1

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.

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.

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

on the business and was not to be divided between members at intervals of time. 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. Thus many Companies came into existence by agreement and without incorporation. Consequently, there was spurt of many Companies having speculative or even fraudulent schemes. The scheme of the South Sea Company is the best example of the notorious Company floatation at that time. To check the emergence of the Companies of the Companies with speculative or fraudulent motives the Bubble Act, 1720 was passed. The Act prohibited the floating of a corporation unless authorized by an Act of Parliament or Royal charter. As a result of the passing of the Bubble Act Companies disappeared like the bursting of the bubble. 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. The Bubble Act was repealed in the year 1825 and in 1834, the Trading Companies Act, 1834 was passed. This Act empowered the Crown to grant by Letters Patent any of the privileges of incorporation except limited liability. The Chartered Companies Act, 1837 provided for the first time that personal liability of members might be limited to a specific amount per share through letters Patent. 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. By this Act the office of the Registrar of Companies was created for the first time. The particulars regarding the constitution of a Company, charges in and annual returns are required to be filed with the Registrar so that there shall be an official record of the Company. Despite the incorporation of the Company, members are still personally liable, 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. Members could escape personal liability by an agreement to the contrary, providing that the members liability shall be limited to unpaid part of the shares. In 1885, parliament enacted Limited Liability Act, 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 1856, the English Companies Act was enacted (the Joint Stock Companies Act, 1856), which repeated both the Acts of 1844 and 1855. Under the Act of 1856, seven or more persons could form themselves into an incorporated Company with or without limited liability by signing memorandum of association. The Act of 1856 was

repealed by the Act of 1962 The Act was further repealed by the Acts of 1908, 1928, 1948, 1967, 1976, 1980, 1981 and 1983. In 1985, the whole of the existing law relating to Companies was consolidated in the Companies Act, 1985 which is the present statute governing Companies in England.

1.2. History of Company Legislation in India

As discussed earlier, the Company legislation in India has closely followed the English Companies Legislation. 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. The Act of 1850 provides for the first time in India registration of joint stock Companies. In 1857, another Act, closely following the English Companies Act y 1855, was passed, which extended the privilege of limited liability to joint stock Companies excepting Banking and Insurance Companies. The Indian Companies 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. 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, regulation and winding up of Companies. The Act was amended several times in 1882, 1887, 1891, 1895 and 1910, till we had a consolidating Act - The Indian Companies Act, 1913 - which brought Indian law at par with English Companies Act of 1908. It was by this Act that the institution of Private Company was for the first time introduced in the Indian Company Law. The Act of 1913 was further amended in the year 1914, 1915, 1920, 1926, 1930 and 1932. The Act was extensively amended in 1936 on the lines of the English Companies Act, 1929. Some formal amendments were made by the Adaptation of Laws Order. 1950 on the date on which constitution of India came into force i.e. 26 January 1950. At the end of 1950, the government appointed a committee under the chairmanship of Sri. H.C. 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. The Bhabha committee submitted its report in April 1952 covering almost all aspects of the Company law. Based on the recommendation of the Committee Report, a Bill was introduced in the parliament in 1953 which later on took the shape of the present Company

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

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

of Companies within a presided period, even where the Annual General Meeting (AGM) has not been held in time. c. Wide powers have been conferred on the Company Law Board in regard to the execution of orders made by it under various sections. d. The ceiling for donations for charitable purposes has been raised from Rs. 25,000 to Rs, 50,000. (7) The Companies ( Amendment) Act, 1985The important changes brought about by that Act are: a. Companies were permitted to make contributions, directly or indirectly, to any political party or for any political purpose to any person, not exceeding 5% of their average net profits during the three immediately preceding financial years, if a resolution authorizing such contributions are passed at a meeting of the Board of Directors. Government Companies and Companies which have been in existence for less than three financial years are prohibited from making any political contribution. Prior to this Act, there was a blanket ban on political contribution by all types of Companies. b. Section 396, dealing with the Central Governments power to order amalgamation of Companies in public interest, has been amended. (8) The Companies ( Amendment Act, 1988 :This Amendment came as a result of the recommendations made by the sacchar committee. Their salient features are: a. Setting up of an independent Company Law Boards having power to regulate its own procedure. The decisions of the CLB on question of fact to be final. However, the orders of the CLB will be appealable to High Court on question of law. b. For a private Company to be treated as Deemed public Company its average annual turnover during three preceding years shall be Rs. 5 crores or more instead of the existing Rs. 1 crore or more or if it accepts deposits from the public through an advertisement. c. It has been made obligatory for every Company intending to offer shores or debentures to the public for subscription by the issue of prospectus, before such issue, to make on application to one or more recognized stock exchanges for permission to deal in the shares or debentures of the Company.

d. Issuing of preference shares which are irredeemable or redeemable after a period of 10 years, is prohibited hereafter. e. Every public limited Company or a subsidiary thereof, having a paid up share capital of Rs. 5 crores or more to compulsorily have a managing or whole time director or a manager. (9) The Companies (Amendment) Act, 1996 :The major changes brought about by this Act are:a. 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. The Amendment Act, by amending section. So has increased the period of redeemable preference shares to 20 years in place of 10 years. c. Mutual fund, venture capital funds and other SEBI recognized funds have been granted voting rights for shares they hold in other Companies. Earlier Public Trustees alone were allowed to vote. d. Companies have been provided with the facility to the file their documents with the Registrar of Companies in computerized format i.e. Soft copy. 10. The Companies (Amendment) Act, 1999 :This Amendment Act is deemed to have come into force with effect from 31st October, 1998, the date of promulgation of ordinance by the president in this regard. The main provisions are:a. Nomination facility provided for depositors, share holders and debenture holders by amending section 58A and by introducing section 109A and 109B. b. By inserting section 77A, 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. c. Provision has been made for issue of sweat equity shares to directors or employees of Companies by inserting section 79A. d. Investor Education and Protection Fund was established for propagation of knowledge as to matters of investment, by inserting section 205C.

10

e. A new section - section 372A, was introduced replacing section 370 and 372, to facilitate inter-corporate capital flows for meeting the demands of liberalization. (11) The Companies (Amendment) Act, 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. The changes brought about by this Act include: a. Requirement of Minimum paid up capital: - Private Companies to have a minimum paid up capital of not less than Rs. 1,00,000 and public Companies must have a minimum period up capital of Rs. 5,00,000. b. Small depositor :- Sections 58AA and 58AAA were introduced for the protection of small depositors c. Shelf Prospects, Information Memorandum and Red Herring Prospectus: - Financial institution and banks, which have to make repeated offers of securities in year, are permitted to issue a shelf Prospectus instead of a Prospectus. The Shelf Prospects to have a shelf life of one year. Any changes in between can be told by issuing an information memorandum. Information Memorandum as envisaged in section 60B recognizes book building process. Information Memorandum is a document for eliciting the demand for the securities and to ascertain the price and terms of the issue. Red Herring Prospects is an incomplete prospectus. It does not contain information regarding price and quantum of shares. d. Non-voting equity shares - Section 86 was amended to allow issue of non-voting equity shares by public Companies. e. Postal Ballot - In order to get a wider participation of share holders voting through postal ballot on a particular resolution has been allowed. f. Audit committees - A new section - section 292A has been added providing for constitution of audit committees by every public Company having a paid up capital of Rs. 5 crores or more. Further, the recommendations of the audit committee on any matter relating to financial management shall be binding on the Board. g. Indian Depository Receipts - Section 605A permits Companies incorporated outside India, whether having a place of business in India or not, to issue Depository Receipts in India and thus raise capital funds from Indian public. (12) Companies (Amendment) Act, 2001 :-

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. Prior to this special resolution is required for buy-back of shares. (13) Companies (Amendments) Act, 2002 :In December 2002, two Companies (Amendment) Acts Viz. Companies (Amendment) Act, 2002 and Companies (Second Amendment) Act, 2002, were passed. The Important provision made through these Acts are :a. Producer Companies: - Setting up and regulation of co-operatives as body corporate under the Companies Act, 1956 and to be known as producer Companies. b. Sick Companies - The second amendment act attempts to rationalize the winding up process and to facilitate rehabilitation of sick Companies by repeating SICA and dissolving BIFR. It seeks to establish a National Company Law Tribunal (NCLT) providing it with powers for expediting the winding up process so that the Companys resources may be utilized for better purpose rather than blocking them in sick undertakings. (14) Companies (Amendment) Act 2006 :This Act has introduced various provisions relating to:a. Directors identification number (DIN) : - DIN to be issued to Directors, and no fresh appointment or re-appointment of any individual as director unless such an individual has been allotted DIN. b. Governance and E-filing The central government has notified the Companies (Electronic Filing and Authentication of Documents) Rules 2006, providing for etiling of forms, applications, documents and declarations in Portable Document Format (PDF) and authentication thereof using digital signature.

