Incorporation for Doing Busines in India

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Apoorva Kulkarni Sharma

Roll No 21/LL.M/2010

Assignment- Third Semester

Corporate Laws Paper –I

INCORPORATION FOR

DOING BUSINESS AND

ITS CONSEQUENCES



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INTRODUCTION

The word ‘Incorporation’ in simple words means to bring into existence. And

associated with an entity under the Companies Act 1956 (the “Act”), it would mean

bringing into legal existence an entity, called a Company. There are various types of

companies that can be incorporated under the Act. Incorporation bestows upon a

company both advantages and disadvantages.

A ‘Company’ under the Act, would mean a company formed and registered under the

Companies Act

1

. To put it simply a company means a company of certain personsregistered under the Act. Two or more persons interested in carrying on business have

the choice of either forming a company or a partnership. A company needs

incorporation under the Act, while a Partnership is formed under the Partnership Act,

1932. A company is treated as a better form of transacting business, as it helps

limiting the personal liability for business debts; also where greater mobilisation of

capital is required, this form of business organisation is on a better footing as

compared to a partnership.

My submissions in the following paper are limited to the Companies Act, as typically

the process of “Incorporation” or incorporating a legal entity falls under the purview

of this Act.

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A BRIEF HISTORY OF COMPANY LAW

The history of the Indian Company Law began with the Joint Stock Companies Act of

1850. The Companies Act developed through the advent of British and thus there are

reflections of the English law in the Act. The reasons for such reflections are very

clear- the British occupation of India AND the British introduction of the British

Company and the Partnership modes of doing business in India. Since then it

underwent multiple rounds of amendment and consolidation and resulted in the

Companies Act 1956. The Companies Act has been subjected to many amendments.

1 Section 3(i) of the Act

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The First Amendment of 2002 of the Act provided for producer companies. The

Second Amendment replaced the Company Law Board with the National Company

Law Tribunal.

LEGAL PERSONALITY

Before we discuss the consequences of incorporation, it is of utmost importance to

understand the concept of legal personality in law; because it is on this very concept

that the entire law of corporations is based.

The term personality entails the possession of those characteristics belonging

particularly to mankind i.e. the power of thought, speech and choice. So far as legal

theory is concerned, a person is any being capable of rights or duties. Persons as so

defined are of two kinds- natural and legal. A natural person is a human being and

legal persons are beings, real or imaginary, who for the purpose of legal reasoning are

treated in greater or less degree in the same way as human beings. Thus they are

created by law only. Since it was felt that the natural persons by themselves cannot

take the responsibility of all their activities, therefore, it was thought necessary to

confer legal personality to not only living entities but non living ones also. Legal

persons are also termed as fictitious, juristic, and artificial. Legal personality thus is

solely a creation of law.

Legal Personality is attained when law recognises a single entity over and above the

group of individuals or the thing which though represents the groups of individuals or

the thing is distinct from them.

Corporation Sole and Corporation Aggregate

Corporations are persons incorporate or politique created by the policy of man.

Corporations are of two types – Sole or Aggregate. A Corporation Aggregate is an

incorporated group of co-existing persons example – a registered company; and a

Corporation Sole is an incorporated series of successive persons example Secretary of

the State, Auditor General etc.

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In both Corporation Sole and Aggregate, the legal person is not identical with any

human being. A company, for instance, in law is different from its shareholders ( a

concept that will be taken up subsequently)2 and can enter into contracts

independently. While a corporation sole is a corporation because of the perpetuity of

the office, the individual here has double capacity.

Theories of Legal Corporate Personality

The question that comes to the mind is that, when law grants personality to a group,

what is the nature of the entity which is thus recognised. It is very difficult to discover

a common essence which unifies all the entities on which legal personality is

conferred.

a) Fiction Theory3-This theory presupposes that only human beings are

‘properly’ called ‘persons’. The corporation not being a ‘real’ person,cannot

have any ‘personality’ of its own. It can have only as much as the law imputes

to it by fiction.

b) Concession Theory-This is allied to Fiction Theory. Its main feature is that it

regards the dignity of being a ‘juristic person’ as having to be conceded by the

State i.e. the law.

