94 U. and was in principle distinct from any contention that corporations have the rights of natural persons. Instead. in 1877. Both could be parties in a lawsuit. 29 U. 36 (1872)) . when taken in connection with the history of the times.

The 14th Amendment does not insulate corporations from all government regulation. Fortunately. v. Co. Hugo Black and William O. for example. Thus.S. just as any other group of persons. and the protection of the newly made freeman and citizen from the oppressions of those who had formerly exercised unlimited dominion over him.61 without a reference to that history. additional powers to the Federal government. may also benefit from its protections. the Court's ruling was that the Fourteenth Amendment did not prohibit the type of regulation at issue. two Supreme Court judges. 243 (1906)) . there is a way provided by the Constitution to accomplish this purpose. An amendment having that purpose could be submitted by Congress as provided by the Constitution. additional restraints upon those of the States. the Court accepted that corporations are for legal purposes "persons. and its leading features. laws often benefit those other than the original intended beneficiary. whites as well as African-Americans are clearly protected by the Fourteenth Amendment. I do not believe that the Fourteenth Amendment had that 111 (203 U. as they bear upon the matter before us. Quoted here is the conclusion of Justice Black's opinion: If the people of this nation wish to deprive the states of their sovereign rights to determine fair and just tax upon corporations doing a purely local business within their own state boundaries. and on the most casual examination of the language of these amendments. and groups organized specifically for business purposes. any more than it relieves individuals from all regulatory obligations.rather. later rendered opinions attacking the doctrine of corporate personhood. then. Douglas. Thus. including corporations. But whatever the reasons for their adaptation. free from doubt. almost too recent to be called history. We repeat. Riggs111 . but which are familiar to us all. lying at the foundation of each. for additional guarantees of human rights." but still ruled that the Fourteenth Amendment was not a bar to many state laws that effectively limited a corporation's right to contract business as it pleased. this was not because corporations were not protected under the Fourteenth Amendment . that history is fresh within the memory of us all. and without which none of them would have been even suggested. That way does not lie along the course of judicial amendment to that fundamental charter. Similarly. However. the people of the States. in Northwestern Nat Life Ins. we mean the freedom of the slave race. the security and firm establishment of that freedom. whether of a corporation or of sole proprietorship or partnership. in the light of this recapitulation of events. no one can fail to be impressed with the one pervading purpose found in them all. for in it is found the occasion and the necessity for recurring again to the great source of power in this country.

individual shareholders are not legally responsible for the corporation's debts and damages beyond their investment in the corporation. which states: In determining the meaning of any Act of Congress. political contributions to candidates in federal races by corporations had been prohibited since the Tillman Act of 1907. even though individual contributions remained unlimited. firms. Justice Black was not alone in his questioning of the legitimacy of corporate personhood. 77. 562. in which the Court. managers. gave an opinion similar to. because the corporation is legally considered the person. Similarly. on procedural grounds. 1949) 114 352 U.114 . societies. and joint stock companies. nor that the people believed it had that purpose. (United States Code). dissenting. For example.S. but are not generally liable for the corporation's actions. but shorter than. v.C. Johnson 112. nor that it should be construed as having that purpose. as well as individuals. the one quoted above.4.S. unless the context indicates otherwise the words person and whoever includes corporations. 567 (1957) . The extent to which the rights of personhood should attach to corporations has remained a subject of controversy. associations. and directors are liable for their own malfeasance or lawbreaking while acting on behalf of the corporation. By the time of those opinions. to which Justice Black concurred. a corporation is allowed to own property and enter contracts. Hugo Black. overruled a lower court decision upholding the prohibition on corporate and union political expenditures: 4. Connecticut General Life Insurance Company v. Among the most frequently discussed and controversial consequences of corporate personhood in the United States is the extension of a limited subset of the same constitutional rights. As well.S. this federal statute has many consequences. Legislation The laws of the United States hold that a legal entity (like a corporation or non-profit organization) shall be treated under the law as a person except when otherwise noted. United Auto Workers. It can also sue and be sued and held liable under both civil and criminal law. individual employees. Yet both Justice Black and Justice Douglas dissented from the Supreme Court's 1957 decision in United States v. dissenting in Wheeling Steel Corp. This rule of construction is specified in 1 U.S. companies.62 purpose. 112 113 (303 U. Glander113. partnerships. 1938) (337 U. Justice Douglas.