1.3. Summary
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

12

to follow the U.K. Companies Act, 1948. 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. 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.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 on the business and was not to be divided between members at intervals of time. 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. Thus many Companies came into existence by agreement and without incorporation. Consequently, there was spurt of many Companies having speculative or even fraudulent schemes. The scheme of the South Sea Company is the best example of the notorious Company floatation at that time. To check the emergence of the Companies of the Companies with speculative or fraudulent motives the Bubble Act, 1720 was passed. The Act prohibited the floating of a corporation unless authorized by an Act of Parliament or Royal charter. As a result of the passing of the Bubble Act Companies disappeared like the bursting of the bubble. In 1856, the English Companies Act was enacted (the Joint Stock Companies Act, 1856), which repeated both the Acts of 1844 and 1855. Under the Act of 1856, seven or more persons could form themselves into an incorporated Company with or without limited liability by signing memorandum of association. The Act of 1856 was repealed by the Act of 1962 The Act was further repealed by the Acts of 1908, 1928, 1948, 1967, 1976, 1980, 1981 and 1983. In 1985, the whole of the existing law relating to Companies was consolidated in the Companies Act, 1985 which is the present statute governing Companies in England. The Company legislation in India has closely followed the English Companies Legislation. 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. The Act of 1850 provides for the first time in India registration of joint stock Companies. In 1857, another Act, closely

13

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

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CHAPTER-2 CORPORATE PERSONALITY

2.1. Types of Corporation and basics

Incorporation by registration was introduced in 1844 and the doctrine of limited liability followed in 1855.Subsequently in 1897 in Solomon v. Solomon & Company the House of Lords effected these enactments and cemented into English law the twin concepts of corporate entity and limited liability. 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. In a number of circumstances, 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. 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. 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. In certain cases, the corpus of the legal person shall be some fund or estate which reserved certain special uses. For instance, a trust estate or the estate of an insolvent, a charitable fund etc..; are included within the term legal personality.

Corporations are of two kinds: 1. Corporation Aggregate: Is an association of human beings united for the purpose of forwarding their certain interest. A limited Company is one of the best examples. Such a company is formed by a number of persons who as shareholders of the company contribute or promise to contribute to the capital of the company for the furtherance of a common object. Their liability is limited to the extent of their shareholding in the company. A limited liability company is thus formed by the

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personification of the shareholders. The property is not that of the shareholders but its own property and its assets and liabilities are different from that of its members. The shareholders have a right to receive dividends from the profits of the company but not the property of the company1. The principle of corporate personality of a company was recognized in the case of Saloman v. Saloman & Co2.

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

2.2. 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. 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. However, modern company law only began in the mid nineteenth century when a series of Companies
1 2

Colonial Bank v. Whilley, (1885) 30 Ch. D. 261 (1887) AC 22.

16

Acts were passed which allowed ordinary individuals to form registered companies with limited liability. The way in which corporate personality and limited liability link together is best expressed by examining the key cases

2.3. Corporate personality in UK

One of the key legal features of corporations is their separate legal personality, also known as personhood or being artificial persons. However, the separate legal personality was not confirmed under English law until 1895 by the House of Lords in Salomon v. Salomon & Co3. Separate legal personality often has unintended consequences, particularly in relation to smaller, family companies. In B v. 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. And in Macaura v. 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, and it was subsequently destroyed in a fire; as the property now belonged to the company and not to him, he no longer had an insurable interest in it and his claim failed. However, separate legal personality does allow corporate groups a great deal of flexibility in relation to tax planning, and also enables multinational companies to manage the liability of their overseas operations. For instance in Adams 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. There are certain specific situations where courts are generally prepared to pierce the corporate veil, to look directly at, and impose liability directly on the individuals behind the company. The most commonly cited examples are:

where the company is a mere faade 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

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, many jurisdictions provide for shareholder liability where a company breaches environmental protection laws)

in

many

jurisdictions,

where

company

continues

to

trade

despite

foreseeable bankruptcy, the directors can be forced to account for trading losses personally.

Corporate Personality and Liability: A companys corporate personality prevents directors from being held liable in respect of company obligations. In Williams v Natural Life Health Foods7, 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. Liability for negligence requires an assumption of responsibility that must be determined objectively. 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. 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. This is separate liability to that of the company. 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. Later cases have followed this reasoning, however a director and controlling shareholder have been held liable jointly with the company for infringement of copyright, MCA Records Inc v Charly Records Ltd8, 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. 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, which is a provision that arises by virtue of the Copyright, Designs and Patents Act 1988 UK..

7 8

[1998] 1 WLR 830 [2001] EWCA Civ 594

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Lifting the Veil of Incorporation There are certain situations where courts are prepared to lift the veil of incorporation, and ignore the separate legal personality of a company. The fundamental principles established in Salomon v Salomon & Co9 are not ignored, but rather the director is found liable for the fraud in their personal capacity, as the corporate form cannot be used for the purposes of fraud, Re Darby10, or as a device to evade contractual or other legal obligation, Gilford Motor Co v Horne11.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 companys business, Smith Stone and Knight Ltd v Birmingham Corporation12. While respecting the separate legal personality of a company in which there is not a true lifting of the veil of incorporation, courts have treated the conduct or characteristics of its directors, managers or shareholders as attributable to the company itself. In doing this, 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, De Beers Consolidated Mining Ltd v Howe13. 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, Re a Company Ltd14. 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. 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, Adams v Cape Industries plc15.

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

[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

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companies within the group, DHN Food Distributors Ltd v Tower Hamlets16. The degree of domination of the subsidiary by the holding company is not stated with precision in the Companies Acts or elsewhere. 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. 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. However if circumstances exist indicating that there is a mere sham or faade concealing the true facts where a company is incorporated ahead of the crystallization of liabilities as a means of avoiding, 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, Woolfson v Strathclyde Regional Council17. More recently doubt has been thrown onto the ability of the principle in Salomon v Salomon & Co18 to insulate the companys 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. 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 subsidiarys purchase of goods. In another case, Odyssey (London) Ltd v OIC Run-Off Ltd20, 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 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. As to what amounts to actionable inducement appears to be one that is outside the operation of independent corporate governance of the subsidiary.

2.4. History of Corporate personality in UK

Historically in the United Kingdom, 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,
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

20

without having to rely on the rights of the members of the organization. Over time, however, 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. By the mid nineteenth century, 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. These companies were extremely complex legal entities that were sometimes used as instruments of fraud. In order to remedy this, a series of mid-nineteenth century Companies Acts were passed, creating a process whereby ordinary individuals could easily form a registered company with limited liability. As a result, within a few decades, the company went from being the privileged of a few to being almost a right.

2.5. Corporate personality in USA

It refers to the question of which subset, if any, of rights afforded under the law to natural persons should also be afforded to corporations as legal persons. In the United States, corporations were recognized as having rights to contract, and to have those contracts honored the same as contracts entered into by natural persons, in Dartmouth College v. Woodward, decided in 1819. In the 1886 case Santa Clara County v. Southern Pacific Railroad22, the Supreme Court recognized that corporations were recognized as persons for purposes of the fourteenth Amendment. The notion of corporations as persons: As a matter of interpretation of the word person in the fourteenth Amendment, U.S. courts have extended certain constitutional protections to corporations. Opponents of corporate personhood seek to amend the U.S. Constitution to limit these rights to those provided by state law and state constitutions. Others argue that corporations should have the protection of the U.S. Constitution, pointing out that they are organizations of people, and that these people shouldn't be deprived of their human rights when they join with others to act collectively. In this view, treating corporations as persons is a convenient legal fiction that allows corporations to sue and to be sued, that provides a single entity for easier taxation and regulation, that simplified complex transactions that would otherwise involve, in the case of large corporations, thousands of people, and that protects the rights of the shareholders,

22

118 U.S. 394

21

including the right of association. 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; 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.23 However the court did not agree in that 1975 case. The Green Party, the Women's International League for Peace and Freedom,24 and former Vice-President Al Gore are among those who have objected to the idea of corporate personhood. Their objections focus on constitutional protections granted to corporations, including claims of a Constitutional right to contribute to political campaigns. Gore argues that the 1886 Southern Pacific decision entrenched the 'monopolies in commerce' that Thomas Jefferson had wanted to prohibit.

2.6. 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, how much power the member states should have over their own affairs, and how much say citizens and citizen organizations should have in public affairs. While both Hamilton and Jefferson participated in the creation of the more centralized Federal Government than that in the Articles of Confederation, they had very different visions of government. Hamilton advocated for a stronger central government, which he believed necessary for an industrialized nation, while Jefferson advocated for a more decentralized, more agrarian nation (Jeffersonian democracy). When Hamilton, as the first US Treasury Secretary, created a national bank for the new country ( First Bank of the United States), Jefferson opposed the idea. After 20 years in operation, the bank's charter was not renewed. (Later, President Andrew Jackson seeing the Second Bank of the United States as a source of corruption, succeeded in eliminating that institution by refusing to renew its charter thereby eliminating a central bank in the United States.)

23

United States of America, Plaintiff-appellant, v. S. Steve Sourapas and Crest Beverage Company, Defendantsappellees 24 WILPF - Challenge Corporate Power, Assert the People's Rights - The Leader in Challenging Corporate Personhood.

22

The Federal Constitution of 1788 did not mention corporations. Thus, although the Federal government has from time to time chartered corporations, the general chartering of corporations has been left to the states. In the late 18th and early 19th centuries, corporations began to be chartered in greater numbers by the states. Corporations had long existed in the new nation, 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. 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, new corporations were greeted with mixed feelings. The degree of permissible government interference in corporate affairs was controversial from the earliest days of the nation. In 1790, John Marshall, a private attorney and a veteran of the Continental Army, represented the board of the College of William and Mary, in litigation that required him to defend that corporation's right to reorganize itself and in the process remove professors, The Rev John Bracken v. The Visitors of Wm & Mary College25 . The Supreme Court of Virginia ruled that the original crown charter provided the authority for the Visitors to make changes including the reorganization. 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. His main reason for the reorganization was to move the college from a curriculum rooted in
theology to a curriculum rooted in science, fine arts, and languages.

