Law and You > Corporate Laws > Companies Act, 2013 > Corporate Personality of a Company
According to Section 2(20) of the Companies Act, 2013, a “Company means a company incorporated under this Act or under any previous company law.” The phrases used do not further explore the meaning, nature, or qualities of the corporation; it just emphasizes its registration and establishment. The legal definition of “company” is therefore “any association, under the 2013 Companies Act or any earlier Companies Act, must be designated as a company.” Once it is registered, it becomes a legal entity recognized by law. Since a corporate body (i.e., a company) is the creation of law, it is not a human being, it is an artificial juridical person (i.e., created by law) and it is clothed with many rights, obligations, powers and duties prescribed by law. In this article, we shall discuss very important feature of incorporation and i.e. Corporate Personality.
Corporate / Legal Personality:
Corporate personality is the creation of law. And as per the law, a corporation is an artificial person created by the personification of a group of individuals. The theory of corporate personality mainly states that a company has a legal identity different from its members. A company with such personality has an independent legal existence separate from its shareholders, directors, officers and creators. This is separation is known as the corporate veil.
Due to a corporate personality a company bears its own name, acts under the name, has a seal of its own and its assets which are separate and distinct from those of its members. It is a different ‘person’ from the members who compose it. Therefore, it is capable of owning property, incurring debts, borrowing money, having a bank account, employing people, entering into contracts and suing or being sued in the same manner as an individual. Its members are its owners however they can be its creditors simultaneously. A shareholder cannot be held liable for the acts of the company even if he holds virtually the entire share capital.
Theories of Corporate Personality:
A Company is an artificial or fictitious Person created by the personification of a group or a series of individuals called members. A Company is an artificial person created by law. It is not a human being but it acts through human beings. It is considered as a legal person which can enter into contracts, possess properties in its own name, sue and can be sued by others etc. It is called an artificial person since it is invisible, intangible, existing only in the contemplation of law. It is capable of enjoying rights and being subject to duties.
In Trustees of Darmouth College v woodward (1819) 17 US 518 case, The Court defined company “as a person, artificial, invisible, intangible and existing only in the eyes of the law. Being a mere creation of law, it possesses only those properties which the charter of its creation confers upon it either expressly or as accident to its very existence”
Theories of corporate personality give us a theoretical perspective to understand the concept, but in the real world with practical problems, they are of little use. Different theories of corporate personality are as follows:
Fiction Theory:
The Fiction theory was propounded by Savigny. Salmond and Holland were the supporters of this theory. As per the fiction theory, a corporation exists only as an outcome of fiction and metaphor. Thus, the personality that is attached to these corporations is done purely by legal fiction. There is double fiction in case of company because the Personality of Corporation is different from the personality of its members. The main defect of this theory is that it exists in the eyes of law only.
Concession Theory:
Salmond, Savigny and Dicey are the main supporters of this theory. This is similar to the fiction theory. According to this theory, the only realities are sovereign and individual. However, it states that the legal entity has been given a corporate personality or a legal existence by the functions of the State. So as per this theory, only the State can endow legal personalities, not the law. Thus company are treated as persons merely by a concession and the part of the sovereign. Thus, a corporate personality is nothing but a concession given to group or body of individuals by law to act as one body.
Realist Theory:
Realist Theory was propounded by Jurist Gierke. It was supported by Pollock, Geldart, Maitland etc. According to Gierke, Corporation is a real but mysterious entity, every group has a real mind, a real will and real power of action. As per the realist theory, there is really no distinction between a natural person and an artificial person. Thus, a corporate entity is as much a person as a natural person. So, the corporation does not owe its existence to the state or the law. It just exists in reality.
Bracket Theory:
Bracket theory or symbolise theory was propounded by Ihering. This is one of the more famous and feasible theories of corporate personality. According to this theory, a corporation is created only by its members and its agents. The members of a corporation are the bearers of the rights and duties which are given to the corporation for the sake of convenience. Thus, the people who represent the corporation make up the corporation. The law only puts a bracket around them for convenience purposes.
The disadvantage of this theory lies in the fact that it is not able to indicate when the bracket may be removed and the mask lifted for the purpose of taking note of the members constituting the corporation.
Separate Legal Existence of a Company Different from its Members:
A registered company is an entity distinct from its members. A creditor of an incorporated company has remedy only against the company for his debts and not any of the members of whom it is composed. The principle of separate legal entity was explained and emphasized in the famous case of Salomon v Salomon & Co. Ltd 1897 AC 22.
