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CorporatePersonality

Source:http://www.
Author:aarsha
Publishedon:May22,2010
CorporatePersonalityisthecreationoflaw.Legalpersonalityof
corporationisrecognizedbothinEnglishandIndianlaw.A
corporationisanartificialpersonenjoyinginlawcapacityto

haverightsanddutiesandholdingproperty.

aarsha'sProfileand
details
Aarsha
Unnikrishnan

Acorporationisdistinguishedbyreferencetodifferentkindsof
thingswhichthelawselectsforpersonification.Theindividualsformingthecorpusof
corporationarecalleditsmembers.Thejuristicpersonalityofcorporationspresupposesthe
existenceofthreeconditions:
(1)Theremustbeagrouporbodyofhumanbeingsassociatedforacertainpurpose.
(2)Theremustbeorgansthroughwhichthecorporationfunctions,and
(3)Thecorporationisattributedwillbylegalfiction.Acorporationisdistinctfromits
individualmembers[1].
Ithasthelegalpersonalityofitsownanditcansueandcanbesuedinitsownname.Itdoes
notcometoendwiththedeathofitsindividualmembersandtherefore,hasaperpetual
existence.However,unlikenaturalpersons,acorporationcanactonlythroughitsagents.Law
providesprocedureforwindingupofacorporatebody[2].Besides,corporationsthebanks,
railways,universities,colleges,church,temple,hospitalsetc.arealsoconferredlegal
personality.UnionofIndiaandStatesarealsorecognizedaslegalorjuristicpersons[3].
Incertaincases,thecorpusofthelegalpersonshallbesomefundorestatewhichreserved
certainspecialuses.Forinstance,atrustestateortheestateofaninsolvent,acharitablefund
etc..areincludedwithinthetermlegalpersonality.
Corporationsareoftwokinds:
1.CorporationAggregate:Isanassociationofhumanbeingsunitedforthepurposeof
forwardingtheircertaininterest.AlimitedCompanyisoneofthebestexample.Sucha
companyisformedbyanumberofpersonswhoasshareholdersofthecompanycontributeor
promisetocontributetothecapitalofthecompanyforthefurtheranceofacommonobject.
Theirliabilityislimitedtotheextentoftheirshareholdinginthecompany.Alimitedliability
companyisthusformedbythepersonificationoftheshareholders.Thepropertyisnotthatof
theshareholdersbutitsownpropertyanditsassetsandliabilitiesaredifferentfromthatofits
members.Theshareholdershavearighttoreceivedividendsfromtheprofitsofthecompany
butnotthepropertyofthecompany[4].Theprincipleofcorporatepersonalityofacompany
wasrecognizedinthecaseofSalomanv.Saloman&Co[5].
2.CorporationSole:Isanincorporatedseriesofsuccessivepersons.Itconsistsofasingle
personwhoispersonifiedandregardedbylawasalegalperson.Inotherwords,asingle
person,whoisinexerciseofsomeofficeorfunction,dealsinlegalcapacityandhaslegal
rightsandduties.Acorporationsoleisperpetual.PostMasterGeneral,PublicTrustee,
ComptrollerandauditorgeneralofIndia,theCrowninEnglandetcaresomeexamplesofa
corporationsole.Generally,corporationsolearetheholdersofapublicofficewhichare
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recognizedbylawasacorporation..Thechiefcharacteristicofacorporationsoleisits
continuousentityendowedwithacapacityforendlessduration.Acorporationsoleisan
illustrationofdoublecapacity.Theobjectofacorporationsoleissimilartothatofa
corporationaggregate.Initasinglepersonholdingapublicofficeholdstheofficeinaseries
ofsuccession,meaningtherebythatwithhisdeath,hisproperty,rightandliabilitiesetc.,do
notextinguishbuttheyarevestedinthepersonwhosucceedshim.Thusonthedeathofa
corporationsole,hisnaturalpersonalityisdestroyed,butlegalpersonalitycontinuestobe
representedbythesuccessiveperson.Inconsequence,thedeathofacorporationsoledoesnot
adverselyaffecttheinterestsofthepublicingeneral.
AdvantagesofIncorporation
1)IndependentCorporateExistence:Acorporatepersonshallhaveanindependentcorporate
existence.Itisinlawaperson.Itissdistinctlegalpersonaexistingindependentofits
members.Incaseofacompany,byincorporationitgainsacorporatepersonalitywhichis
separateordistinctfromthememberswhocomposeit.Thepropertyofthecompanybelongs
toitandnotitsmembersitmaysueorbesuedinitsownnameitmayenterintocontracts
withthirdpartiesindependentlyandeventhemembersthemselvescanenterintocontractwith
thecompanyAccordingtoSection34(2)oftheCompaniesAct,uponissueofthecertificate
ofincorporation,thesubscriberstothememorandumandotherpersons,whomayfromtime,
bethemembersofthecompany,shallbeabodycorporate,whichiscapableofexercisingall
thefunctionsofanincorporatedcompanyandhavingperpetualsuccessionandacommonseal.