to 115 (118 U.. The question of whether corporations were persons within the meaning of the Fourteenth Amendment had been argued in the lower courts and briefed for the Supreme Court. before oral argument took place. applies to these corporations. is often traced to the 1886 U.e. to speech. Supreme Court case Santa Clara County v. Therefore corporations have always had a legal personality for the purposes of conducting business while shielding individual stockholders from personal liability (i. Generally speaking. at the outset. such as the right to petition. and Fourteenth Amendment rights have been asserted by corporations.63 Corporations as legal entities have always been able to perform commercial activities. However. "we avoided meeting the [Constitutional] question. The stronger concept of corporate personhood. In numerous cases since. Chief Justice Waite wrote in private correspondence that. We are all of the opinion that it does. to enter into contracts and to hold property. In that case. similar to a person acting as a sole proprietor. but in this interpretation. court reporter Bancroft Davis stated: The court does not wish to hear argument on the question whether the provision in the Fourteenth Amendment to the Constitution. the Court has reiterated that corporations are protected in many activities by the equal protection clause of the Constitution. however. 394) . which forbids a State to deny to any person within its jurisdiction the equal protection of the laws.S. corporations may invoke rights that groups of individual may invoke. in which (for example) First. Liberal/progressive author and radio/TV talk show host Thom Hartmann has argued that the court was reluctant to establish precedent in that decision. the Waite Court assumed that corporations were entitled to protection under the Fourteenth Amendment. Hartmann claims that correspondence between Waite and Bancroft Davis (available in the Library of Congress) demonstrates that Waite did not intend to create a legal precedent. writing a summary of the decision in a head note to the Court's opinion.S. The extent of the protection is what continues to be at issue. the Waite Court did not explicitly decide upon this issue. such as entering into a contract or owning property. protecting personal assets which were not invested in the corporation). Thus. Fifth. Southern Pacific Railroad115 . the court did not specifically address the matter of whether corporations could be considered 'persons' with respect to the Fourteenth Amendment as the decision made such a finding unnecessary (being based on less expansive law).

including the right to vote and the right against self incrimination. Federal Election Campaign Act of 1971. Austin v. Corporate political spending A central point of debate in recent years is what role corporate money plays and should play in democratic politics. banned corporate political contributions to national campaigns. should reject the doctrine of corporate personhood under the Fourteenth Amendment." dissenting in "McConnell v. However. and Justice Rehnquist himself eventually endorsed overruling "Austin. In the United States. Chief Justice William Rehnquist repeatedly criticized the Court's invention of corporate constitutional rights. these justices' rulings have continued to affirm the assumption of corporate personhood. legal milestones in this debate include:    Tillman Act of 1907.64 sue and to be sued. This is part of the larger debate on campaign finance reform and the role that money may play in politics. such as that of Justice Antonin Scalia.   116 117 (1976) (1978) 118 (1990) . landmark campaign financing legislation. Bellotti.e. Bellotti117 upheld the rights of corporations to spend money in non-candidate elections (i. Ralph Nader and others have argued that a strict originalist philosophy. FEC. Michigan Chamber of Commerce 118 upheld the right of the state of Michigan to prohibit corporations from using money from their corporate treasuries to support or oppose candidates in elections. Valeo116 upheld limits on campaign contributions. Indeed. they may not exercise rights that are exclusive to individuals and cannot be exercised by other associations of individuals. noting that corporate wealth can unfairly influence elections. Buckley v. Nonetheless. but held that spending money to influence elections is protected speech as in the first amendment. as the Waite court did. ballot initiatives and referendums). First National Bank of Boston v. most famously in his dissenting opinion in the 1978 case First National Bank of Boston v.

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Bipartisan Campaign Reform Act of 2002 (McCain- Feingold), banned corporate funding of issue advocacy ads that mentioned candidates close to an election. McConnell v. Federal Election Commission119 , substantially upheld McCain-Feingold. Federal Election Commission v. Wisconsin Right to Life, Inc.120 weakened McCain– Feingold, but upheld core of McConnell. Citizens United v. Federal Election Commission121 the Supreme Court of the United States held that corporate funding of independent political broadcasts in candidate elections cannot be limited under the First Amendment, overruling Austin (1990) and partly overruling McConnell (2003).

