Law and You > Corporate Laws > Companies Act, 2013 > Separate Property of a Company
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. Separate property of a Company is one of the distinctive feature 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.” 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. 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.
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.
A company being a legal person and entirely distinct from its members, is capable of owning, enjoying and disposing of property in its own name. It is to be noted that the company is the real person in which the property is vested, and by which it is controlled, managed and disposed of. If a majority shareholder of the company uses the company’s resources for personal reasons, he is liable to be held for criminal misappropriation of company funds under the Act.
In R. F. Perumal v. H. John Deavin, AIR 1960 Mad. 43 case, the Court held that “no member can claim himself to be the owner of the company’s property during its existence or in its winding-up”. A member does not even have an insurable interest in the property of the company.
In partnership, the partnership property belongs to all the partners and the distinction between the property belonging to the firm and the private property of the partners is quite hazy.
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 Macaura v. Northern Assurance Co. Ltd., (1925) AC 619 case, a shareholder of a timber company, held all shares of the company but one. He also insured the timber (asset of the company) on his own name, which was destroyed in a fire. When he sought compensation, it was held that they were not liable to pay any money to the shareholder, in lieu of the timber since he did not own the timber and that timber, which the company owned was not insured. In this case, Lord Buckmaster said: “No shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein”.
In Gramophone &Typewriter Co. Ltd. v. Stanley (1908) 2 KB 856 case the Court held that the property of the company is not the property of shareholders, it is the property of the company.
In Subhra Mukherjee v. Bharat Cooking Coal Ltd., (2000) 3 SCC 312 case, On the nationalization of the coal mines of a company, it was found that it has sold an item of its immovable property to the wife of one of the directors. The Court ripped open the veil to probe into the genuineness of the transaction and discovered it to be sham. The property continued to be that of a company and became vested in Government.
In H. C. Shastri v. Dolphin Canpak (P) Ltd. (2000) 3 SCC 312 case, the Court held that the assets of the company were not allowed to be used for payment of a shareholder’s debt.
In State of Rajasthan v. Goton Lime Stone Khanij Udyog (P) Ltd., 2015 SCC online Raj 780 case, the Court held that properties of a company including licenses, permits, concessions, and leases are not the property of shareholders, only of company. Transfer of shares, change of management, the company becoming a subsidiary of another company, rights belonging to the company remains as they were before.
Conclusion:
A company being a legal person and entirely distinct from its members, is capable of owning, enjoying and disposing of property in its own name. It is to be noted that the company is the real person in which the property is vested, and by which it is controlled, managed and disposed off. If a majority shareholder of the company uses the company’s resources for personal reasons, he is liable to be held for criminal misappropriation of company funds under the Act. In partnership, the partnership property belongs to all the partners and the distinction between the property belonging to the firm and the private property of the partners is quite hazy.