The notion of corporate personhood, then, has roots in the early history of the republic. Still, as the 19th century matured, manufacturing in the U.S. became more complex as the Revolution generated new inventions and business processes. 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, especially for capital intensive yet risky projects such as railroads. The Civil War accelerated the growth of manufacturing and the power of the men who owned the large corporations. Businessmen such as Mark Hanna, sugar trust magnate Henry O. Havemeyer, banker J. P. Morgan, steel makers Charles M. Schwab and Andrew Carnegie, and railroad owners Cornelius Vanderbilt and Jay Gould created corporations that influenced legislation at the local, state, and federal levels as they built businesses that spanned multiple states and communities. Beginning in the 1870s,
25

7 Va. 573; 1790 Supreme Court of Virginia

23

corporate lawyers became bolder about using the Webster/Marshall theory of corporations as persons, arguing that as such they were entitled to some of the legal protections against arbitrary state action accorded also to natural persons. In the late 19th century, 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. 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. Manufacturing corporations needed coal, iron ore, finished iron, or any other materials transported and consumer goods business such as Sears, Roebuck and Company used railroads to deliver goods to mail order catalogue customers. As railroads increased their size, a number of conflicts between various states and the railroads began to surface. In four cases that reached the Supreme Court (94 U.S. 155, 94 U.S. 164, 94 U.S. 179, 94 U.S. 180 (1877)), railroads tried to argue that the Fourteenth Amendment prevented states from regulating the maximum rates they could charge. These cases did not rely on just an interpretation of the Fourteenth Amendment as most also tied in the Interstate Commerce clause as well. In each case the Court refused to render an opinion as to whether the Fourteenth Amendment applied to corporations, instead couching their decision on the Interstate Commerce clause.

2.7. Doctrine of Identification

The concept of Doctrine of Identification finds its roots in the English Law. The growth of this doctrine has helped in the implication and prosecution of the criminal activities of directors / managers of many companies. The corporate personality of a company is different and separate from the promoters, directors or owners of the company. This is a widely known principle in law and has its source in the celebrated case of Solomon v. Solomon26. In this case, the Court held that the corporate entity is different from the people who are in the business of running of the company. 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.

26

[1897] AC 22

24

A corporate entity can sue and be sued in its own individual name. In criminal cases, the company can be prosecuted against but it is quite ineffectual as the company cannot be punished with imprisonment or death. The only punishment that can be levied on the company is by way of fine, which at times is quite minimalistic. 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. The Courts in England, during the 1940s had in various judgments like DPP v. Kent & Sussex Contractors Ltd27. R v. ICR Haulage Ltd28. and Moore v. Bresler Ltd.29 ruled that the corporate personalities could be subjected to criminal action and the companies were held liable for crimes requiring intent (mens rea). In light of the above, the Doctrine of Identification was promulgated so as to affix liability of the crimes committed by the people in charge of running the company.

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. The growth of this doctrine has been in the early 20th century, over many common law countries. 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. Kent and Sussex Contractors Ltd , 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. In H.L. Bolton Company v. T.J. Graham & Sons31, Lord Denning as explained the position and said that the company could in many terms be equated with a human body. They do have a brain and a nervous centre which controls the entire body. They have people as their hands and legs, under instructions of whom work of the nervous centre is carried out. Lord Denning equated the brain and nervous system to the directors and managers who represent the directing will of the company. 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. So also in the criminal law, in cases where the law requires a guilty
27 28

[1897] AC 22 (1944) 1 All E.R. 691 29 (1944) 2 All E.R. 515 (KBD) 30 (1944) 1 All ER 119 31 1956) 3 All E.R. 624

25

mind as a condition of a criminal offence, the guilty mind of the directors or the managers will render the company themselves guilty. In the celebrated case of Tesco Supermarkets Ltd. v. Nattrass32, the Appellant was marketing a packet of washing powder at a price lower than the market price, but the Defendant did not find the packet of washing powder at the reduced price, as advertised. The Defendant therefore filed a complaint under the Trade Descriptions Act, 1968. One Mr. Clemant of the Appellant was in charge of the packets with the reduced price being displayed in the store. Lord Reid discussed the law relating mens rea and the importance of the same in criminal law.A living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intentions. A corporation has none of these: it must act through living persons, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company. There is no question of the company being vicariously liable. He is not acting as a servant, representative, agent or delegate. He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company. It must be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as the company's servant or agent. 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. 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. In this case, it was held that the shop manager could not be identified with the company. In Meriden Global Funds Management Asia Ltd. V. Securities Commissioner33, Lord Hoffman discussed the principle of identification and stated that if an employee had be considered the directing mind and will of the company, the employee should have the authority to act as he did. In the same case, 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. That is not the

32 33

(1971) 2 All E.R. 127 (1995) 3 All E.R. 918

26

case in larger companies. In Lennard's Carrying Co. v. Asiatic Petroleum Co.34, Viscount Haldane propounded the alter ego theory and distinguished that from vicarious liability. The House of Lords stated that the default of the managing director who is the directing mind and will of the company, could be attributed to him and he be held for the wrongdoings of the company. It was famously stated that: .. a corporation is an abstraction. It has no mind of its own any more than a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes maybe called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. There was a different view taken in Tesco Stores Ltd. V. Brent London Borough Council35 wherein a store clerk sold a over -18 video to an underage customer. The Court noted that Doctrine of Identification could not be applied here and the company was hence not liable. The reason for this decision was that in a large company, the senior management could not be expected to know each and every customer and whether the customer was a minor or not. In that event to locate a person for this knowledge was hence impossible and the doctrine of identification was hence inapplicable in this case. Again in R v. Redfern & Dunlop Ltd. (Aircraft Division)36 , 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. The question that comes up is that if a person at a lower level commits a crime in the name of the company, the company cannot be held liable for the same. 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. 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 most recent judgment of the Supreme Court in the Reliance Natural Resources Limited v. Reliance Industries Limited, discusses the Doctrine of Identification. This case is a dispute over two brothers namely Mukesh Ambani led RIL and Anil Ambani led RNRL. After the death of their father Mr. Dhirubhai Ambani, the entire
34 35

1915 AC 705 (HL) (1993) 2 All E.R.718 36 (1993) Crim LR 43

27

Ambani Group of Companies was divided between the two brothers. An arrangement was reached between the parties, with their mother as the mediator. Mukesh Ambani had in this family arrangement, made certain concessions on behalf of the RIL, which RNRL had sought to rely upon in the present case. 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. The observation of the judges was that in the Identification Doctrine, the company was identified with such key personnel through whom it works. 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. The Supreme Court overruled the judgment of the Bombay High Court in respect of the Identification Doctrine. It observed that the family arrangement was between three parties namely the mother and the 2 sons. The legal entity of the company was different than the individual entity and in the present case, the company having more than a million shareholders, one person could not be said to have had the knowledge with respect to the company, which knowledge he had in his personal capacity. 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. United India Insurance Co. Ltd. and others 37 and Assistant Commissioner, Assessment-II, Bangalore and others v. Velliappa Textiles Ltd. & Ors.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. Claims were made by the injured and the relatives of the deceased and after many appeals, 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. The court discussed the principle of identification or imputation, 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. In the second case, the question was whether in the case of criminal misdemeanours, the employees can be charged with imprisonment or is the company is liable for fine and/or imprisonment. The Court held that the director/mangers of the company, who are the directing will and mind of the company, should be held liable.
37 38

(1997) 8 SCC 683 AIR 2004 SC 86

28

The case of U.S. Supreme Court in New York Central & Hudson River Railroad Company v. United States39 stated that It is true that there are some crimes which, in their nature, cannot be committed by corporation. But there is a class of offences, of which rebating under the Federal statutes is one, wherein the crime consists in purposely doing the things prohibited by statute. 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, acting within the authority conferred on them. If it were not so, many offences might go unpunished and acts be committed in violation of law where, as in the present case, the statute required all persons, corporate and private, to refrain from certain practices, forbidden in the interest of public policy.

2.8. 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. As a result of this, a company can sue and be sued in its own name, hold its own property and crucially - be liable for its own debts. 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. What this means is that the company has life of its own, can own property, can sue and be sued in its own name, has perpetual life and existence to name a few of the benefits of incorporation. 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.

39

53 Lawyers Edn. 613

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Chapter-3 STUDY OF CORPORATE PERSONALITY IN INDIAN PERSPECTIVE

3.1. 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. Its existence is distinct and separate from that of its members. Members may change or die but the company continues to exist until it is wound up on grounds specified by the Companies Act - in other words, it has perpetual succession. A company can: own property; have a bank account; be liable for taxes;40 raise loans;41 incur liabilities; and enter into contracts.42 Members can even contract with the company, acquire rights against it or incur liability in respect of it. However, in respect of debts, creditors can take legal action only against the company, not against its members.43 In addition, according to Section 34(2) of the act, on registration of the company the association of persons becomes a body corporate by the name contained in the memorandum.44

40 41

Section 159 and 160 of the Companies Act. 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, such of the subscribers of the memorandum and other persons, as may from time to time be members of the company, shall be a body corporate by the name contained in the memorandum capable forthwith of exercising all the functions of an incorporated company, and having perpetual succession and a common seal, 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."

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. In Bacha F Guzdar v The Commissioner of Income Tax, Bombay,47 the plaintiff, Mrs Guzdar, received certain amounts as dividends in respect of shares held by her in a tea company. Under the Income Tax Act, agricultural income is exempt from payment of income tax. As the income of a tea company is partly agricultural, only 40% of the companys income is treated as income from manufacture and sale and is therefore liable to tax. The plaintiff argued that the dividend income in her hands should be treated as agricultural income up to 60%, on the grounds that dividends received by the shareholders represented the income of the company. It was held by the apex court that although the income in the hands of the company was partly agricultural, the same income when received by Guzdar as dividends could not be regarded as agricultural income. This judgment followed the principle that in the eyes of the law shareholders are not part holders of the undertaking - a shareholder is not the part owner of the company, but rather has certain rights in law to vote, attend meetings or receive dividends. Nature of Corporate Identity In certain cases a company can be used as a faade or alias in order to carry on illegal activity. The question now arises as to whether a company is a legal person, whether the company is a citizen and, if so, whether it may be protected under Part III of the Constitution. In order fully to understand and appreciate this much-debated issue,48 the terms person and citizen must first be understood. The word person, while not defined in the Companies

45

(1897) AC 22 (1960) 3 All ER 420 PC.