 

The corporate personhood aspect of the campaign finance debate turns on Buckley v. Valeo 122 and Citizens United (2010): Buckley ruled that political spending is protected by the First Amendment right to free speech, while Citizens United ruled that corporate political spending is protected, holding that corporations have a First Amendment right to free speech Controversies about corporate personhood in the United States Since the mid-19th century, corporate personhood has become increasingly controversial, as courts have extended other rights to the corporation beyond those necessary to ensure their liability for debts. Other commentators argue that corporate personhood is not a fiction anymore-it simply means that for some legal purposes, person has now a wider meaning than it has in non-legal uses. Some groups and individuals (including the American Green Party) have objected to corporate personhood. In part as a matter of subsequent interpretations of the word person in the Fourteenth Amendment, U.S. courts have extended certain constitutional protections to corporations. Opponents of corporate personhood don't necessarily want to eliminate legal entities, but do want to limit these rights to those provided by state constitutions through constitutional amendment. Often, this is motivated by a desire to restrict the political speech and donations of corporations, lobby groups, lobbyists, and political parties. Because legal persons have limited “free speech” rights, legislation meant to eliminate campaign contributions by legal persons (notably, corporations and labour unions) has been repeatedly struck down by various courts.

119 120

(2003) (2007) 121 (2010) 122 (1976)

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4.5.Summary

Corporate personality is in fact a corporate legal personality. The concept of corporate personality is not modern day contemplation. The corporation as a legal entity is in existence from the last 500 years. Nonetheless, with the classical connotation the concept of a corporation to exist as a legal person is not more than 100 years old. The modern corporate personality concept supports a corporation even if the business is not earning profit or only to limit the shareholders liabilities.

Chapter-5 STUDY OF CORPORATE PERSONALITY IN UK

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5.1. United Kingdom Company law

In the United Kingdom, corporation most commonly refers to a body corporate formed by Royal Charter or by statute, of which few now remain. The BBC is the oldest and best known corporation within the UK that is still in existence. Others, such as the British Steel Corporation, were privatized in the 1980s. In the private sector, corporations are referred to as companies, and are regulated by the Companies Act 2006 (or the Northern Ireland equivalent). The most common type of company is the private limited company (Limited or Ltd.). Private limited companies can either be limited by shares or by guarantee. Other corporate forms include the public limited company (PLC) and the private unlimited company, and companies limited by guarantee. A special type of corporation is a corporation sole, which is an office held by an individual natural person (the incumbent), but which has a continuing legal entity separate from that person: an example is a Church of England bishopric. United Kingdom company law is the body of rules that concern corporations formed under the Companies Act 2006. Also regulated by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary legal vehicle to organise and run business. Tracing their modern history to the late Industrial Revolution, public companies now employ more people and generate more of wealth in the United Kingdom economy than any other form of organisation. The United Kingdom was the first country to draft modern corporation statutes, where through a simple registration procedure any investors could incorporate, limit liability to their commercial creditors in the event of business insolvency, and where management was delegated to a centralised board of directors. An influential model within Europe, the Commonwealth and as an international standard setter, UK law has always given people broad freedom to design the internal company rules, so long as the mandatory minimum rights of investors under its legislation are complied with. Company law, or corporate law, can be broken down into two main fields. Corporate governance in the UK mediates the rights and duties among shareholders, employees, creditors and directors. Since the board of directors habitually possesses the power to manage the business under a company constitution, a central theme is