Thusthecompanybecomesabodycorporatewhichiscapableimmediatelyoffunctioningas
anincorporatedindividual.Withtheincorporation,theentityofthecompanybecomes
institutionalized.Thisprincipleoftheindependentcorporateexistenceandtheprincipleof
corporatepersonalityofacompanywasrecognizedinthecaseofSalomanv.Saloman&Co
[6].InthiscaseSalomonwasabootandshoemanufacturer.Heincorporatedacompany
namedSalomon&CoLtd,forthepurposeoftakingoverandcarryingonhisbusiness.The
sevensubscriberstothememorandumwereSalomon,hiswife,hisdaughterandfoursonsand
theyremainedtheonlymembersofthecompany.Thecompanywentintoliquidationwithina
year.TheunsecuredcreditorscontendedthatthoughincorporatedundertheAct,thecompany
neverhadanindependentexistence,itwasinfactSalomonunderanothernamehewasthe
managingdirector,theotherdirectorsbeinghissonsandunderhiscontrol.Itwasheldthat
Salomon&CoLtdwasarealcompanyfulfillingallthelegalrequirements.Itmustbetreated
asacompany,asanentityconsistingofcertaincorporators,butadistinctandindependent
corporation.Thusitwasdecidedinthiscasethatacorporatebodyhasitsownexistenceor
personalityseparateanddistinctfromitsmembersandtherefore,ashareholdercannotbeheld
liablefortheactsofthecompanyeventhoughheholdsvirtuallytheentiresharecapital.The
casehasalsorecognizedtheprincipleoflimitedliabilityofacompany.
Theprincipleofdistinctandindependentexistenceofcompanyconsequenttoitsincorporation
wasrecognizedinIndiaevenbeforethedecisioninSalomoncase.TheHighCourtofCalcutta
inacaseobservedthatthecompanywasaltogetheraseparateperson,differentfromits
shareholdersandthereforethetransferwasasmuchaconveyance,atransferoftheproperty,
asiftheshareholdershadbeentotallydifferentpersons[7].Inthiscase,themembers
transferredaTeaEstatetoacompanyandclaimedexemptionfromadvaloremdutyonthe
groundthattheythemselvesbeingtheshareholdersinthecompany,itwasinfactatransferto
themselvesinanothername.TheCourt,however,rejectedtheircontentionandruledthatin
theeyesoflawthecompanywasadistinctindependentperson,separatefromitsshareholders.
TheSupremeCourtinM/s.ElectronicsCorporationofIndiaLtd.v.Secretary,Revenue
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Department[8].,GovernmentofAndhraPradesh,interaliaobservedthatacleardistinction
mustbedrawnbetweenacompanyanditsshareholders,eventhoughthatshareholdermaybe
onlyonei.e.theCentraloraStateGovernment.Intheeyesofthelaw,acompanyregistered
undertheCompaniesActisadistinctlegalentityotherthanthelegalentityorentitiesthat
holditsshares.
2)LimitedLiability:Oneoftheprincipaladvantagesofanincorporatedcompanyisthe
privilegeoflimitedliability.Itisthemainfeatureofregisteredcompanieswhichprovidesa
specialattractiontoinvestors.Theprincipleoflimitedliabilityimpliesthattheliabilityofa
memberintheeventofthecompany'swindingup,inrespectofthesharesheldbyhimis
limitedtotheextentoftheunpaidvalueonsuchshares.Thustheliabilitydoesnotfluctuate
butremainslimitedtotheamountwhich,forthetimebeingremainsunpaid,whetherfromthe
originalshareholderorthetransfereeofsuchsharesasthecasemaybe.limitedliabilityof
membersextendsonlyforcompany'sdebtintheeventofitswindingup.Thecompanyitself,
beingalegalpersona,isalwaysfullyliableandthereforeitsliabilityisunlimited.Inother
words,itisliabletopaythedebtssolongasassetsareavailable.Theorderofpriorityfor
paymentofdebtshall,however,dependontheclassofcreditorsaslaiddowninthe
CompaniesAct.Nomemberisboundtocontributeanythingmorethanthenominalvalueof
thesharesheldbythem[9].Section34(2)oftheCompaniesAct,1956providesthatinthe
eventofthecompanybeingwoundup,themembersshallhaveliabilitytocontributetothe
assetsofthecompanyinaccordancewiththeAct,Inthecaseoflimitedcompanies,no
memberisboundtocontributeanythingmorethanthenominalvalueofsharesheldbyhim.
Theprivilegeoflimitingtheliabilityisoneofthemainadvantagesofcarryingonbusiness
underacorporateorganization.