c) Bracket/Symbolist Theory-This theory propounded by R Ihering, rests on the

proposition that only human beings have interests and rights and that a

corporation is only a legal device or formula which will enable very complex

jural relations to be understood more easily.

d) Hohfeld’s Theory-He draws a distinction between human beings and ‘juristic

persons’. The latter he says are a creation of arbitrary rules of procedure. Only

human beings have claims, rights, duties, powers and liabilities. The corporate

person is merely a procedural form.

e) Purpose Theory- It says only human beings have personality. Juristic persons

are no persons at all. They are simply ‘subject less properties’ meant for

certain purposes.

f) Realist Theory-According to this theory a corporation is like a living

organism, like a natural human being, which also possesses natural rights. A

corporation is not the creation of a State or fiction. This theory builds on an

2 Under Advantages of Incorporation3 Supported by Savigny , Salmond ,Kelsen and Holland

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analysis of human personality and regards group personality as in essence

possessing the same characteristics. A corporation is a real but mysterious

entity with a special type of existence.

These theories are philosophical, political or analytical, but are not so much

concerned with finding solutions to practical problems and with trying to explain the

meaning of the word ‘person’. Thus courts have not adopted any particular theory of

corporate personality and have proceeded according to policy not logic.

TYPES OF COMPANIES

Broadly there are five kinds of companies that can be incorporated under the

Companies Act.

a) Private limited company:4 The minimum number of members is two, and the

maximum is limited to 50, excluding employees and former employees who

continue to be members after their employment ceases.

b) Public limited company:5 A public limited company has wider membership

and the number of shareholders is unlimited. It must have a minimum of

seven members.

c) Company limited by guarantee: Such companies may or may not have a share

capital and are generally non-profit-making bodies. Only associations which

4Section 3 (iii) "private company" [means a company which has a minimum paid-up capital of one lakh

rupees or such higher paid-up capital as may be prescribed, and by its articles,-]

(a) restricts the right to transfer its shares, if any;

(b) limits the number of its members to fifty not including-(i) persons who are in the employment of the company, and

(ii) persons who, having been formerly in the employment of the company, were members of the

company while in that employment and have continued to be members after the employment ceased;

and

(c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company;

[(d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or

their relatives:]

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for

the purposes of this definition, be treated as a single member;5 Section 3(iv) "public company" means a company which-

(a) is not a private company;

(b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be

prescribed;(c) is a private company which is a subsidiary of a company which is not a private company.]

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are about to be formed as a limited company for the promotion of commerce,

science, religion, charity or any other similar objects and which intend to

apply their profits or any other income to the promotion of their purpose and

to prohibit the payment of any dividend to their members eligible to be placed

in this special class. In the case of such associations, the central government

may be registered as a company with limited liability without the additional to

the name of word or words ‘limited’ or ‘private’.

d) Government company:6 A company in which not less than 51 per cent of the

paid-up capital is held by the central government or by a state government is

called a ‘government company’ and the provisions of the companies Act,

subject to such exemptions as may be notified by the central government,

apply to such companies.

e) Foreign company:7 It means a body corporate incorporated outside India, and

includes a firm or other association of individuals as defined under section

2(b) of the Foreign Exchange Management (Establishment in India of Branch

or Office or other Place of Business) Regulations, 2000. Such Foreign

companies are required to obtain permission of Reserve Bank of India to carry

on in India, any activity of trading, commercial or industrial nature or to

establish in India, a branch, a liaison office or a project office or any other

place of business by whatever name

6 617. Definition of "Government Company".

For the purposes of [this Act] Government company, means any company in which not less than fifty

one per cent of the [paid-up share capital] is held by the Central Government, or by any State

Government or Governments, or partly by the Central Government and partly by one or more State

Governments, [and includes a company which is a subsidiary of a Government company as thus

defined].7

591. Application of sections 592 to 602 to foreign companies.[(1)] Sections 592 to 602, both inclusive, shall apply to all foreign companies, that is to say, companies

falling under the following two classes, namely:-

(a) Companies incorporated outside India which, after the commencement of this Act, establish a place

of business within India; and

(b) Companies incorporated outside India which have, before the commencement of this Act,

established a place of business within India and continue to have an established place of business

within India at the commencement of this Act.