a company's life ends when its assets are liquidated. Through the Takeover Code the UK strongly protects the right of shareholders to be treated equally and freely trade their shares. A purchaser of shares is helped to make an informed decision directly by prospectus requirements of full disclosure.2. typified by the London Stock Exchange. Directors must carry out their responsibilities with competence. In turn. Of central importance in public and listed companies is the securities market. typically exercise sole voting rights in the general meeting. directors duties and other member rights may be vindicated in court. If rescue proves impossible. Debt finance means getting loans. Corporate Personality The Corporation of London. usually for the price of a fixed annual interest repayment. so that in the event of default on loan repayments they may seize the company‟s property directly to satisfy debts. Creditors are also. The general meeting holds a series of minimum rights to change the company constitution. which governs the Square Mile from the Griffin at Temple Bar to the Tower of London. directors owe a set of duties to their companies. When a company is unable to pay its debts as they fall due. Corporate finance concerns the two money raising options of incorporators. Shares can contain any rights the company and purchaser wish to contract for. distributed to creditors and the company is struck off the register 5. If the mechanisms of voting do not prove enough. but generally grant the right to participate in dividends after a company earns profits and the right to vote in company affairs. protected by courts‟ power to set aside unfair transactions before a company goes under. in good faith and undivided loyalty to the enterprise. Sophisticated lenders. is an early example of a separate legal person.68 what mechanisms exist to ensure directors' accountability. UK law is shareholder friendly in that shareholders. or recoup money from negligent directors engaged in wrongful trading. such as banks typically contract for a security interest over the assets of a company. issue resolutions and remove members of the board. UK insolvency law requires an administrator to attempt a rescue of the company. to some extent. particularly for minority shareholders. to the exclusion of employees. and indirectly through restrictions on financial assistance by companies for purchase of their own shares. . Equity finance involves the traditional method of issuing shares to build up a company‟s capital.

Historically. a company can persist forever. for they have no souls. for an invisible body cannot be in person. Legal personality simply means the entity is the subject of legal rights and duties. unpaid creditors cannot (generally) seek contributions from the company's shareholders and employees. for a Corporation aggregate of many is invisible.” Without a body to be kicked or a soul to be damned. but those who stand to lose their investments will. body. A company will.bankrupt. A Corporation aggregate of many cannot do fealty. Sir Edward Coke remarked in the Case of Sutton’s Hospital. They may not commit. & resteth only in intendment and consideration of the Law. In 1612. and resteth only in intendment and consideration of the Law. “ the Corporation itself is only in abstracto. However. as a separate person. nor ex communicates. Most companies adopt limited liability for their members. even as the natural people who invest in it and carry out its business change or pass away. neither can they appear in person. it is not subject to imbecilities. municipal councils (such as the Corporation of London) or charitable establishments would be the primary examples of corporations. nor can swear. Yet if business remains successful. or death of the natural. If a company does not have enough assets to pay its debts as they fall due. The liability of a company itself is unlimited (companies have to pay all they owe with the assets they have). it will be insolvent . but the liability of those who invest their capital in a company is (generally) limited to their shares. This means that if a company does go insolvent. employees will lose their jobs and a liquidator will be appointed to sell off any remaining assets to distribute as much as possible to unpaid creditors. but by Attorney. be the first liable entity for any obligations its directors and employees create on its behalf. and divers other cases. limited liability . and those who invest their labour can only lose their jobs. seen in the suffix of Ltd or plc.69 English law recognised long ago that a corporation would have legal personality. Unless an administrator (someone like an auditing firm partner. a corporation does not itself suffer penalties administered by courts. shareholders will lose their money. even if shareholders and employees profited handsomely before a company‟s fortunes declined or would bear primary responsibility for the losses under ordinary civil law principles. immortal. and therefore it cannot have predecessor nor successor. It can sue and be sued. usually appointed by creditors on a company‟s insolvency) is able to rescue the business. nor be outlawed.