46

47 48

AIR 1955 SC 74 On the one hand, the High Courts of Madras, Punjab, 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); Jupiter General Ins Co v Rajagopalan (AIR 1952 Punj 9); 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). On the other hand, the High Courts of Rajasthan, Bombay, Assam and Kerala in M K Mills v State of Rajasthan (AIR 1953 Raj 88); State of Bombay v Chamarbaugwalia (AIR 1956 Bom 1);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.

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Act, 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. Thus, it is well established that a company is held to be a person in every sense of the term. 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, where it is not defined. Although the Constitution determines which persons are Indian citizens50, Article 11 empowers Parliament to regulate by legislation questions relating to the acquisition and termination of citizenship and all related matters. In pursuance of that power, Parliament has enacted the Citizenship Act.51 While the Citizenship Act denies the status of natural personality to artificial persons such as companies,52the leading case on this issue is State Trading Corporation v Commercial Tax Officer.53The majority judgment, delivered by Chief Justice Sinha, 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. This was also the opinion of the apex court in Tata E & L Co Ltd v State of Bihar, in which Chief Justice Gajendragadkar held that were Part III of the Constitution to apply to companies, lifting the corporate veil would be of no use, since the members of the company would be able to do indirectly what they could not have done directly. 54 In addition, it was held in Heavy Engineering Mazdoor Union v State of Bihar that a company was not a citizen under the Constitution of India.55 However, a company may claim the protection of the fundamental rights that are available to all persons, whether citizens or not. The fundamental rights of shareholders as citizens are not lost when they associate to form a company. When their fundamental rights are impaired by state action, 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, whether incorporated or not. 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. 53 (1964) 4 SCR 99 54 AIR 1965 SC 40 55 AIR 1970 SC 82

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shareholders are protected because such rights are equally and necessarily affected if the rights of the company are affected.56 Hence, the debate seems well settled: an artificial person cannot claim the protection of fundamental rights under Part III of the Constitution. However, a company is a person in the general sense of the term and should be treated as such.

3.2. Lifting the Corporate Veil

The advantages of incorporation are extended only to those wishing to make honest use of a company. In the case of dishonest and fraudulent use of the facility of incorporation, the law lifts the corporate veil and identifies the persons (i.e. 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, that is, disregarding the corporate entity and paying regard instead, to the realities behind the legal faade. As to when the corporate veil may be lifted, 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. The veil of corporate personality, even though not lifted sometimes, is becoming more and more transparent in modern jurisprudence... In the expanding horizon of modern jurisprudence, lifting... the corporate veil is permissible; its frontiers are unlimited. But it must depend primarily upon the realities of the situation.58 Similarly, in Life Insurance Corporation of India v Escorts Ltd the apex court identified the circumstances under which the corporate veil may be lifted.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. Generally and broadly speaking, the corporate veil may be lifted where a statute itself contemplates lifting the veil, fraud or improper conduct is

56

Bennett Coleman and Co v Union of India, (1972) SCC 788, 806; DCM Ltd v Union of India, [1983] Comp LJ 281; R C Cooper v Union of India, (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, 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

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intended to be prevented, a taxing or beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern. It is neither desirable nor necessary to enumerate the classes of case where lifting of the veil is permissible, since that must necessarily depend upon the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of public interest and the effect on parties who may be interested. There are some circumstances in which a company is not deemed as having a separate legal personality from its members. 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. 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. For this purpose, he formed four private companies, in all of which he was the majority shareholder. The companies made investments and whenever interest and dividends were received by the companies, he would apply for loans which were immediately granted and never repaid. 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. 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 shareholders will be liable for the companys acts. This position is based on Sections 22262and 22363of the Contract Act 1872. There may be an express agreement to this effect or such an agreement may be implied from the facts of the particular case. 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.

60

S Beresden Ltd v Commissioner of Inland Revenue [1953] 1 Ex Ch 132; 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, the employer is liable to indemnify the agent against the consequences of that act, though it may cause an injury to the rights of third persons

34

For example, 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. The defendant, wishing to re-enter business, formed a private company with majority shareholdings in violation of the contractual obligation. The plaintiff initiated legal proceedings against him and the private company. The court granted an injunction restraining the defendant and his company from continuing on with the business.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. In addition, construction was started and space sold to various persons. 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. However, they could not produce satisfactory proof in support of their claim. It was held that the transfer of the shareholding between the father and sons must be treated as a sham. 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. 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 corporate veil may be ignored.66 However, it must be established that the holding company was created only for that purpose. 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, individual members may be open to legal action by the creditors of the company.67 The privileges of both limited liability and separate entity are lost
64 65

[1933] 1 Ex Ch 935 [1996] 4 SCALE 202. 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, in the case of public company, below seven or in the case of a private company, below two and the company carries on business for more than six months while the number is so reduced, 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

35

and the creditors are permitted to look beyond the company to the shareholders for the satisfaction of their claims. Where the prospectus of the company includes a fraudulent misrepresentation: In the case of a prospectus containing fraudulent misrepresentation of a material fact, 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 Rs5,000 or two years' imprisonment or both. 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, under Section 147(4) (c) the officer who signed the instrument is liable to the holder of the instrument, unless the company had already made the payment to that effect on the instrument.71

is carrying on business with fewer than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefore.

68

Section 62 of the act states that: Subject to the provisions of this section, where a prospectus invites persons to subscribe for shares in or debentures of a company, the following persons shall be liable to pay compensation ... for any loss or damage he may have sustained by reason of any untrue statement included therein, that is to say: every person who is a director of the company at the time of the issue of the prospectus;... has authorized himself to be named and is named in the prospectus either as a director, or as having agreed to become a director, either immediately or after an interval of time;... is a promoter of the company; and... has authorized the issue of the prospectus.

69

Section 63 of the act reads as follows: Where a prospectus issued after the commencement of this act includes any untrue statement, every person who authorized the issue of the prospectus shall be punishable with imprisonment for a term which may extend to two years, or with a fine which may extend to Rs5,000, or with both, unless he proves either that the statement was immaterial or that he had reasonable grounds to believe, and did up to the time of the issue of the prospectus believe, that the statement was true.

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, but does not include any person by reason of acting in a professional capacity for persons engaged in procuring the formation of the 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, any bill of exchange, hundi, promissory note, endorsement, cheque or order for money or goods wherein its name is not mentioned in the manner aforesaid... such officer

36

Holding and subsidiary companies: In the eyes of the law the holding company and its subsidiaries are separate legal entities. However, a subsidiary company may lose its separate identity to a certain extent if:

at the end of its financial year, the holding company lays down before its members in a general meeting not only the accounts of the holding company, 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, and their combined state of affairs at the end of the year;72

the central government deems it necessary to direct the holding and subsidiary companies to synchronize their financial years;73 or

A court, based on the facts of the case, treats the subsidiary company as merely a branch or department of a larger undertaking owned by the holding company. 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.74

or person shall be punishable with a fine which may extend to Rs500, and shall further be personally liable to the holder of the bill of exchange [etc]... for the amount thereof, 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 companys subsidiary to extend its financial year so that the subsidiarys financial year may end with that of the holding company, and for that purpose to postpone the submission of the relevant accounts to a general meeting, the central government may, on the application or with the consent of the board of directors of the company whose financial year is to be extended, direct that in the case of that company, the submission of accounts to a general meeting, the holding of an annual general meeting or the making of an annual return, shall not be required to be submitted, held or made, earlier than the dates specified in the direction, 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, which is, or has at any relevant time been the companys subsidiary or holding company, or a subsidiary of its holding company, or a holding company of its subsidiary, any other body corporate, which is, or has at any relevant time been, managed by any person as managing director or as manager, who is, or was at the relevant time, either the managing director or the manager of the company, or any other body corporate which is, or has at any relevant time been, managed by the company or whose board

37

Investigation of ownership of company: The separate legal entity may be disregarded under Section 247 of the Companies Act. 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. 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, or for any other fraudulent purpose, the court, on the application by the liquidator or any creditor or contributory, 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.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, 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, concealment or wilful misstatement, suppression of facts or contravention by the provisions of the act or rules made thereunder.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, or any of the directors of the company, or any company, any of whose directorships is held by the employees or nominees of those having the control and management of the first mentioned company, or any person who is or has at any relevant time been the companys managing director or manager.
75

Section 247 of the act states that: Where it appears to the central government that there is good reason to do so, it may appoint one or more inspectors to investigate and report on the membership of any company and other matters relating to the company, for the purpose of determining the true persons who are or have been financially interested in the success or failure, whether real or apparent, of the company; or who are or have been able to control or materially influence the policy of the company. 76 Section 542 of the Companies Act
77

(1989) 65 Comp Cas 196 (Del).

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.78 The annual bonus paid to the company's workmen depended on the amount of gross profit in that particular year. The company transferred part of its shareholding to a newly formed, wholly owned subsidiary company, thus reducing its own profits on paper. 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 workers would not benefit and hence, the corporate veil could be ignored. 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 Rs1.5 million by the company to purchase properties in Delhi. The respondent diverted the amount to three companies floated by him and his son. The companies used the money to purchase the properties. The Delhi High Court restrained the respondent from alienating, transferring, disposing of or encumbering the properties in question. 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.80 Thus, the doctrine of lifting of the corporate veil can be applied in five kinds of situation, namely:

where companies are related as holding and subsidiary (or sub-subsidiary) companies; 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, with his or her knowledge, the company continued to carry on business for at least six months after the number of members had fallen below the legal minimum;

In certain matters pertaining to tax law, particularly where controlling interest is at issue; In the law relating to exchange control; and In the law relating to trading with the enemy, where the test of actual control is adopted.