[(2) Notwithstanding anything contained in sub-section (1), where not less than fifty per cent of the

paid up share capital (whether equity or preference or partly equity and partly preference) of a

company incorporated outside India and having an established place of business in India, is held by one

or more citizens of India or by one or more bodies corporate incorporated in India, or by one or more

citizens of India and one or more bodies corporate incorporated in India, whether singly or in the

aggregate, such company shall comply with such of the provisions of this Act as may be prescribedwith regard to the business carried on by it in India, as if it were a company incorporated in India.]

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_____________________________________________________________________

Procedure for Registration & Incorporation

1. Registration8

To obtain registration of a company an application has to be filed with the Registrar

of Companies and must be accompanied with the following documents

1. Memorandum of Association

2. Articles of Association, if necessary

3. The Agreement, if any the company wishes to enter into with any individual

for his appointment as its managing or whole time director or manager.

These documents are to be supported by a declaration that all the requirements of the

Act are satisfied. After making a thorough check the Registrar registers the company

in the Register of Companies. A Certificate of Incorporation is then issued by the

Registrar which certifies “under his hand that the company is incorporated and in the

case of a limited company, that the company is limited”.

2. Certificate of Incorporation9

8 Section 33. Registration of memorandum and articles- 1) There shall be presented for registration, to

the Registrar of the State in which the registered office of the company is stated by the memorandum to

be situate— (a) the memorandum of the company;

(b) its articles, if any; and

[(c) the agreement, if any, which the company proposes to enter into with any individual for

appointment as its managing or whole-time director or manager.]

(2) A declaration by an advocate of the Supreme Court or of a High Court, an attorney or a pleader

entitled to appear before a High Court, or [a Secretary or a chartered accountant in whole-time practice

in India] who is engaged in the formation of a company, or by a person named in the articles as a

director [***] manager or secretary of the company, that all the requirements of this Act and the rules

thereunder have been complied with in respect of registration and matters precedent and incidental

thereto, shall be filed with the Registrar; and the Registrar may accept such a declaration as sufficient

evidence of such compliance.

[Explanation.—For the purposes of this sub-section, “chartered accountant in whole-time practice in

India” means a chartered accountant within the meaning of clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949) who is practising in India and who is not in full-time

employment.]

(3) If the Registrar is satisfied that all the requirements aforesaid have been complied with by the

company and that it is authorised to be registered under this Act, he shall retain and register the

memorandum, the articles, if any, and the agreement referred to in clause (c) of sub-section (1), if any.

9 Section 34. Effect of Registration- (1) On the registration of the memorandum of a company, the

Registrar shall certify under his hand that the company is incorporated and, in the case of a limited

company that the company is limited.

(2) 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 withsuch 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.

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The certificate of incorporation brings the company into existence as a legal person.

Upon its issue the company is born. The company’s life commences from the date

mentioned in the certificate of incorporation and the date appearing on it is

conclusive, even if it is wrong.

3. Commencement of Business

A private company can commence business right from its incorporation. But in the

case of public company, a further certificate for the commencement of business has to

be obtained. This becomes mandatory where a company has issued a prospectus

inviting the public to subscribe for its shares. The certificate is subject to certain

conditions stated in Section 149(1).

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CONSEQUENCES OF INCORPORATION

“Like any juristic person, a company is legally an entity apart from its members,

capable of rights and duties of its own, and endowed with the potential of perpetual

succession”10. In common law a company is a “legal person” or “legal entity” separate

from, and capable of surviving beyond the lives of its members. 11 Though a company

is not merely a legal institution, it is a combined political, social and economic and

legal institution. It is a means of co-operation in the conduct of an enterprise.12

Thus once a certificate of incorporation is given to a company, it can commence its

business. Incorporation brings upon certain advantages to a company, as compared to

other business forms. I shall now deal with these advantages one by one.