the default position for companies can be switched back so that shareholders or directors do agree to pay off all debts. The assets are beyond reach behind the metaphorical "veil of incorporation 5. If a company's investors do not do this. may not lend to a small company unless the company's director gives her own house as security for the loan (e. Courts have relied upon several factors in deciding whether to ignore the existence of the corporate entity . Courts have relied on an “interests of justice” rationale to lift the veil. provided creditors have the opportunity and the bargaining power to do so. A bank. Cape Industries123.g. so their limited liability is not "contracted around". at times. Shayif categorically rejects this approach. Cape rejected the „single economic entity‟ argument. In this context. it left open the door for agency-based arguments. The important conclusions reached by the Justice Munby are as follows: 123 [1991] 1 All ER 929 .. and there must have been some impropriety. Now. Just as it is possible for two contracting parties to stipulate in an agreement that one's liability will be limited in the event of contractual breach. by mortgage).70 acts merely as a default position. British decision on lifting the corporate veil: Considerable difficulty arises in trying to find a coherent set of principles to govern issues related to lifting the corporate veil. single economic entity. Further. Hashem v. and concluded that for the veil to be lifted. determination of nationality etc.fraud or sham. for instance. whether the Justice Munby‟s judgment closes the door on agency-type arguments as well because of the insistence on impropriety. In a recent judgment in Hashem v. in a landmark judgment in Adams v. It needs to be considered.3. then. Shayif. Justice Munby of the England and Wales High Court considered in depth several cases on the corporate veil issue. although Adams v. the Court of Appeal rejected the argument of „single economic entity‟. In the early 1990s. agency. that defendant must have control of the entity. The Court refused to ignore the legal form to look at the economic substance. „agency‟ would mean not just a formal contractual relationship but also a „factual‟ agency. tax evasion. It can be contracted around. their assets will (generally) be protected from claims of creditors.

Again. an “associated enterprise” etc. specific agency-based arguments were raised before the Court Justice Munby however said that for any question of lifting the veil. The veil can be pierced only if there is some impropriety. Agency-type arguments (such as “the company so habitually acts according to the wishes of the defendant that it is should be treated as an alter-ego”) are not sufficient to lift the veil because of the element of “impropriety”. The Courts cannot pierce the corporate veil merely because it is thought to be in the interests of justice.lifting the veil over one company and then pulling it down to include another entity in the same veil. This is done in seeing whether a company is a “wholly-owned subsidiary”. If the answer is “no. . 4. 3. Penetrating the veil . but that despite the company being existent. 3. The impropriety must be linked to the use of the company structure to avoid or conceal liability.is the company a façade at the relevant time? Whether it is a façade or not is determined by factors 1 to 5. certain factors require the Court to directly look at the shareholders. 2. It is essential to show both control and impropriety in the sense mentioned in point 4. This is the approach in both „single economic entity‟ and „factual-agency‟ arguments. “… the wrongdoer controlled the company. the veil cannot be lifted at all. Further.for the purpose of fastening liability on the shareholders for the acts of the company or for granting shareholders direct interest in a company‟s assets.merely for the purpose of looking at the controlling persons and for nothing more. Prof. mere existence of impropriety is also not sufficient. The test for lifting the veil is .71 1. 5. Extending the veil . it is not a facade”. In a seminal article in the Modern Law Review (May 1990). 2. Justice Munby notes that whenever the Courts have lifted the corporate veil. Ottolenghi characterized judicial action in “corporate veil” cases to be of four types: 1. the above factors were the essential test. S.” Thus it would appear that the only way in which the veil can be lifted in by proving the existence of a façade. Indeed. which he used as a façade or device to facilitate and cover up his own wrongdoing … in each of these cases there were present the twin features of control and impropriety. This does not mean that the company is treated as non-existent. Peeping behind the veil . Ownership and control of the company are not sufficient to justify the piercing of the corporate veil. 6.

Accordingly. There would be nothing wrong with Justice Munby‟s approach if the case dealt with only the 4th category . judicial dicta supporting the view that the rule in Salomon is subject to exceptions are thin on the ground. Although the secondary literature refers to different means of “lifting” or “piercing” the veil. rather than strict legal form . After a series of attempts by the Court of Appeal during the late 1960s and early 1970s to establish a theory of economic reality. the arguments made before him required him to look at all the categories listed above. he claims to lay down principles which would cover all these categories.entirely ignoring the existence of the company as a „façade‟ or a „sham‟. Ignoring the veil . Adams v Cape Industries plc. However this has largely been repudiated and has been treated with caution in subsequent judgments. There are also significant statements still among the judiciary in support of a broader veil lifting approach in the interests of justice. despite the fact that this is “not necessarily the most honest way of trading”.in DHN Food Distributors v Tower Hamlets.nonetheless. The corporate veil in UK company law is pierced very rarely. The veil is also often ignored in the process of interpreting a statute. or where it is established to avoid an existing obligation. “Single economic unit” theory It is an axiomatic principle of English company law that a company is an entity separate and distinct from its members. it can create subsidiaries with inadequate capitalization and secure loans to the subsidiaries with fixed charges over their assets. Furthermore. On a strict reading of the most prominent recent case. and a doctrine of control for lifting the veil. and as a matter of tort law it is open as a matter of authority that a direct duty of care may be owed by the managers of a parent company to accident victims of a subsidiary. the former owning the . the House of Lords reasserted an orthodox approach.72 4. the only true veil piercing may take place when a company is set up for fraudulent purposes. The effect of this rule is that the individual subsidiaries within a conglomerate will be treated as separate entities and the parent cannot be made liable for the subsidiaries debts on insolvency. Lord Denning MR outlined the theory of the “single economic unit” wherein the court examined the overall business operation as an economic unit. who are liable only to the extent that they have contributed to the company's capital: Salomon v Salomon [1897]. the House of Lords held that it was a decision to be confined to its facts (the question in DHN had been whether the subsidiary of the plaintiff. In Woolfson v Strathclyde BC.