78 79

(1986) 59 Comp Cas 134 SC: AIR 1986 SC 1 (1983) 54 Comp Cas 66 (Del) 80 (1995) 1 SCC 478

39

Thus, despite the concept of a corporate body having a separate personality; there are also a number of exceptions to the rule whereby individual members of the company may be held liable for its actions.

3.3. Advantages of Incorporation

1) Independent Corporate Existence: A corporate person shall have an independent corporate existence. It is in law a person. It is s distinct legal persona existing independent of its members. In case of a company, by incorporation it gains a corporate personality which is separate or distinct from the members who compose it. The property of the company belongs to it and not its members ; it may sue or be sued in its own name ; it may enter into contracts with third parties independently and even the members themselves can enter into contract with the company According to Section 34(2) of the Companies Act , upon issue of the certificate of incorporation , the subscribers to the memorandum and other persons , who may from time , be the members of the company, shall be a body corporate, which is capable of exercising all the functions of an incorporated company and having perpetual succession and a common seal. Thus the company becomes a body corporate which is capable immediately of functioning as an incorporated individual. With the incorporation, the entity of the company becomes institutionalized. This principle of the independent corporate existence and the principle of corporate personality of a company was recognized in the case of Saloman v. Saloman & Co. In this case Salomon was a boot and shoe manufacturer. He incorporated a company named Salomon & Co Ltd, for the purpose of taking over and carrying on his business. The seven subscribers to the memorandum were Salomon, his wife, his daughter and four sons and they remained the only members of the company. The company went into liquidation within a year. The unsecured creditors contended that though incorporated under the Act, the company never had an independent existence, it was in fact Salomon under another name; he was the managing director, the other directors being his sons and under his control. It was held that Salomon & Co Ltd was a real company fulfilling all the legal requirements. It must be treated as a company, as an entity consisting of certain corporators, but a distinct and independent corporation. Thus it was decided in this case that a corporate body has its own existence or personality separate and distinct from its members and therefore, a shareholder cannot be held liable for the acts of the company even though he

40

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

Re Kondoli Tea Co. Ltd, (1886) ILR 13Cai. 43 AIR 1999 SC 1734

41

the shares held by them. Section 34(2) of the Companies Act, 1956 provides that in the event of the company being wound up, the members shall have liability to contribute to the assets of the company in accordance with the Act, In the case of limited companies; no member is bound to contribute anything more than the nominal value of shares held by him. The privilege of limiting the liability is one of the main advantages of carrying on business under a corporate organization. 3) Perpetual Succession: An incorporated company has perpetual succession that is notwithstanding any change in its members, the company shall retain as the same entity with the same privileges and immunities, estate and possessions. the death or insolvency of individual member does not in any way, affect its corporate existence and the company shall continue its existence as usual until it is wound up in accordance with the provisions of the Companies Act, The perpetual existence of an incorporated company is well illustrated by proverbial saying, "members may come and members may go, but the company can go on forever. In Gopalpur Tea Co. Ltd. v. Penhok Tea Co Ltd.83, the court while applying the doctrine of company's perpetual succession observed that though the whole undertaking of a company was taken over under an Act which purported to extinguish all rights of action against the company, neither the company was thereby extinguished nor any body's claim against it.

4) Transferability of shares: Section 82 of the Companies Act, 1956, specifically provides that the shares or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of association of the company. Thus the member of an incorporated company can dispose of his share by selling them in the open market and get back the amount so invested. The transferability of shares has two main advantages, namely it provides liquidity to investors and at the same time ensures stability of the company. The transfer of shares of a company does not in any way affect its existence or management and the shareholder can conveniently get relieved of his liability by transferring his shares to some other person. 5) Separate Property: Incorporation helps the property of the company to be clearly distinguished from that of its members. The property is vested in the company as a body
83

(1982) 52 Comp. Out. 238

42

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

84 85

(1955) 1 SCR 876 1925 AC 619 HL 86 AIR 1960 Mad. 43

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.87. A criminal complaint can be filed by a company, but it should be represented by a natural person. A company has the right to protect its fair name. It can sue for such defamatory remarks against it as are likely to damage its business or property etc. A company has the right to seek damage where a defamatory material published about it affects its business. In TVS Employees Federation v. TVS & Sons 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 R v. Broadcasting Standards Commission the court of appeal held that a company can complain under the Broadcasting Act, 1996 about unwarranted infringement of its privacy. In this case the complaint was about the secret filming of transactions in shops by the BBC and the allegation was that this constituted an infringement of the companys privacy.

3.4. Disadvantages of Incorporation

1.

Lifting or Piercing the Corporate Veil: A corporation is cloth with a distinct

personality by fiction of law, yet in reality it is an association of persons who are in fact, in a way, the beneficial owners of the property of the body corporate. A company being an artificial person, cannot act on its own, it can act only through natural persons. The whole theory of incorporation is based on the theory of corporate entity but the separate personality of the company and its statutory privileges should be used for legitimate purposes only. Where the legal entity of the company is being used for fraudulent and dishonest purpose, the individuals concerned will not be allowed to take the shelter behind the corporate personality. The court in such cases shall break through the corporate shell and apply the principle of what is known as lifting or piercing the corporate veil. The corporate veil of a company may be lifted to ascertain the true character and economic realities behind the legal personality of the company. Undoubtedly, the theory of corporate entity of a company is still

87 88

Union Bank of India v. Khaders International Constructions Ltd , [1993] 2Comp Lj 89 Ker (1996) 1 WLR 132 (CA)

44

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

(1995) 1 SCC 478

45

persons who are in real control of the corporate affairs of the company. In a case90 a company was incorporated in England for the purpose of selling tyres manufactured in Germany by a German company, all the shares except one were held by the German subjects residing in Germany. The remaining one share was held by a British subject who was the Secretary of the company. Thus the real control of the English company was in German hands. During World War I, the company commenced an action to recover trade debts. The question therefore was whether company had become an enemy company consequent to World War I. The House of Lords, inter alia observed: But it can assume enemy character when persons in de facto control of its affairs are residents in any enemy country or, wherever resident, are acting under the control of enemies. Therefore held that the company was an enemy company for the purpose of trading and therefore it was barred from maintaining the action. In an American case91 it was held that the Courts may refuse to pierce the corporate veil where there is no danger to public interest. In this case certain lands were transferred by an Englishman to another perpetually restraining the transferee from selling the said property to coloured persons i.e. Negroes. The transferee, however, transferred the land to a company which was exclusively composed of Negroes. Thereupon, the petitioners brought an action against the company for annulment of the conveyance on the ground of breach of condition. Rejecting the contention of the petitioners the court held that members individually or employment was terminated under an agreement. Thereafter he started a new company to carry on the business of solicitation and solicited plaintiffs customers. The court held that the defendant company was a mere cloak or sham and channel used by defendant to obtain advantage of the customers of the plaintiff company for his own benefit and therefore it ought to be restrained from carrying on the business. The Supreme Court in Subhra Mukherjee & Another v. M/s. Bharat Coking Coal Ltd. (BCCL) & 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. (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. In this case the assessee was a
90 91

Daimler Co. Ltd. v. Continental Tyre & Rubber Co., (1916)2 AC 307 People's Pleasure Park Co. v. Rohleder, (1908) 109 Va 439. 92 AIR 2000 SC 1203 93 Juggilal v. CIT , (1969) 2 SCC 376

46

wealthy man, enjoying huge dividends and interest income. He formed four private companies and agreed with each to hold a block of investment as an agent for it. Income received was credited in the accounts of the company, but the company handed back the amount to him as pretended loans. The court held that the company was formed by the assessee purely and simply as a means of avoiding super tax and the company was nothing more than the assessee himself. (c) Fraud or improper conduct: The courts will refuse to uphold the separate existence of the company where it is formed to defeat or circumvent law, to defraud creditors or to avoid legal obligations. In Gilford Motor Co v. Horne94 , 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. He was employed under an agreement. Shortly he opened a business in the name of a company which solicited the plaintiffs customers. 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. In P.N.B. Finance Ltd. v. Shital Prasad Jain,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, to prevent the corporate entity from being used as an instrument of fraud, and the fundamental principle of corporate personality itself may be disregarded having regard to the exigencies of the situation and for the ends of justice. (d) Government Companies: companies at times loose their individuality in favour of its principal and, may be treated as an agent or trustee. In Re F.G. (Films) Ltd.96, an American company produced a film called MANSOON in India technically in the name of a British company. This British company had a capital of 100 out of which majority was held by the President of the American company which financed the production of the film. In these circumstances the Board of Trade refused to register the film as a British film on the ground that in the instant case the British company acted merely as the nominee or agent of the American company. This view was upheld by the Court. The court may, in some circumstances, treat a holding company and its subsidiary as a single entity. This inference does not flow automatically from the relationship of holding and subsidiary company. There must be evidence that the business of the two is combined. In Smith Stone & Knight Ltd. v.
94 95