3)PerpetualSuccession:Anincorporatedcompanyhasperpetualsuccession,thatis
notwithstandinganychangeinitsmembers,thecompanyshallretainasthesameentitywith
thesameprivilegesandimmunities,estateandpossessions.thedeathorinsolvencyof
individualmemberdoesnotinanyway,affectitscorporateexistenceandthecompanyshall
continueitsexistenceasusualuntilitiswoundupinaccordancewiththeprovisionsofthe
CompaniesAct,Theperpetualexistenceofanincorporatedcompanyiswellillustratedby
proverbialsaying,"membersmaycomeandmembersmaygo,butthecompanycangoonfor
ever."
InGopalpurTeaCo.Ltd.v.PenhokTeaCo,Ltd.[10],thecourtwhileapplyingthedoctrineof
company'sperpetualsuccessionobservedthatthoughthewholeundertakingofacompanywas
takenoverunderanActwhichpurportedtoextinguishallrightsofactionagainstthe
company,neitherthecompanywastherebyextinguishednoranybody'sclaimagainstit.
4)Transferabilityofshares:Section82oftheCompaniesAct,1956,specificallyprovides
thatthesharesorotherinterestofanymemberinacompanyshallbemovableproperty,
transferableinthemannerprovidedbythearticlesofassociationofthecompany.Thusthe
memberofanincorporatedcompanycandisposeofhissharebysellingthemintheopen
marketandgetbacktheamountsoinvested.Thetransferabilityofshareshastwomain
advantages,namelyitprovidesliquiditytoinvestorsandatthesametimeensuresstabilityof
thecompany.Thetransferofsharesofacompanydoesnotinanywayaffectitsexistenceor
managementandtheshareholdercanconvenientlygetrelievedofhisliabilitybytransferring
hissharestosomeotherperson.
5)SeparateProperty:Incorporationhelpsthepropertyofthecompanytobeclearly
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distinguishedfromthatofitsmembers.Thepropertyisvestedinthecompanyasabody
corporate,andnochangesofindividualmembershipaffectthetitle.Incaseofacompany,it
beingalegalpersoniscapableofowning,enjoyinganddisposingofpropertyinitsown
name.Thecompanybecomestheownerofitscapitalandassets.Theshareholdersarenotthe
severalorjointownersofcompanysproperty.InBachaFGuzdarv.CITBombay[11]itwas
heldthatthecompanyisarealpersoninwhichallitspropertyisvested,andbywhichitis
controlled,managedanddisposedof.InMacaurav.NorthernAssuranceCoLtd[12]itwas
heldthatthepropertyofacompanyisnotthepropertyoftheshareholdersitistheproperty
ofthecompany.
6)CorporateFinances:Thesharesofanincorporatedcompanybeingtransferable,itcan
raisemaximumcapitalinminimumpossibletime.Thatapart,anincorporatedcompanyhas
theprivilegeofraisingitscapitalbypublicsubscriptionseitherbywayofsharesor
debentures.Thepublicfinancialinstitutionswillinglylendloantocompaniesasitisgenerally
securedbyfloatingchargewhichisanexclusiveprivilegeofaregisteredcompany.
InR.T.Perumalv.JohnDeavin,[13]ithasbeenobservedthatacompanyisarealpersonin
whichallitspropertyisvested,andbywhichitiscontrolled,managedanddisposedof.Their
Lordshipsfurtherobservedthat"nomembercanclaimhimselftobetheownerofthe
company'spropertyduringitsexistenceorinitswindingup."
7)CentralizedManagement:Theshareholdershavenodirectconcernwiththemanagement
ofthecompany.Theyexercise,onlyaformativecontrol.Thusthemanagementofthe
companyisaltogetherdifferentfromitsownership.Independentfunctioningofmanagerial
personnelattractstalentedprofessionalpersonstoworkforthecompanyinanatmosphereof
independencethusenablingthemtoachievehighesttargetsofproductionandmanagement
leadingtocompany'soverallprosperity.
Themanagementofthecompanygenerallyvestsinthedirectorswhodecidethepolicy
mattersinthemeetingsoftheBoardofDirectors.Withskilledprofessionalmanagers
supportedbyfinancialresources,companiesareabletodevelopandcarryontheirbusiness
efficiently.Inshort,professionalformofmanagementofbusinessdisassociatesthe
'ownership'fromcontrolofbusinessandthushelpstopromoteefficiency.Besides,itprovides
flexibilityandautonomytobusinessundertakingswithintheframeworkofcompanylaw.