1. Independent Corporate Existence

Unlike partnership, which has no separate existence from its members; a company has

a separate legal existence. Section 3413 of the Act clearly provides that on registration

the Registrar shall certify under his hand that the company is incorporated. And from

such instance onwards the company shall be a body corporate 14 having perpetual

10 Hahlo’s CASEBOOK ON COMPANY LAW;42( 2nd Edition by Hahlo and Trebilock)11 Salomon v Salomon& Co [1895-99] All ER Rep 3312 Woodrow Wilson , The New Freedom, 26( 1968) Jaico

13 Supra note 914 "body corporate" or "corporation" includes a company incorporated outside India but [does not

include-

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succession and a common seal. An incorporated company has a separate existence

and the law recognizes it as a legal person separate and distinct from its members. A

new legal personality emerges from the moment of incorporation but the members

who form the incorporated company do not pool their status or their personality 15. The

business belongs to an institution. The entity of an enterprise becomes

institutionalised. “The Benefits following from incorporation can hardly be

exaggerated. It is because of this incorporation that the owner of the business ceases

to trade in his own person. The company carries on the business, the liabilities are the

company’s liabilities and the former owner is under no liability for anything that the

company does, although as principal shareholder, he is able to take full advantage of

profits which the company makes”.16

2. Limited Liability

The privilege of doing business with limited or restricted liability is the most

important advantage of doing business under such form of business organisational set

up. The Members of a company are neither the owners of the company nor liable for

its debts. Incase where the subscribers register the company with limited liability, the

members’ liability is still restricted to the nominal value of shares taken by them or

guaranteed by them. Whereas in a Partnership, the liability of a partner for the debts

of the business is unlimited. Speaking of the advantage of trading with limited

liability, BUCKLEY J observed:17

“The Statutes relating to limited liability have probably done more than any

legislation of the last fifty years to further the commercial prosperity of the country.

They have, to the advantage of the investor as well as of the public, allowed and

encouraged aggregation of small sums into large capitals which have been employed

in undertakings of great public utility largely increasing the wealth of the country.

(a) a corporation sole;

(b). a co-operative society registered under any law relating to co-operative societies; and

(c) any other body corporate (not being a company as defined in this Act) which the Central

Government may, by notification in the Official Gazette, specify in this behalf;]

15 State Trading Corporation of India v. The Commercial Tax Officer, (1963) 33 Comp. Cas. 1057: AIR

1963 SC 181116 Palmer’s Private Companies, 13 (42nd Edition, 1961)17 London Globe Finance Corpn, Re, [1903] 1 Ch 728, 731

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One of the primary and accepted motivations behind incorporating a company is to

limit personal risks by obtaining the benefit of limited liability.”

3. Perpetual Succession

An incorporated company can in a way said to be immortal. One of the benefits of

incorporation is Perpetual Succession. It is irrespective of the fact whether the entire

composition of a company changes; still the company remains the same entity as it

was at the time of its incorporation. Perpetual Succession would thus mean that,

membership of a company may keep changing from time to time, but that does not

affect the company’s continuity. The death or insolvency of a member does not affect,

in any way, the corporate existence of the company.

In Gopalpur Tea Co Ltd. V Penhok Tea Co Ltd 18 , where the whole undertaking of a

company was taken over under an Act which purported to extinguish all rights of

action against the company, the court held that neither the company was thereby

extinguished nor any body’s claim against it.

In Punjab National Bank v Lakshmi Indisutrial & Trading Co(P) Ltd 19 , it was held

that the guarantors of a company’s loan could not claim to be relieved of liability by

reason of the fact that the company’s management had totally changed including the

managing director. Such changes do not affect the continuity of the company or its

commercial and contractual relations.

4. Separate Property

A company, post its incorporation is capable of owning and disposing property in it

own name. Since it is a separate legal entity than its members, the members thus, are

not several or joint owners of the property that the company owns. In Bacha F

Guzdar v CIT, Bombay20 , 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 RT

Perumal v John Deavin,21 the court held no member can claim himself to be the

owner of the company’s property during its existence or winding up. Also in Regional

18 (1982) 52 Comp Cas 238 Cal

19 AIR 2001 All 2620 1955 1 SCR 87621 AIR 1960 Mad 43

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Provident Fund Commr v Narayani Udyog 22 it was very clearly held that property is

that of the company and not of its members, nor directors nor the company’s

employees.

Thus incorporation helps the property of the company to be clearly distinguished from

that of its members. On the other hand, in a Partnership, the distinction between the

joint property of the firm and the private property of the partners is often not clear.