[1944] 1 Ch 935. (1983)53Comp. Cas.66 96 (1953) All ER 615

47

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

In India, a large number of private Companies have a tendency to register themselves as Government companies under the Companies Act with President and few other officers as the shareholders. They do so with a view to availing certain advantages in their commercial ventures. The Courts are, therefore, confronted with the problem of deciding the true nature of a Government company in a number of cases. The Supreme Court has decided once for all that a Government company is neither an extension of the State, nor its agent. The Supreme Court has ruled that Life Insurance Corporation cannot be treated as an instrumentality of the State when it is exercising its ordinary right as a majority shareholder in a company for removing the existing management and reconstituting the Board of Directors of that 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. (f) To prevent abuse of Process of Law: The doctrine of lifting the corporate veil can also be used to prevent abuse of process of Court. Thus in Bijay Kumar Agarwal & others v. Ratanlal Bagaria & others,98 the Court observed that although broadly speaking the principle of lifting the corporate veil will be available in the statute like Companies Act, and other financial and taxing statutes etc. but admittedly one cannot rule out the applicability of the principle elsewhere if the situations are falling under the following categories : (a) depend upon the relevant statutory or other provisions; (b) the object sought to be achieved; (c) the impugned conduct; (d) the involvement of the element of public interest; (e) the effect on parties who may be affected. It, therefore, logically follows that the doctrine of lifting the

97 98

Life Insurance Corporation v. Escorts Ltd., (1986) 1 SCC 264 AIR 1999 Cal. 106, (107)

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. Thus the Lifting of corporate veil or principle analogous thereto cannot be monopoly of any particular statute. It can well be used by the judiciary or the Court to prevent the abuse of process of Court of Law. The Supreme Court in Delhi Development Authority v. Skipper Construction Co. (P.) 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. In the instant case, the company was defrauding others in deliberate disobedience of Supreme Court's orders which amounted to contempt of Court. Disposing of the appeal, the Supreme Court observed that imposition of punishment for contempt would not denude the Court of its power to issue directions and make appropriate orders to grant relief to the persons aggrieved in order to do complete justice. For this purpose, the Court can lift the corporate veil of the company to took into the misdeeds of its officials and punish them i.e. the contemnors. That apart, the Court may also order the contemnors to restore the illegally derived benefit to the persons who are defrauded so that the contemnors are not able to retain the fruits of the contempt. The Court may also order forfeiture/attachment of the properties acquired by the illegal and corrupt means by the real men behind the corporate as also the properties of their family members.

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

(a) Reduction of membership (Section 45) : Section 45 of the Companies Act, 1956 specifically provides that if at any time the number of members of a company falls below the statutory minimum i.e.. seven in case of a public company and two in the case of a private company, and the company carries on business for more than six months while the number is so reduced, every person who is a member of that company during the time the company so carries on business after those six months and is aware of that fact, shall be severally liable

99

AIR 1996 SC 2005

49

for the payment of company's debts contracted during that time. Thus, in such cases, the privilege of limited liability is denied to the shareholders. (b) Misdescription of name (Section 147): Where an officer of a company signs on behalf of the company any contract, Bill of exchange, hundi, promissory note, cheque or an order for money goods, such person shall be personally liable to the holder if the name of the company is not fully or properly mentioned in the instrument. (c) Fraudulent conduct of business (Section 542): This section imposes liability for fraudulent conduct of a companys business. According to the section if it is found that a business is found to be carried on with the intent to defraud the creditors of the company or any other person , or for any fraudulent purpose, those who were knowingly parties to this business shall be personally held liable for all or any of the debts of the company.

(d) Subsidiary company (Sections 212 and 214): As required by Sections 212 and 214 of the Act, a holding company has to disclose to its members, the accounts of its subsidiaries. Though in the eyes of law a subsidiary company is a separate legal entity under certain circumstances, the court may not treat the subsidiary company as an independent entity in a particular situation. There may be two situations when a subsidiary company may lose its independent identity to a certain extent, namely, (1) the law may brush aside the legal forms and require companies in a group to present a joint picture in order to give better information of the financial position of the group as a whole to the public, creditors and shareholders ; and (2) where the control and conduct of business of a subsidiary company rests solely in the nominees of the holding company, it may be inferred that the subsidiary company is merely a branch of holding company and has no separate identity of its own. (e) Failure to Return Application Money (Section 69(5)): The provision contained in clause (5) of Section 69 of the Companies Act, 1956 makes the director of a public company personally liable to pay the money with interest if the application money is not repaid within thirty days in the event of minimum subscription not having been received or company not having obtained certificate of commencement of business by the company. (f) Misrepresentation in Prospectus (Section 62): In case of misrepresentation in the prospectus of a company, every director, promoter, and every other person who authorizes

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issue of such prospectus, incurs liability towards those who subscribe for shares on the faith of untrue statement. (g) Ultra vires acts: The directors of a company shall be personally liable for all those acts done by them on behalf of the company if they are ultra vires the company. (h) Non-payment of Tax: In the event of winding up of a private company, if any tax assessed on the company whether before or in course of liquidation in respect of any income of any previous year cannot be recovered, every person who was director of that company at any time during the relevant previous year, shall be jointly and severally liable for payment of such tax. 3. Expenses and formalism: Incorporation of a company is an expensive affair. Besides, it involves completion of a number of formalities. Moreover, the administration of a company has to be carried on strictly in accordance with the provisions of the company law and activities are limited by its memorandum which at times creates problems in its progress.

4. Company is not a citizen: Though a company is a legal person, it is not a citizen under the constitutional law of India or the Citizenship Act, 1955. The reason as to why a company cannot be treated as a citizen is that citizenship is available to individuals or natural persons only and not to juristic persons. The question whether a corporation is a citizen was decided by the Supreme Court in State Trading Corporation of India v. Commercial Tax Officer100. Since a company is not treated as a citizen, it cannot claim protection of such fundamental rights as are expressly guaranteed to citizens, but it can certainly claim the protection of such fundamental rights as are guaranteed to all persons whether citizens or not. In Tata Engineering Company v. State of Bihar101 it was held that since the legal personality of a company is altogether different from that of its members and shareholders, it cannot claim protection of fundamental rights although all its members are Indian citizens. Though a company is not a citizen, it does have a nationality, domicile and residence. In case of residence of a company, it has been held that for the purposes of income tax law, a company resides where its real business is carried on and the real business of a company shall be deemed to be carried on where its Central management and control is actually located.

100 101

AIR 1963 SC 1811 AIR 1965 SC 40

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Statutory Corporations or Companies Companies and undertakings concerned with public utility such as railways, roadways, docks, electricity etc. are usually incorporated by special Acts of the Legislature. They are mostly invested with extensive powers. The examples of statutory corporations are the Reserve Bank of India established by the Reserve Bank of India Act, 1934, the Industrial Finance Corporation of India established by the Industrial Finance Corporation Act, 1948, Air India incorporated under the Air Corporation Act, 1953, the Life Insurance Corporation of India created by the Life Insurance Corporation of India Act, 1956 and so on. Therefore a statutory corporation is a public enterprise which comes into existence by a special Act of Parliament. The Act would define its powers and functions, rules and regulations governing its employees and its relationship with the government department. They are financially independent. Though the Parliament and the State Legislatures have power to create statutory trading or non-trading corporations for even private purposes as per Entry 44 of List I and Entry 32 of List II of Seventh Schedule of the Constitution of India, any group or association desiring to seek incorporation for other than public purposes is generally expected to get itself incorporated by registration under the Companies Act. One Man Company: A one man company means a single person owns the whole or practically the whole of share capital. There may or may not be other members. The other members shall be acquaintances like friends, relatives or nominees. The central person shall have the full control over the company. These types of company enjoy a corporate status and have limited liability of the company. They also have a legal status. The concept of one Man Company was accepted in Salomans case

3.5. Summary
As soon as a company is incorporated, whether public or private limited, it becomes a juristic person. It has its own name and property. It is a separate legal entity distinct from its members who incorporate it. A company does its business through its Directors. The

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directors are also called the ears, eyes and hands of the company. The directors of a company are in fiduciary position. 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. They are entitled to do any work on behalf of the company, what a company can do in ordinary course of business. There are certain items for which Board is not empowered to do. 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. But wrong done by the Directors (criminal action) are the responsibility of the Directors and not the responsibility of the Company.

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Chapter-4 STUDY OF CORPORATE PERSONALITY IN USA PERSPECTIVE

4.1. US companies law

In the United States, corporations are generally incorporated, or organized, under the laws of a particular state. 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). The corporate laws of the various states differ - in some cases significantly - 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, and a majority of public companies in the U.S. are Delaware

corporations. The federal laws of the United States and local law may also be applicable sources of corporate law. Company law theory A corporation is described to be a person in a political capacity created by the law, to endure in perpetual succession. Americans in the 1790s knew of a variety of corporations established for various purposes, including those of commerce, education, and religion. As the law of corporations was articulated by the Supreme Court under Chief Justice Marshall, over the first several decades of the new American state, emphasis fell, in a way which seems natural to us today, upon commercial corporations. Nonetheless, Wilson believed that, in all cases, corporations should be erected with caution, and inspected with care. The actions of corporations were clearly circumscribed: To every corporation a name must be assigned; and by that name alone it can perform legal acts. For non-binding external actions or transactions, corporations enjoyed the same latitude as private individuals; but it was with an eye to internal affairs that many saw principal advantage in incorporation. The power of making by-laws was tacitly annexed to corporations by the very act of their establishment. While they must not directly contradict the overarching laws of the land, the central or local government cannot be expected to regulate toward the peculiar circumstances

54

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

55

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

56

physically located there because that state has very favorable corporate tax and disclosure laws. Companies set up for privacy or asset protection often incorporate in Nevada, which does not require disclosure of share ownership. Many states, particularly smaller ones, have modelled their corporate statutes after the Model Business Corporation Act, one of many model sets of law prepared and published by the Association. As juristic persons, corporations have certain rights that attach to natural persons. The vast majority of them attach to corporations under state law, especially the law of the state in which the company is incorporated - since the corporations very existence is predicated on the laws of that state. A few rights also attach by federal constitutional and statutory law, but they are few and far between compared to the rights of natural persons. For example, a corporation has the personal right to bring a lawsuit (as well as the capacity to be sued) and, like a natural person, a corporation can be libelled. But a corporation has no constitutional right to freely exercise its religion because religious exercise is something that only natural persons can do. That is, only human beings, not business entities, have the necessary faculties of belief and spirituality that enable them to possess and exercise religious beliefs. Harvard College (a component of Harvard University), formally the President and Fellows of Harvard College (also known as the Harvard Corporation), is the oldest corporation in the western hemisphere. Founded in 1636, the second of Harvards two governing boards was incorporated by the Great and General Court of Massachusetts in 1650. Significantly, 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. Many nations have modelled their own corporate laws on American business law. Corporate law in Saudi Arabia, for example, follows the model of New York State corporate law. In addition to typical corporations in the United States, the federal government, in 1971 passed the Alaska Native Claims Settlement Act (ANCSA), 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. In addition to the 12 regional corporations, 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.