8)Capacitytosueandtobesued:Acompanybeingabodycorporatecansueandcanbe
suedinitsownname.[14].Acriminalcomplaintcanbefiledbyacompany,butitshouldbe
representedbyanaturalperson.Acompanyhastherighttoprotectitsfairname.Itcansuefor
suchdefamatoryremarksagainstitasarelikelytodamageitsbusinessorpropertyetc.A
companyhastherighttoseekdamagewhereadefamatorymaterialpublishedaboutitaffects
itsbusiness.InTVSEmployeesFederationv.TVS&SonsLtd[15]itwasheldthatthe
preparationofavideocassettebytheworkmenofacompanyshowingtheirstruggleagainst
thecompany'smanagementandexhibitioncouldberestrainedonlyonshowingthatthematter
wouldbedefamatory.InRv.BroadcastingStandardsCommissionthecourtofappealheld
thatacompanycancomplainundertheBroadcastingAct,1996aboutunwarranted
infringementofitsprivacy.Inthiscasethecomplaintwasaboutthesecretfilmingof
transactionsinshopsbytheBBCandtheallegationwasthatthisconstitutedaninfringement
ofthecompanysprivacy.
DisadvantagesofIncorporation
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1)LiftingorPiercingtheCorporateVeil:Acorporationisclothwithadistinctpersonality
byfictionoflaw,yetinrealityitisanassociationofpersonswhoareinfact,inaway,the
beneficialownersofthepropertyofthebodycorporate.Acompanybeinganartificialperson,
cannotactonitsown,itcanactonlythroughnaturalpersons.Thewholetheoryof
incorporationisbasedonthetheoryofcorporateentitybuttheseparatepersonalityofthe
companyanditsstatutoryprivilegesshouldbeusedforlegitimatepurposesonly.Wherethe
legalentityofthecompanyisbeingusedforfraudulentanddishonestpurpose,theindividuals
concernedwillnotbeallowedtotaketheshelterbehindthecorporatepersonality.Thecourtin
suchcasesshallbreakthroughthecorporateshellandapplytheprincipleofwhatisknownas
liftingorpiercingthecorporateveil.Thecorporateveilofacompanymaybeliftedto
ascertainthetruecharacterandeconomicrealitiesbehindthelegalpersonalityofthecompany.
Undoubtedly,thetheoryofcorporateentityofacompanyisstillthebasicprincipleonwhich
thewholelawofcorporationsisbased.Buttheseparatepersonalityofthecompany,beinga
statutoryprivilege,itmustalwaysbeusedforlegitimatebusinesspurposesonly.Wherethe
legalentityofacorporatebodyismisusedforfraudulentand.dishonestpurposes,the
individualsconcernedwillnotbeallowedtotakeshelterbehindthecorporatepersonality.In
suchcases,thecourtwillbreakthroughthecorporateshellandapplytheprincipleofwhatis
knownas"liftingorpiercingthecorporateveil".Thatis,thecourtwilllookbehindthe
corporateentity.
InNewHorizonsLtd.v.UnionofIndiaandothers,[16]theappellantcompanywhenseen
throughtheveilcoveringthefaceofNewHorizonsLtd.wasfoundtobeajointventure
createdasaresultofreorganizationin1992.Sixtypercentofitssharecapitalwasownedby
anIndiangroupofcompaniesandfortypercentsharecapitalwasownedbyaSingaporebased
foreigncompany.TheGovernmenthadinvitedtendersfordistributionofStatelargesse.The
appellant'stenderwasnotconsideredonthegroundthattheexperienceofitsconstituentswas
notthesameasthatoftheappellantandbecauseofinadequateexperience,therespondent's
tenderwasacceptedastheyhadlongexperienceandhadalsoofferedamuchloweramountof
royalty.Theappellantspleadedtheexperienceofconstituentsofthejointventurecompany
shouldbetreatedasitsownexperienceandcorporateveilshouldbeseenthroughforthis
purpose.Allowingtheappeal,theSupremeCourtruledthattheactionoftheState
Governmentindeterminingtheeligibilityoftenderswasnotinconsonancewiththe
standardsornormsandwasarbitraryandirrational.TheCourtfurtherobservedthatincaseof
ajointventurecorporation,theCourtcanseethroughthecorporateveiltoascertainthetrue
natureofacompany.Thedoctrineofliftingthecorporateveilisinvokedwhenthecorporate
personalityisfoundtobeopposedtojustice,convenienceorinterestofrevenue.
Theprincipleof'liftingthecorporateveil'hasfoundstatutoryrecognitionincertainprovisions
likeSections45,147,212,247and542oftheCompaniesAct.Corporateveilissaidtobe
liftedwhenthecourtignoresthecompanyandconcernsitselfdirectlywiththemembersor
managers.Thecourtshavefounditnecessarytodisregardtheseparatepersonalityofa
company,4inthefollowingsituations:
(a)DeterminationofRealcharacterofacompany
Atthetimeofwar,itmaybecomenecessarytoliftthecorporateveilofacompanyto
determinewhetherthecompanyhasanenemycharacter.Insuchacasethecourtsmayintheir
discretionexaminethecharacterofpersonswhoareinrealcontrolofthecorporateaffairsof
thecompany.