Despite the rejection of the justice of the case test. Mr. Existing obligation The case of Jones v Lipman. held that the legal conception of the corporate structure was entirely distinct from the economic realities. where a company was used to defraud the creditors of the defendant and Gilford Motor Co Ltd v Horne. They are not instances of the corporate veil being pierced but instead involve the application of other rules of law. and these doubts were shared by Moritt V-C in Trustor v Smallbone: the corporate veil cannot be lifted merely because justice requires it. who had concurred in the result in DHN. Courts have been reluctant to agree to this. The single economic unit theory was likewise rejected by the CA in Adams v Cape Industries. where Slade LJ held that cases where the rule in Salomon had been circumvented were merely instances where they didn't know what to do. it is because of the separate identity of the company concerned and not despite it that equity intervened in all of these cases.73 premises on which the parent carried out its business. it is observed from judicial reasoning in veil piercing cases that the courts employ equitable discretion guided by general principles such as male fides to test whether the corporate structure has been used as a mere device. Similarly. In truth. Reverse piercing There have been cases in which it is to the advantage of the shareholder to have the corporate structure ignored. in Bank of Tokyo v Karoon. where an injunction was granted against a trader setting up a business which was merely as a vehicle allowing him to circumvent a covenant in restraint of trade are often said to create a fraud exception to the separate corporate personality. could receive compensation for loss of business under a compulsory purchase order notwithstanding that under the rule in Salomon. in Gencor v Dalby. Macaura was the sole owner of a company he had set up to grow timber. The view expressed at first instance by HHJ Southwell QC in Creasey v Breachwood that English law definitely recognized the principle that the corporate veil could be lifted was described as a heresy by Hobhouse LJ in Ord v Bellhaven. The trees were destroyed by fire but the insurer refused to pay since the policy was with Macaura (not the company) and he was not the . as Lord Cooke (1997) has noted extra judicially. The often cited case Macaura v Northern Assurance Co Ltd is an example of that. it was the parent and not the subsidiary that had lost the business). Lord Goff. Likewise. the tentative suggestion was made that the corporate veil was being lifted where the company was the alter ego of the defendant.

Thirdly. “cloak” or “sham”.4. It cannot do so simply because it considers it might be just to do so. where an offender does acts in the name of a company which (with the necessary mens rea) constitute a criminal offence which leads to the offender's conviction. Secondly. a director of the company). Criminal law In English criminal law there have been cases in which the courts have been prepared to pierce the veil of incorporation. First if an offender attempts to shelter behind a corporate façade. In the context of criminal cases the courts have identified at least three situations when the corporate veil can be pierced.e. 5. It is “hornbook” law that a duly formed and registered company is a separate legal entity from those who are its shareholders and it has rights and liabilities that are separate from its shareholders. an attempt to disguise the true nature of the transaction or structure so as to deceive third parties or the courts. Summary 124 [2009] EWCA Crim 1303 . A useful brief summary of the position regarding 'piercing the veil' in English criminal law was given in the Court of Appeal judgment in the case of R v Seager124 in which the court said: “There was no major disagreement between counsel on the legal principles by reference to which a court is entitled to “pierce” or “rend” or “remove” the “corporate veil”.74 owner of the trees. In consequence those monies become an element in the individual's 'benefit' obtained from criminal conduct (and hence subject to confiscation from him). or veil to hide his crime and his benefits from it. but not always. Each of these circumstances involves impropriety and dishonesty. The House of Lords upheld that refusal based on the separate legal personality of the company. A court can “pierce” the carapace of the corporate entity and look at what lies behind it only in certain circumstances. The court will then be entitled to look for the legal substance. For example in confiscation proceedings under the Proceeds of Crime Act 2002 moneys received by a company have been regarded as having been 'obtained' by an individual (who is usually. not the just the form. where the transaction or business structures constitute a “device”. i. then "the veil of incorporation is not so much pierced as rudely torn away": per Lord Bingham in Jennings v CPS.