Salomon v. Salomon Co. Ltd. Case
The facts of the case are as follows: Mr. Salomon was the owner of a very prosperous business engaged in the manufacture and sale shoes. He sold his business for the sum of £ 40,000 to Salomon and Co. Ltd. which consisted of Salomon himself, his wife, his daughter, and his four sons (7 shareholders). The purchase consideration was paid by the company by allotment of & 20,007 shares and £ 10,000 debentures and the balance in cash to Mr. Salomon. The debentures carried a floating charge on the assets of the company. 20001 shares of face value £ 1 each were allotted to Salomon. One share of £ 1 each was subscribed by the remaining six members of his family. Salomon and his two sons became the directors of this company. Salomon was the Managing Director. The company went into liquidation within a year due to trade depression. At that time the statement of affairs’ was like this: Assets: £ 6000, liabilities; Salomon as a secured creditor and debenture holder £ 10,000 and unsecured creditors £ 7,000. Thus its assets were running short of its liabilities b £11,000.
The unsecured creditors of the company contended that the company, though incorporated under the Act, had never an independent existence; it was, in fact, Salomon under the name of a company. Actually, the company and Salomon were one and the same person. But the House of Lords held that the existence of a company is quite independent and distinct from its members. Shareholders may also be the creditors of the company. The court recognized the separate and independent personality of the company.
One argument put forth on the behalf of unsecured creditors was that the company was only the agent of Mr. Salomon and, in truth, the business belonged to him and not to the company. The Court opined that it is not the case, in fact, Mr. Salomon was the agent of the company and not vice versa.
Their Lordships of the House of Lords observed: “…the company is a different person altogether from the subscribers of the memorandum; and though it may be that after incorporation the business is precisely the same as before, the same persons are managers, and the same hands receive the profits, the company is not, in law, their agent or trustee. The statute enacts nothing as to the extent or degree of interest, which may, be held by each of the seven or as to the proportion of interest, or influence possessed by one or majority of the shareholders over others. There is nothing in the Act requiring that the subscribers to the memorandum should be independent or unconnected, or that they or any of them should take a substantial interest in the undertakings, or that they should have a mind or will of their own, or that there should be anything like a balance of power in the constitution of company.”
Salomon’s case established beyond doubt that in law a registered company is an entity distinct from its members, even if the person holds all the shares in the company i.e., a company has separate legal existence. There is no difference in principle between a company consisting of only two shareholders and a company consisting of two hundred members. In each case, the company is a separate legal entity.
Lee V. Lee’s Air Farming Ltd. Case:
The principle established in Saloman’s case also been applied also in Lee V. Lee’s Air Farming Ltd. (1961) AC 12 case, Lee formed a company with a share capital £ 3000 for the purpose of carrying on his own business of aerial top-dressing. Lee subscribed to shares worth £ 2999. He was the beneficial owner of the shares and also the sole “governing director” of the company. He also got himself appointed as the chief pilot of the company and under statutory obligations caused the company to insure him against liability to pay compensation under the Workmen’s compensation Act.
He was killed in a flying accident. His widow was granted compensation for the husband in the course of employment. Court held that Lee was a separate person from the company he formed, and compensation was due to the widow. Thus, the rule of corporate personality enabled Lee to be the master and servant at the same time. Thus, a company and its members are two distinct parties i.e. a company has separate legal existence.
Re. Kondoi Tea Co Ltd. Case:
Years before the famous Salomon case, the principle of the separate legal entity of a company was affirmed by the Calcutta High Court. In Re. Kondoi Tea Co Ltd. (1886 ILR 13 Cal 43) case, some persons owned a tea estate. They transferred it to a company. They claimed exemption from ad valorem (according to value) duty on the ground that it is simply a transfer from them to themselves under a different name. The court did not accept this contention and observed, “The Company was a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of property, as the shareholders had been totally different persons.” i.e. a company has separate legal existence.
Other Case Law:
In Abdul Haq v. Das Mai (1910) 19 IC 595 case, Abdul Haq was an employee in a company. He had not been paid his salary for several months. He sued Das Mai, a director of the company for recovery of the amount of salary due to him. It was held that he would not succeed, because “the remedy lies against the company and not against the directors or members of the company.
In T. R. Pratt (Bombay) Ltd. v. E. D. Sassoon & Co. Ltd., AIR 1936 Bom 62 case, the Bombay High Court the Court said: “Under the law, an incorporated company is a distinct entity, and although all the shares may be practically controlled by one person, in law, a company is a distinct entity.” i.e. a company has separate legal existence.
In Turnstall v. Steigman, (1962) 2 WLR 1045 case, a landlady could not succeed in gaining possession of tenanted premises for her own business, because the premises belonged to her in her personal capacity, whereas business was conducted by her in the form of a company.
In Macaura v. Northen Assurance Co. Ltd. 1925 app Cases 619 case, a person who held all the shares, except one, of a timber company, insured timber belonging to the company in his own name. When the timber was destroyed by the fire, it was held that he could not recover compensation from the insurance company as he had no insurable interest in the property which belonged, not to him, but to the company.