Inacase[17]acompanywasincorporatedinEnglandforthepurposeofsellingtyres
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manufacturedinGermanybyaGermancompany,allthesharesexceptonewereheldbythe
GermansubjectsresidinginGermany.TheremainingonesharewasheldbyaBritishsubject
whowastheSecretaryofthecompany.ThustherealcontroloftheEnglishcompanywasin
Germanhands.DuringWorldWarI,thecompanycommencedanactiontorecovertrade
debts.Thequestionthereforewaswhethercompanyhadbecomeanenemycompany
consequenttoWorldWarI.TheHouseofLords,interaliaobserved:
Butitcanassumeenemycharacterwhenpersonsindefactocontrolofitsaffairsareresidents
inanyenemycountryor,whereverresident,areactingunderthecontrolofenemies.therefore
heldthatthecompanywasanenemycompanyforthepurposeoftradingandthereforeitwas
barredfrommaintainingtheaction.
InanAmericancase[18]itwasheldthattheCourtsmayrefusetopiercethecorporateveil
wherethereisnodangertopublicinterest.Inthiscasecertainlandsweretransferredbyan
Englishmantoanotherperpetuallyrestrainingthetransfereefromsellingthesaidpropertyto
colouredpersonsi.e.Negroes.Thetransferee,however,transferredthelandtoacompany
whichwasexclusivelycomposedofNegroes.Thereupon,thepetitionersbroughtanaction
againstthecompanyforannulmentoftheconveyanceonthegroundofbreachofcondition.
Rejectingthecontentionofthepetitionersthecourtheldthatmembersindividuallyor
employmentwasterminatedunderanagreement.Thereafterhestartedanewcompanyto
carryonthebusinessofsolicitationandsolicitedplaintiffscustomers.Thecourtheldthatthe
defendantcompanywasamerecloakorshamandchannelusedbydefendanttoobtain
advantageofthecustomersoftheplaintiffcompanyforhisownbenefitandthereforeitought
toberestrainedfromcarryingonthebusiness.
TheSupremeCourtinSubhraMukherjee&Anotherv.M/s.BharatCokingCoalLtd.(BCCL)
&others[19]hasobservedthattheCourtwillbejustifiedinpiercingtheveilofincorporation
inordertoascertainthetruenatureofthetransactionastowhoweretherealpartiestothesale
andwhetheritwasbetweenhusbandsandwivesbehindthefacadeofseparateentityofthe
company.
(b)Forthebenefitofrevenue:Thecourthasthepowertodisregardcorporateentityifitis
usedfortaxevasionortocircumventthetaxobligation[20].Inthiscasetheassesseewasa
wealthyman,enjoyinghugedividendsandinterestincome.Heformedfourprivate
companiesandagreedwitheachtoholdablockofinvestmentasanagentforit.Income
receivedwascreditedintheaccountsofthecompany,butthecompanyhandedbackthe
amounttohimaspretendedloans.Thecourtheldthatthecompanywasformedbythe
assesseepurelyandsimplyasameansofavoidingsupertaxandthecompanywasnothing
morethantheassesseehimself.
(c)Fraudorimproperconduct:Thecourtswillrefusetoupholdtheseparateexistenceofthe
companywhereitisformedtodefeatorcircumventlaw,todefraudcreditorsortoavoidlegal
obligations.InGilfordMotorCov.Horne[21],Hornewasappointedasamanagingdirector
oftheplaintiffcompanyontheconditionthatheshallsolociteorenticeawaythecustomersof
thecompanyatanypointoftime.Hewasemployedunderanagreement.Shortlyheopeneda
businessinthenameofacompanywhichsolicitedtheplaintiffscustomers.Itwasheldthat
thecompanywasmerecloakorshamforthepurposeofenablingthedefendanttocommita
breachofhiscovenantagainstthesolicitation.
InP.N.B.FinanceLtd.v.ShitalPrasadJain,[22]thecourtheldthat"thedoctorineofpiercing
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thecorporateveilmaybeinvokedwhenevernecessarybythecourtintheinterestofjustice,to
preventthecorporateentityfrombeingusedasaninstrumentoffraud,andthefundamental
principleofcorporatepersonalityitselfmaybedisregardedhavingregardtotheexigenciesof
thesituationandfortheendsofjustice.
(d)GovernmentCompanies:Acompanyattimesloosetheirindividualityinfavourofits
principaland,maybetreatedasanagentortrustee.InReF.G.(Films)Ltd.[23],anAmerican
companyproducedafilmcalled'MANSOON'inIndiatechnicallyinthenameofaBritish
company.ThisBritishcompanyhadacapitalof100outofwhichmajoritywasheldbythe
PresidentoftheAmericancompanywhichfinancedtheproductionofthefilm.Inthese
circumstancestheBoardofTraderefusedtoregisterthefilmasaBritishfilmontheground
thatintheinstantcasetheBritishcompanyactedmerelyasthenomineeoragentofthe
Americancompany.ThisviewwasupheldbytheCourt.Thecourtmay,insome
circumstances,treataholdingcompanyanditssubsidiaryasasingleentity.Thisinference
doesnotflowautomaticallyfromtherelationshipofholdingandsubsidiarycompany.There
mustbeevidencethatthebusinessofthetwoiscombined.