the company assets meet with its liabilities and the properties of its shareholders remain intact. Limited liability of shareholders is a legal consequence of the discrete corporate personality in existence under the company laws. By virtue of that.75 According to the UK companies laws a corporate personality exists in actuality. Hence. When a company is liquidated. . A company incorporated under the law is a separate legal entity and is responsible for its own debts. This concept had two developed with the promulgation of UK‟s Companies Act 1862 that is incarnated in the modern times in the shape of Companies Act 2006. This is the longest law in the law making history of the British Legislature. Moreover. according to the law a company (as a corporate person) can sue and can be sued in its own name and identity. it is liable for its own debts. Superseding the Companies Act 1985. Corporate legal personality and the limited liability are not synonymous terms. The evaluation of UK company law with reference to corporate personality concerns the basic idea that a company or corporation is a distinct legal personality distinguishable from its shareholders or owners including employees as well. This is a law stretched over 700 pages. The shareholders no doubt have to lose their initial investment in shares but they are never responsible for the debts of a company. This doctrine limits liability of the shareholders. it was enforced in stages and that law enforcement process finalized in October 2009. all debts and liabilities belong to the legal corporate personality of a company and not to its shareholders. Therefore. discretely and different from its owners. contains 1300 sections and 15 schedules. the company as a corporate personality can own and hold its own property.

Chief Justice Marshall. A company should however. Disadvantages of incorporation include: Formalities and expense. Company form of organisation is however. the ability to enter into contracts. Body corporate includes. distinct legal entity. Prof. loss of privacy. greater tax burden and detailed winding up procedure. such as fraud and manslaughter. besides a company. when creditors force the liquidation and dissolution of the corporation under court order. common seal free transfer of shares. public financial institutions. Haney etc we can gather that the characteristics features of a company are incorporated association. Insolvency may result in a form of corporate „death‟. and the ability to sue and be sued. be distinguished from a body corporate. the requirement to pay taxes. but it most often results in a restructuring of corporate holdings. the ability to hold and transfer property. Artificial entities that are created by state statute and that are treated much like individuals under the law. nationalized banks and any other association of persons declared as a body corporate by the Central Government. Corporations can exercise human rights against real individuals and the state. The rights and responsibilities of a corporation are independent and distinct from the people who own or invest in the corporation.76 CONCLUSION „Company‟ in simple terms means a voluntary association of persons who have come together for carrying on same business and sharing the profits there from. Corporations can even be convicted of criminal offenses. Although corporate law varies in different jurisdictions . not an unmixed blessing. the ability to acquire debt and pay out profits. order of court. artificial personality. The expression body corporate is a wider expression than company. From the definitions givens by Lord Justice Lindley. perpetual succession. and they can themselves be responsible for human rights violations. Corporations are conceptually immortal but they can die when they are dissolved either by statutory operation. limited liability. divorce between ownership and control. a company incorporated outside India. Section (1) (i) and (ii) of the Companies Act defines a company as a company formed and registered under those Act or an existing company. having legally enforceable rights. A corporation simply provides a way for individuals to run a business and share in profits and losses. or voluntary action on the part of shareholders.