In Dhulia – Amalner Motor Transport Ltd. v. R. R. Dharamsi, AIR 1952 Bom 337 case, a majority of partners of a firm formed a private company and sold to the company, buses belonging to them, which were earlier used by their partnership firm. When other partners of the firm filed a suit for accounts and their share of the profits from the buses. It was held that such a suit was not maintainable. The buses being the property of the company and not of its shareholders; a company when formed is an entity which is separate and distinct from its shareholders. i.e. a company has separate legal existence.
In Bacha F. Guzdar v Commissioner of Income Tax Bombay, 1955 AIR SC 740 case, the Court held that though the income of a tea company is entitled to be exempted from Income-tax up to 60% being partly agricultural, the same income when received by a shareholder in the form of dividend cannot be regarded as agricultural income for the assessment of income-tax. It was also observed by the Supreme Court that a shareholder does not, as is erroneously believed by some people, become the part owner of the company or its property; he is only given certain rights by law, e.g., to receive notice of or to attend or vote at the meetings of the shareholders. The court refused to identify the shareholders with the company and reiterated the distinct personality of the company.
In case of a partnership firm, it has no separate legal entity as a company. Partners are responsible for every act.
Company has Nationality/Residence:
Company is governed by the laws of the land, in which it is incorporated. In TDM Infrastructure Private Limited v UE Development India Private Limited, Arbitration Application No. 2 of 2008, the Supreme Court of India held that a company’s nationality is determined primarily by its place of incorporation, and is not affected by the company’s “central management and control” being located outside India.
Though it is established through judicial decisions that a company cannot be a citizen, yet it has nationality, domicile and residence.
In Gasque v. Inland Revenue Commissioners, (1940) 2 K.B. 88, Macnaghten. J. held that a limited company is capable of having a domicile and its domicile is the place of its registration and that domicile clings to it throughout its existence. He observed in this case: “It was suggested that a body corporate has no domicile. It is quite true that a body corporate cannot have a domicile in the same sense as an individual. But by analogy with a natural person the attributes of residence, domicile and nationality can be given to a body corporate.”
In Tulika v. Parry and Co., (1903) I.L.R. 27 Mad. 315, Kelly C.B. observed: “A joint stock company resides where its place of incorporation is, where the meetings of the whole company or those who represent it are held and where its governing body meets in bodily presence for the purposes of the company and exercises the powers conferred upon it by statute and by the Articles of Association.”
Company is Not a Citizen:
The company, though a legal person, is not a citizen under the Citizenship Act, 1955 or the Constitution of India. Section 2(f) of Citizenship Act, 1955 expressly excludes a company or association or body of individuals from citizenship.
The Constitution guarantees fundamental articles under Article 14 to all and under Article 19 to the citizens of India. A company has a nationality, domicile, and residence but cannot ask for the enforcement of those fundamental rights which are exclusively available to national citizens. The nationality of the company, however, does not depend upon the nationality of its shareholders. The nationality of the company, however, does not depend upon the nationality of its shareholders.
In the State Trading Corporation of India v. Commercial Tax Officer, 1963 SCJ 705 case, the company argued that as all the shareholders of the company are citizens of India, the company should be treated as a citizen of India and it should get all the benefits conferred upon the citizens of India. The Court rejected the argument and it was held that neither the provisions of the Constitution nor the Citizenship Act applies to the company. It should be noted that though a company does not possess fundamental rights, yet it is a person in the eyes of law. It can enter into contracts with its directors, its members, and outsiders.
In Rustom Cavasjee Cooper v. Union of India, 1970 AIR SC 564 popularly known as the Bank Nationalization case, the Court observed that in all cases where the company alleges that its fundamental rights have been violated, it is a fact that the fundamental rights of its shareholders are violated. So, if a shareholder files a writ petition, either by himself or even jointly with the company, his petition cannot be dismissed if he is a citizen of India. In such a case, he does not lose his fundamental right only because he is also a shareholder in a company.
In Bennet Coleman Co. v. Union of India, AIR 1973 SC 106 case, the Supreme Court stated that: “It is now clear that the Fundamental Rights of shareholders as citizens are not lost when they associate to form a company. When their Fundamental Rights as shareholders are impaired by State action, their rights as shareholders are protected. The reason is that the shareholders’ rights are equally and necessarily affected if the rights of the company are affected.”
But it is to be noted that certain fundamental rights enshrined in the Constitution for protection of “person”, e.g., right to equality (Article 14) etc. are also available to company.
Conclusion:
Company is artificial person and has corporate personality different from its members. Due to a corporate personality a company bears its own name, acts under the name, has a seal of its own and its assets which are separate and distinct from those of its members. Company is governed by the laws of the land, in which it is incorporated. Since a corporate body (i.e., a company) is the creation of law, it is not a human being, it is an artificial juridical person (i.e., created by law) and it is clothed with many rights, obligations, powers and duties prescribed by law. The company, though a legal person, is not a citizen under the Citizenship Act, 1955 or the Constitution of India.