InSmithStone&KnightLtd.v.BirminghamCorporation,itwasobservedthatthecourtsfind
itdifficulttogobehindthecorporateentityofacompanytodeterminewhetheritisreally
independentorisbeingusedasanagentortrustee.Ifaparentcompanyandasubsidiary
companyaredistinctlegalentitiesundertheordinaryrulesoflawandintheabsenceofan
agencycontractbetweenthetwocompaniesonecannotbesaidtobetheagentoftheother.If
onecompanyisheldliableasaprincipalfortheactsofanothercompany,therelationshipof
agencyshouldbesubstantiallyestablished,aswasthecaseintheinstantdecision.
InIndia,alargenumberofprivateCompanieshaveatendencytoregisterthemselvesas
GovernmentcompaniesundertheCompaniesActwithPresidentandfewotherofficersasthe
shareholders.Theydosowithaviewtoavailingcertainadvantagesintheircommercial
ventures.TheCourtsare,therefore,confrontedwiththeproblemofdecidingthetruenatureof
aGovernmentcompanyinanumberofcases.TheSupremeCourthasdecidedonceforallthat
aGovernmentcompanyisneitheranextensionoftheState,noritsagent.
TheSupremeCourthasruledthatLifeInsuranceCorporationcannotbetreatedasan
instrumentalityoftheStatewhenitisexercisingitsordinaryrightasamajorityshareholderin
acompanyforremovingtheexistingmanagementandreconstitutingtheBoardofDirectorsof
thatcompany[24]
(e)TopunishtherealpersonsinQuasiCriminalcasesagainsttheCompany
Thecourtshavesometimesappliedthedoctrineofliftingthecorporateveilinquasicriminal
casesrelatingtocompaniesinordertolookbehindthelegalpersonandpunishthereal
personswhohaveviolatedthelaw.
(f)TopreventabuseofProcessofLaw
ThedoctrineofliftingthecorporateveilcanalsobeusedtopreventabuseofprocessofCourt.
ThusinBijayKumarAgarwal&othersv.RatanlalBagaria&others,[25]theCourtobserved
thatalthoughbroadlyspeakingtheprincipleofliftingthecorporateveilwillbeavailableinthe
statutelikeCompaniesAct,andotherfinancialandtaxingstatutesetc.butadmittedlyone
cannotruleouttheapplicabilityoftheprincipleelsewhereifthesituationsarefallingunder
thefollowingcategories:(a)dependupontherelevantstatutoryorotherprovisions(b)the
objectsoughttobeachieved(c)theimpugnedconduct(d)theinvolvementoftheelementof
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publicinterest(e)theeffectonpartieswhomaybeaffected.It,therefore,logicallyfollows
thatthedoctrineofliftingthecorporateveilorprincipleanalogoustheretocannotberuledout
frombeingusedasatoolofjudiciaryinadjudicatingoverthedisputebetweentwoparties.
Thusthe"Liftingofcorporateveil'orprincipleanalogoustheretocannotbemonopolyofany
particularstatute.ItcanwellbeusedbythejudiciaryortheCourttopreventtheabuseof
processofCourtofLaw.
TheSupremeCourtinDelhiDevelopmentAuthorityv.SkipperConstructionCo.(P.)
Ltd[26]hasobservedthattheliftingorpiercingthecorporateveilcanbeundertakenbyCourt
toseetherealmenbehindtheveilwhoareinvolvedindefraudingothersbycorruptandillegal
meansindeliberatedefianceofCourt'sorder.Intheinstantcase,thecompanywasdefrauding
othersindeliberatedisobedienceofSupremeCourt'sorderswhichamountedtocontemptof
Court.Disposingoftheappeal,theSupremeCourtobservedthatimpositionofpunishmentfor
contemptwouldnotdenudetheCourtofitspowertoissuedirectionsandmakeappropriate
orderstograntrelieftothepersonsaggrievedinordertodocompletejustice.Forthispurpose,
theCourtcanliftthecorporateveilofthecompanytotookintothemisdeedsofitsofficials
andpunishthemi.e.thecontemnors.Thatapart,theCourtmayalsoorderthecontemnorsto
restoretheillegallyderivedbenefittothepersonswhoaredefraudedsothatthecontemnors
arenotabletoretainthefruitsofthecontempt.TheCourtmayalsoorderforfeiture/attachment
ofthepropertiesacquiredbytheillegalandcorruptmeansbytherealmenbehindthe
corporateasalsothepropertiesoftheirfamilymembers.