it becomes a juristic person. (2) There must be organs through which the corporation functions. On the one hand they run the company as its owner (Policy maker) and on the other hand they are merely a servant of the company and take remuneration. However. a corporation can act only through its agents. Besides. In the United States. has a perpetual existence. corporations the banks.77 Corporate Personality is the creation of law. the corpus of the legal person shall be some fund or estate which reserved certain special uses. if any. They are entitled to do any work on behalf of the company. and (3) The corporation is attributed will by legal fiction. A corporation is distinguished by reference to different kinds of things which the law selects for personification. It does not come to end with the death of its individual members and therefore. temple. In certain cases. Law provides procedure for winding up of a corporate body. railways. and to have those contracts honored the same as contracts entered into by natural persons. The individuals forming the corpus of corporation are called its members. what a company can do in ordinary course of business. It has its own name and property. The directors of a company are in fiduciary position.. Corporate personhood refers to the question of which subset. are also conferred legal personality. A corporation is distinct from its individual members.. whether public or private limited. hospitals etc. As soon as a company is incorporated. freely transferable shares. corporations were recognized as having rights to contract. A corporation is an artificial person enjoying in law capacity to have rights and duties and holding property. Legal personality of corporation is recognized both in English and Indian law. a charitable fund etc. It has the legal personality of its own and it can sue and can be sued in its own name. are included within the term „legal personality‟. of rights afforded under the law to natural persons should also be afforded to corporations as legal persons. church. universities. There are certain . A legal entity properly registered with the secretary of state. colleges. Union of India and States are also recognized as legal or juristic persons. eyes and hands of the company. It is a separate legal entity distinct from its members who incorporate it. Can have limited liability . The directors are also called the ears. The juristic personality of corporations pre-supposes the existence of three conditions : (1) There must be a group or body of human beings associated for a certain purpose. a trust . For instance.estate or the estate of an insolvent. unlike natural persons. A company does its business through its Directors. and centralized management. perpetual life.

But wrong done by the Directors (criminal action ) are the responsibility of the Directors and not the responsibility of the Company. and have ownership over property. In many jurisdictions. incur debt. However. They may sue and be sued. For investigation of ownership of company. privileges. Prevention of fraud or improper conduct. just as natural persons (humans) do. Failure to deliver share certificate etc. and body corporate. Legal personality (also artificial personality. The concept of a legal person is a fundamental legal fiction. Protection of revenue. Determination of the enemy character of a company. legal personality allows such composite to be considered under law separately from its individual members or shareholders. There are certain circumstances provided by the statue itself and certain circumstances provided through judicial pronouncements under which the „corporate veil‟ may be lifted viz. . Legal personality allows one or more natural persons to act as a single entity (a composite person) for legal purposes. infinite membership. Misrepresentation in Prospectus. juridical personality. Within stipulate time period. The corporate veil of the company may be lifted in certain cases to identify the persons who are guilty of any fraud or improper conduct. transferability of shares. Mis-description of name. Reduction of membership below statutory minimum. Such items are done by the company in general meeting. Any action done by the directors in the ordinary course of business are treated as done by the Company. enter into contracts. protections. juridical person. separate property. and liabilities under law. perpetual succession. under special circumstances this disparity may be removed. Thus. The company from of organisation offers certain distinct advantages over other association of persons. It is pertinent to the philosophy of law. responsibilities. and juristic personality) is the characteristic of a non-human entity regarded by law to have the status of a person. To punish for contempt of court. also commonly called a vehicle) has a legal name and has rights. the law in both the United Kingdom and India is well settled that a company has a separate legal personality from its members. Fraudulent Conduct. (also artificial person. as is essential to laws affecting a corporation (corporations‟ law) (the law of business associations). ease in control and management. juristic person. etc. limited liability of members. Failure to return application money. Liability for ultra-vires Acts.78 items for which Board is not empowered to do. These include: Independent legal entity. A legal person (Latin: persona ficta).

this may result in a legal decision in which the rights or duties of a corporation are treated as the rights or liabilities of that corporation's shareholders or directors. The concept of a legal person is now central to Western law in both common law and civil law countries. Generally. human rights or civil rights (including the right to freedom of speech. The concept of legal personality is not absolute. .for example. but it is also found in virtually every legal system. “Piercing the corporate veil” refers to looking at individual human agents involved in a corporate action or decision. legal persons do not have all the same rights as natural persons .79 Entities with legal personality may also be subject to certain legal obligations. although the United States has become an exception in this regard). An entity with legal personality may shield its shareholders from personal liability. such as the payment of tax.