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4.2. United State and corporate veil piercing

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

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Factors for courts to consider

Absence or inaccuracy of corporate records; Concealment or misrepresentation of members; Failure to maintain arms length relationships with related entities; Failure to observe corporate formalities in terms of behaviour and documentation; Failure to pay dividends; Intermingling of assets of the corporation and of the shareholder; Manipulation of assets or liabilities to concentrate the assets or liabilities; Non-functioning corporate officers and/or directors; Significant undercapitalization of the business entity (capitalization requirements vary based on industry, location, and specific company circumstances);

Siphoning of corporate funds by the dominant shareholder; Treatment by an individual of the assets of corporation as his/her own; Was the corporation being used as a facade for dominant shareholder personal dealings; alter ego theory;

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. Further, some courts might find that one factor is so compelling in a particular case that it will find the shareholders personally liable.

Berkey v. Third Avenue Railway,102. Benjamin Cardozo decided there was no right to pierce the veil for a personal injury victim. Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc103. The Fourth Circuit held that no piercing could take place merely to prevent unfairness or injustice, where a corporation in a real estate building partnership could not pay its share of a lawsuit bill

Fletcher v. Atex, Inc.

Undercapitalization Minton v. Cavaney104. Mr. Minton's daughter drowned in the public swimming pool owned by Mr. Cavaney. Then-Associate Justice Roger J. Traynor (later Chief Justice) of the

102 103

244 N.Y. 602, 155 N.E. 914 (1927) 974 F.2d 545 (4th Cir. 1992)

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Supreme Court of California held: The equitable owners of a corporation, for example, are personally liable . . . when they provide inadequate capitalization and actively participate in the conduct of corporate affairs. Kinney Shoe Corp. v. Polan105. The veil was pierced where its enforcement would not have matched the purpose of limited liability. Here a corporation was undercapitalized and was only used to shield a shareholder's other company from debts.

Internal Revenue Service In recent years, the Internal Revenue Service in the United States has made use of corporate veil piercing arguments and logic as a means of recapturing income, estate, or gift tax revenue, particularly from business entities created primarily for estate planning purposes. A number of US Tax Court cases involving family limited partnerships, such as Strangi, Hackl, Shepherd, and Bongard, show the IRS's use of veil piercing arguments. Since owners of US business entities created for asset protection and estate purposes often fail to maintain proper corporate compliance, the IRS has achieved multiple high-profile court victories.

4.3. Case law

In 1818, the United States Supreme Court heard the case Dartmouth College v. Woodward,106 making the following statement in their decision: The opinion of the Court, after mature deliberation, is that this corporate charter is a contract, the obligation of which cannot be impaired without violating the Constitution of the United States. This opinion appears to us to be equally supported by reason, and by the former decisions of this Court. A public outcry ensued. State courts and legislatures, supported by many of their constituents, and declared that state governments had an absolute right to amend or repeal a corporate charter. Seven years after the Dartmouth College opinion, the Supreme Court decided Society for the Propagation of the Gospel in Foreign Parts v. Town of Pawlet,107 in which an English corporation dedicated to missionary work, with land in the U.S., sought to protect its rights to that land under colonial-era grants against an effort by the state of Vermont to revoke the grants. Justice Joseph Story, writing for the court, explicitly extended the same
104 105

56 Cal. 2d 576 (1961) 939 F.2d 209 (4th Cir. 1991) 106 17 U.S. 518 (1819) 107 (1823)

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protections to corporate-owned property as it would have to property owned by natural persons. Seven years later, Chief Justice Marshall stated that, The great object of incorporation is to bestow the character and properties of individuality on a collective and changing body of men.108 It should be understood that the term artificial person was in long use, prior to the Dartmouth College decision, and was in principle distinct from any contention that corporations have the rights of natural persons. Artificial person was used because there were certain resemblances, in law, between a natural person and corporations. Both could be parties in a lawsuit; both could be taxed; 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.... Similarly, in 1877, in Munn v. Illinois109 , 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. Instead, the decision focused on the question of whether or not a private company could be regulated in the public interest. The courts decision was that it could, if the private company could be seen as a utility operating in the public interest. In the 1886 case Santa Clara v. Southern Pacific, 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. One of the 1886 judges, Samuel F. Miller, had considered the purpose of the Amendment in 1872; only six years after the Amendment had become law, when the court was called upon for the first time to give construction to these articles. In the Slaughterhouse Cases 110, 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, when taken in connection with the history of the times, which cannot fail to have an important bearing on any question of doubt concerning their true meaning. Nor can such doubts, when any reasonably exist, be safely and rationally solved
108 109

Providence Bank v. Billings, 29 U.S. 514 (1830) (94 U.S. 113 (1876)) 110 (83 U.S. 36 (1872))

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

(203 U.S. 243 (1906))

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purpose, nor that the people believed it had that purpose, nor that it should be construed as having that purpose. Hugo Black, dissenting, Connecticut General Life Insurance Company v. Johnson 112. Justice Black was not alone in his questioning of the legitimacy of corporate personhood. Justice Douglas, dissenting in Wheeling Steel Corp. v. Glander113, gave an opinion similar to, but shorter than, the one quoted above, to which Justice Black concurred. The extent to which the rights of personhood should attach to corporations has remained a subject of controversy. By the time of those opinions, political contributions to candidates in federal races by corporations had been prohibited since the Tillman Act of 1907, even though individual contributions remained unlimited. Yet both Justice Black and Justice Douglas dissented from the Supreme Court's 1957 decision in United States v. United Auto Workers,114 , in which the Court, on procedural grounds, overruled a lower court decision upholding the prohibition on corporate and union political expenditures:

4.4. 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. This rule of construction is specified in 1 U.S.C. (United States Code), which states: In determining the meaning of any Act of Congress, unless the context indicates otherwise the words person and whoever includes corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals; this federal statute has many consequences. For example, a corporation is allowed to own property and enter contracts. It can also sue and be sued and held liable under both civil and criminal law. As well, because the corporation is legally considered the person, individual shareholders are not legally responsible for the corporation's debts and damages beyond their investment in the corporation. Similarly, individual employees, managers, and directors are liable for their own malfeasance or lawbreaking while acting on behalf of the corporation, but are not generally liable for the corporation's actions. 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.

112 113

(303 U.S. 77, 1938) (337 U.S. 562, 1949) 114 352 U.S. 567 (1957)

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

115

(118 U.S. 394)

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sue and to be sued. However, they may not exercise rights that are exclusive to individuals and cannot be exercised by other associations of individuals, including the right to vote and the right against self incrimination. Ralph Nader and others have argued that a strict originalist philosophy, such as that of Justice Antonin Scalia, should reject the doctrine of corporate personhood under the Fourteenth Amendment. Indeed, Chief Justice William Rehnquist repeatedly criticized the Court's invention of corporate constitutional rights, most famously in his dissenting opinion in the 1978 case First National Bank of Boston v. Bellotti. Nonetheless, these justices' rulings have continued to affirm the assumption of corporate personhood, as the Waite court did, and Justice Rehnquist himself eventually endorsed overruling "Austin," dissenting in "McConnell v. FEC.

Corporate political spending

A central point of debate in recent years is what role corporate money plays and should play in democratic politics. This is part of the larger debate on campaign finance reform and the role that money may play in politics. In the United States, legal milestones in this debate include:

Tillman Act of 1907, banned corporate political contributions to national campaigns. Federal Election Campaign Act of 1971, landmark campaign financing legislation. Buckley v. Valeo116 upheld limits on campaign contributions, but held that spending money to influence elections is protected speech as in the first amendment. First National Bank of Boston v. Bellotti117 upheld the rights of corporations to spend money in non-candidate elections (i.e. ballot initiatives and referendums). Austin v. 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, noting that corporate wealth can unfairly influence elections.

116 117

(1976) (1978) 118 (1990)

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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

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

5.2. Corporate Personality

The Corporation of London, which governs the Square Mile from the Griffin at Temple Bar to the Tower of London, is an early example of a separate legal person.