2.PersonalLiabilityofDirectorsorMembers
Secondly,thecompanylawimposespersonalliabilityonthedirectorsormembersofa
companyincertaincasesnotwithstandingthecardinalprinciplesof'separatepersonality'and
'limitedliability'.Therearecertainstatutoryprovisions,intheCompaniesAct,1956,apart
fromtheliabilityofthecompanyasanindependentlegalperson,thosecloakedbehinditare
alsomadeliable.Suchcasesare:
(a)Reductionofmembership(Section45)
Section45oftheCompaniesAct,1956specificallyprovidesthatifatanytimethenumberof
membersofacompanyfallsbelowthestatutoryminimumi.e..sevenincaseofapublic
companyandtwointhecaseofaprivatecompany,andthecompanycarriesonbusinessfor
morethansixmonthswhilethenumberissoreduced,everypersonwhoisamemberofthat
companyduringthetimethecompanysocarriesonbusinessafterthosesixmonthsandis
awareofthatfact,shallbeseverallyliableforthepaymentofcompany'sdebtscontracted
duringthattime.Thus,insuchcases,theprivilegeoflimitedliabilityisdeniedtothe
shareholders.
(b)Misdescriptionofname(Section147)
Whereanofficerofacompanysignsonbehalfofthecompanyanycontract,Billofexchange,
hundi,promissorynote,chequeoranorderformoneygoods,suchpersonshallbepersonally
liabletotheholderifthenameofthecompanyisnotfullyorproperlymentionedinthe
instrument.
(c)Fraudulentconductofbusiness(Section542):Thissectionimp[oseliabilityfor
fraudulentconductofacompanysbusiness.Accordingtothesectionifitisfoundthata
businessisfoundtobecarriedonwiththeintenttodefraudthecreditorsofthecompanyor
anyotherperson,orforanyfraudulentpurpose,thosewhowereknowinglypartiestothis
businessshallbepersonallyheldliableforalloranyofthedebtsofthecompany.
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(d)Subsidiarycompany(Sections212and214)
AsrequiredbySections212and214oftheAct,aholdingcompanyhastodisclosetoits
members,theaccountsofitssubsidiaries.Thoughintheeyesoflawasubsidiarycompanyisa
separatelegalentityundercertaincircumstances,thecourtmaynottreatthesubsidiary
companyasanindependententityinaparticularsituation.Theremaybetwosituationswhena
subsidiarycompanymayloseitsindependentidentitytoacertainextent,namely,(1)thelaw
maybrushasidethelegalformsandrequirecompaniesinagrouptopresentajointpicturein
ordertogivebetterinformationofthefinancialpositionofthegroupasawholetothepublic,
creditorsandshare
holdersand(2)wherethecontrolandconductofbusinessofasubsidiary
companyrestssolelyinthenomineesoftheholdingcompany,itmaybeinferredthatthe
subsidiarycompanyismerelyabranchofholdingcompanyandhasnoseparateidentityofits
own.
(e)FailuretoReturnApplicationMoney(Section69(5)
Theprovisioncontainedinclause(5)ofSection69oftheCompaniesAct,1956makesthe
directorofapubliccompanypersonallyliabletopaythemoneywithinterestiftheapplication
moneyisnotrepaidwithinthirtydaysintheeventofminimumsubscriptionnothavingbeen
receivedorcompanynothavingobtainedcertificateofcommencementofbusinessbythe
company.
(f)MisrepresentationinProspectus(Section62)
Incaseofmisrepresentationintheprospectusofacompany,everydirector,promoter,and
everyotherpersonwhoauthorizesissueofsuchprospectus,incursliabilitytowardsthosewho
subscribeforsharesonthefaithofuntruestatement.
(g)Ultraviresacts
Thedirectorsofacompanyshallbepersonallyliableforallthoseactsdonebythemonbehalf
ofthecompanyiftheyareultraviresthecompany.
(h)NonpaymentofTax
Intheeventofwindingupofaprivatecompany,ifanytaxassessedonthecompanywhether
beforeorincourseofliquidationinrespectofanyincomeofanypreviousyearcannotbe
recovered,everypersonwhowasdirectorofthatcompanyatanytimeduringtherelevant
previousyear,shallbejointlyandseverallyliableforpaymentofsuchtax.
3.Expensesandformalism:Incorporationofacompanyisanexpensiveaffair.Besides,it
involvescompletionofanumberofformalities.Moreover,theadministrationofacompany
hastobecarriedonstrictlyinaccordancewiththeprovisionsofthecompanylawand
activitiesarelimitedbyitsmemorandumwhichattimescreatesproblemsinitsprogress.
4.Companyisnotacitizen
Thoughacompanyisalegalperson,itisnotacitizenundertheconstitutionallawofIndiaor
theCitizenshipAct,1955.Thereasonastowhyacompanycannotbetreatedasacitizenis
thatcitizenshipisavailabletoindividualsornaturalpersonsonlyandnottojuristicpersons.
ThequestionwhetheracorporationisacitizenwasdecidedbytheSupremeCourtinState
TradingCorporationofIndiav.CommercialTaxOfficer[27].Sinceacompanyisnottreated
asacitizen,itcannotclaimprotectionofsuchfundamentalrightsasareexpresslyguaranteed
tocitizens,butitcancertainlyclaimtheprotectionofsuchfundamentalrightsasare
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guaranteedtoallpersonswhethercitizensornot.InTataEngineeringCompanyv.Stateof
Bihar[28]itwasheldthatsincethelegalpersonalityofacompanyisaltogetherdifferentfrom
thatofitsmembersandshare
holders,itcannotclaimprotectionoffundamentalrightsalthough
allitsmembersareIndiancitizens.Thoughacompanyisnotacitizen,itdoeshavea
nationality,domicileandresidence.Incaseofresidenceofacompany,ithasbeenheldthatfor
thepurposesofincometaxlaw,acompanyresideswhereitsrealbusinessiscarriedonandthe
realbusinessofacompanyshallbedeemedtobecarriedonwhereitsCentralmanagement
andcontrolisactuallylocated.
StatutoryCorporationsorCompanies
Companiesandundertakingsconcernedwithpublicutilitysuchasrailways,roadways,docks,
electricityetc.areusuallyincorporatedbyspecialActsoftheLegislature.Theyaremostly
investedwithextensivepowers.TheexamplesofstatutorycorporationsaretheReserveBank
ofIndiaestablishedbytheReserveBankofIndiaAct,1934,theIndustrialFinance
CorporationofIndiaestablishedbytheIndustrialFinanceCorporationAct,1948,AirIndia
incorporatedundertheAirCorporationAct,1953,theLifeInsuranceCorporationofIndia
createdbytheLifeInsuranceCorporationofIndiaAct,1956andsoon.
Thereforeastatutorycorporationisapublicenterprisewhichcomesintoexistencebyaspecial
ActofParliament.TheActwoulddefineitsp[owersandfunctions,rulesandregulations
governingitsemployeesanditsrelationshipwiththegovernmentdepartment.Theyare
financiallyindependent.
ThoughtheParliamentandtheStateLegislatureshavepowertocreatestatutorytradingor
nontradingcorporationsforevenprivatepurposesasperEntry44ofListIandEntry32of
ListIIofSeventhScheduleoftheConstitutionofIndia,anygrouporassociationdesiringto
seekincorporationforotherthanpublicpurposesisgenerallyexpectedtogetitself
incorporatedbyregistrationundertheCompaniesAct.
OneManCompany
Aonemancompanymeansasinglepersonownsthewholeorpracticallythewholeofshare
capital.Theremayormaynotbeothermembers.Theothermembersshallbeacquaintances
likefriends,relativesornominees.Thecentralpersonshallhavethefullcontroloverthe
company.Thesetypesofcompanyenjoyacorporatestatusandhaslimitedliabilityofthe
company.Theyalsohavealegalstatus.Theconceptofonemancompanywasacceptedin
Salomanscase

[1]Section34ofCompaniesAct,1956.
[2]Section433to526ofCompanieAct,1956.
[3]Art300ofConstitutionofIndia.
[4]ColonialBankv.Whilley,(1885)30Ch.D.261.
[5](1887)AC22.
[6][189599]AllERRep33.
[7]ReKondoliTeaCo.Ltd,(1886)ILR13Cai.43.
[8]AIR1999SC1734.
[9]J.H.RaynerLtdv.DepttofTradeandIndustry,(1989)3WLR969HL.
[10](1982)52Comp.Out.238,
[11](1955)1SCR876.
[12]1925AC619HL.
[13]AIR1960Mad.43.
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[14]UnionBankofIndiav.KhadersInternationalConstructionsLtd,[1993]2CompLj89
Ker.
[15](1996)1WLR132(CA).
[16](1995)1SCC478
[17]DaimlerCo.Ltd.v.ContinentalTyre&RubberCo.,(1916)2AC307.
[18]People'sPleasureParkCo.v.Rohleder,(1908)109Va439.
[19]AIR2000SC1203.
[20]Juggilalv.CIT,(1969)2SCC376.
[21][1944]1Ch935.
[22](1983)53Comp.Cas.66.
[23](1953)AllER615,
[24]LifeInsuranceCorporationv.EscortsLtd.,(1986)1SCC264.
[25]AIR1999Cal.106,(107).
[26]AIR1996SC2005.
[27]AIR1963SC1811.
[28]AIR1965SC40.
Theauthorcanbereachedat:[email protected]

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