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

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acts merely as a default position. It can be contracted around, provided creditors have the opportunity and the bargaining power to do so. A bank, for instance, may not lend to a small company unless the company's director gives her own house as security for the loan (e.g., by mortgage). 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, the default position for companies can be switched back so that shareholders or directors do agree to pay off all debts. If a company's investors do not do this, so their limited liability is not "contracted around", their assets will (generally) be protected from claims of creditors. The assets are beyond reach behind the metaphorical "veil of incorporation

5.3. 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. Courts have relied upon several factors in deciding whether to ignore the existence of the corporate entity - fraud or sham, single economic entity, agency, tax evasion, determination of nationality etc. In the early 1990s, in a landmark judgment in Adams v. Cape Industries123, the Court of Appeal rejected the argument of single economic entity. The Court refused to ignore the legal form to look at the economic substance. In a recent judgment in Hashem v. Shayif, Justice Munby of the England and Wales High Court considered in depth several cases on the corporate veil issue, and concluded that for the veil to be lifted; that defendant must have control of the entity, and there must have been some impropriety. Now, although Adams v. Cape rejected the single economic entity argument, it left open the door for agency-based arguments. In this context, agency would mean not just a formal contractual relationship but also a factual agency. It needs to be considered, then, whether the Justice Munbys judgment closes the door on agency-type arguments as well because of the insistence on impropriety. Further, at times, Courts have relied on an interests of justice rationale to lift the veil. Hashem v. Shayif categorically rejects this approach. The important conclusions reached by the Justice Munby are as follows:

123

[1991] 1 All ER 929

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

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4. Ignoring the veil - entirely ignoring the existence of the company as a faade or a sham. There would be nothing wrong with Justice Munbys approach if the case dealt with only the 4th category - nonetheless, the arguments made before him required him to look at all the categories listed above. Accordingly, he claims to lay down principles which would cover all these categories. The corporate veil in UK company law is pierced very rarely. After a series of attempts by the Court of Appeal during the late 1960s and early 1970s to establish a theory of economic reality, and a doctrine of control for lifting the veil, the House of Lords reasserted an orthodox approach. On a strict reading of the most prominent recent case, Adams v Cape Industries plc, the only true veil piercing may take place when a company is set up for fraudulent purposes, or where it is established to avoid an existing obligation. The veil is also often ignored in the process of interpreting a statute, 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. There are also significant statements still among the judiciary in support of a broader veil lifting approach in the interests of justice. 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, who are liable only to the extent that they have contributed to the company's capital: Salomon v Salomon [1897]. 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. Furthermore, it can create subsidiaries with inadequate capitalization and secure loans to the subsidiaries with fixed charges over their assets, despite the fact that this is not necessarily the most honest way of trading. Although the secondary literature refers to different means of lifting or piercing the veil, judicial dicta supporting the view that the rule in Salomon is subject to exceptions are thin on the ground. Lord Denning MR outlined the theory of the single economic unit wherein the court examined the overall business operation as an economic unit, rather than strict legal form - in DHN Food Distributors v Tower Hamlets. However this has largely been repudiated and has been treated with caution in subsequent judgments. In Woolfson v Strathclyde BC, 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, the former owning the

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premises on which the parent carried out its business, could receive compensation for loss of business under a compulsory purchase order notwithstanding that under the rule in Salomon, it was the parent and not the subsidiary that had lost the business). Likewise, in Bank of Tokyo v Karoon, Lord Goff, who had concurred in the result in DHN, held that the legal conception of the corporate structure was entirely distinct from the economic realities. 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. 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, and these doubts were shared by Moritt V-C in Trustor v Smallbone: the corporate veil cannot be lifted merely because justice requires it. Despite the rejection of the justice of the case test, 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. Existing obligation The case of Jones v Lipman, where a company was used to defraud the creditors of the defendant and Gilford Motor Co Ltd v Horne, 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. Similarly, in Gencor v Dalby, the tentative suggestion was made that the corporate veil was being lifted where the company was the alter ego of the defendant. In truth, as Lord Cooke (1997) has noted extra judicially, it is because of the separate identity of the company concerned and not despite it that equity intervened in all of these cases. They are not instances of the corporate veil being pierced but instead involve the application of other rules of law. Reverse piercing There have been cases in which it is to the advantage of the shareholder to have the corporate structure ignored. Courts have been reluctant to agree to this. The often cited case Macaura v Northern Assurance Co Ltd is an example of that. Mr. Macaura was the sole owner of a company he had set up to grow timber. 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

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owner of the trees. The House of Lords upheld that refusal based on the separate legal personality 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. 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, but not always, a director of the company). In consequence those monies become an element in the individual's 'benefit' obtained from criminal conduct (and hence subject to confiscation from him). 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. 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. A court can pierce the carapace of the corporate entity and look at what lies behind it only in certain circumstances. It cannot do so simply because it considers it might be just to do so. Each of these circumstances involves impropriety and dishonesty. The court will then be entitled to look for the legal substance, not the just the form. In the context of criminal cases the courts have identified at least three situations when the corporate veil can be pierced. First if an offender attempts to shelter behind a corporate faade, or veil to hide his crime and his benefits from it. Secondly, 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, then "the veil of incorporation is not so much pierced as rudely torn away": per Lord Bingham in Jennings v CPS. Thirdly, where the transaction or business structures constitute a device, cloak or sham, i.e. an attempt to disguise the true nature of the transaction or structure so as to deceive third parties or the courts.

5.4. Summary

124

[2009] EWCA Crim 1303

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

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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. 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. From the definitions givens by Lord Justice Lindley, Chief Justice Marshall, Prof. Haney etc we can gather that the characteristics features of a company are incorporated association, distinct legal entity, artificial personality, limited liability, perpetual succession, common seal free transfer of shares. Company form of organisation is however, not an unmixed blessing. Disadvantages of incorporation include: Formalities and expense, loss of privacy, divorce between ownership and control, greater tax burden and detailed winding up procedure. A company should however, be distinguished from a body corporate. The expression body corporate is a wider expression than company. Body corporate includes, besides a company, a company incorporated outside India, public financial institutions, nationalized banks and any other association of persons declared as a body corporate by the Central Government. Artificial entities that are created by state statute and that are treated much like individuals under the law, having legally enforceable rights, the ability to acquire debt and pay out profits, the ability to hold and transfer property, the ability to enter into contracts, the requirement to pay taxes, and the ability to sue and be sued. The rights and responsibilities of a corporation are independent and distinct from the people who own or invest in the corporation. A corporation simply provides a way for individuals to run a business and share in profits and losses. Corporations can exercise human rights against real individuals and the state, 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, order of court, or voluntary action on the part of shareholders. Insolvency may result in a form of corporate death, when creditors force the liquidation and dissolution of the corporation under court order, but it most often results in a restructuring of corporate holdings. Corporations can even be convicted of criminal offenses, such

as fraud and manslaughter. Although corporate law varies in different jurisdictions

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Corporate Personality is the creation of law. Legal personality of corporation is recognized both in English and Indian law. A corporation is an artificial person enjoying in law capacity to have rights and duties and holding property. A corporation is distinguished by reference to different kinds of things which the law selects for personification. The individuals forming the corpus of corporation are called its members. 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. (2) There must be organs through which the corporation functions, and

(3) The corporation is attributed will by legal fiction. A corporation is distinct from its individual members. It has the legal personality of its own and it can sue and can be sued in its own name. It does not come to end with the death of its individual members and therefore, has a perpetual existence. However, unlike natural persons, a corporation can act only through its agents. Law provides procedure for winding up of a corporate body. Besides, corporations the banks, railways, universities, colleges, church, temple, hospitals etc. are also conferred legal personality. Union of India and States are also recognized as legal or juristic persons. In certain cases, the corpus of the legal person shall be some fund or estate which reserved certain special uses. For instance, a trust - estate or the estate of an insolvent, a charitable fund etc..; are included within the term legal personality. Corporate personhood refers to the question of which subset, if any, of rights afforded under the law to natural persons should also be afforded to corporations as legal persons. In the United States, corporations were recognized as having rights to contract, and to have those contracts honored the same as contracts entered into by natural persons. A legal entity properly registered with the secretary of state. Can have limited liability , perpetual life, freely transferable shares, and centralized management. As soon as a company is incorporated, whether public or private limited, it becomes a juristic person. It has its own name and property. It is a separate legal entity distinct from its members who incorporate it. A company does its business through its Directors. The directors are also called the ears, eyes and hands of the company. The directors of a company are in fiduciary position. 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. They are entitled to do any work on behalf of the company, what a company can do in ordinary course of business. There are certain

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items for which Board is not empowered to do. 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. But wrong done by the Directors (criminal action ) are the responsibility of the Directors and not the responsibility of the Company.

Thus, the law in both the United Kingdom and India is well settled that a company has a separate legal personality from its members. However, under special circumstances this disparity may be removed. 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. 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. Reduction of membership below statutory minimum, Misrepresentation in Prospectus, Failure to return application money, Failure to deliver share certificate etc. Within stipulate time period, Mis-description of name, For investigation of ownership of company, Fraudulent Conduct, Liability for ultra-vires Acts, Protection of revenue, Prevention of fraud or improper conduct, Determination of the enemy character of a company, To punish for contempt of court, etc. The company from of organisation offers certain distinct advantages over other association of persons. These include: Independent legal entity, limited liability of members, perpetual succession, transferability of shares, infinite membership, separate property, ease in control and management. Legal personality (also artificial personality, juridical personality, and juristic personality) is the characteristic of a non-human entity regarded by law to have the status of a person. A legal person (Latin: persona ficta), (also artificial person, juridical person, juristic person, and body corporate, also commonly called a vehicle) has a legal name and has rights, protections, privileges, responsibilities, and liabilities under law, just as natural

persons (humans) do. The concept of a legal person is a fundamental legal fiction. It is pertinent to the philosophy of law, as is essential to laws affecting

a corporation (corporations law) (the law of business associations). Legal personality allows one or more natural persons to act as a single entity (a composite person) for legal purposes. In many jurisdictions, legal personality allows such composite to be considered under law separately from its individual members or shareholders. They may sue and be sued, enter into contracts, incur debt, and have ownership over property.

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