5. Transferable Shares

Joint Stock Companies were formed with the intention that their shares could be

easily transferrable. The Act in Section 82 states “The shares or debentures or other

interest of any member in a company shall be movable property, transferable in the

manner provided by the articles of the company”. Thus incorporation enables a

member to sell his shares in a share market and get back his investment without

actually withdrawing money from the company. This provides liquidity to the

investor and stability to the company.

In a Partnership, a partner cannot transfer his share in the capital of the firm against

the will of the partners; the transferee does not become a partner, although he has

some rights in the dissolution of the firm.

6. Capacity to Sue and be Sued

A company being a body corporate can sue and be sued in its own name. A company

has a right to protect its name. It can sue for defamatory remarks against it as are

likely to damage its business. Similarly a company has a right to seek damages where

a defamatory material has been published about it affects its business.

7. Professional Management

A company is capable of attracting professional managers. It is due to the fact that

being attached to the management of the company gives them the status of business or

executive class.With the financial backing that companies are able to provide, they are

capable of developing the business to a considerable extent.

22 (1993) 1 Raj LR 224

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8. Finances

The company is the only medium of organizing business which is given the privilege

of raising capital by public subscriptions either by way of shares or debentures.

Further Public Financial Institutions lend their resources more willingly to companies

than to other forms of business organisation. The facility of borrowing and giving

security by way of a floating charge is also an exclusive privilege of companies.

There are always two sides to a coin. If there are advantages of incorporation, there

are disadvantages of incorporation as well. But the above advantages of incorporation

weigh heavier than the disadvantages. Nevertheless they need to be listed.

1. Lifting the corporate veil

The chief advantage of incorporation is a separate legal existence that is bestowed

upon a company. The chief disadvantage of incorporation also flows from this very

existence of separate legal existence. Ultimately a company is run by human beings

and the real beneficiaries are humans. The fact of a separate legal existence is just a

fiction of law, as in reality it is the association of persons who actually run the affairs

of the company.

It is this theory of corporate entity on which the entire law of corporations is based.

There have been many instances where the courts have had to pierce through this

fictional personality which is called the corporate veil. The lifting of the corporate veil

has been best depicted in Salomon v Salomon & Co23 which shall be discussed at

length subsequently.

In Lee v Lee’s Air Farming Ltd 24, Lee incorporated a company of which he was the

managing director. In that capacity he appointed himself as a pilot of the company.

While on business of the company he was lost in a flying accident. His widow

recovered compensation under the Workmen’s Compensation Act. In effect the magic

of corporate personality made him the master and servant at the same time.

23 Supra note 1124 1961 AC 12

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But this theory cannot be pushed to unnatural limits. Circumstances must occur where

the courts are compelled to identify the company with its members. There are

situations where the courts will have to lift the veil of incorporations to examine the

“realities” which lay behind this fiction of separate corporate existence. Sometimes

this is expressly authorised by the statute and sometimes the court will lift this veil on

its own. The matter when in the hands of the court will largely depend on the

underlying social, economic and moral factors. Adherence to the Salomon principle

would not be followed if it is leading to unjust results.

Certain grounds have been established over the years where the act of lifting the

corporate veil becomes necessary.

a) Determination of Character - It might become necessary under certain

circumstances to ascertain the character of a company, to see whether it is

“enemy”. In such a case, the courts may in their discretion examine the

character of persons in real control of the corporate affairs. Though a company

can neither be a friend or an enemy, neither can be loyal or disloyal; but it may

assume an 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. But if there is no danger to the public interest, the courts

may refuse to pierce the veil.

b) For Benefit of Revenue- the court has the power to disregard the corporate

entity if it is used for tax evasion or to circumvent tax obligation. In a leading

case this has been demonstrated well. In Dinshaw Maneckjee Petit Re25, the

assessee was a wealthy man enjoying huge dividend 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 a pretended

loan. This way his income was divided into four parts to reduce the tax

liability. It was 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. It did no business, but was created simple as legal

entity to ostensibly receive the dividends and interests and to hand them over

to the assessee as pretended loans”

25 AIR 1927 Bom 371

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c) Fraud or improper conduct -The corporate entity is wholly incapable of being

strained to an illegal or fraudulent purpose. The courts will refuse to uphold

the separate existence of the company where it is formed to defeat or

circumvent the law, to defraud creditors or to avoid legal obligations. The

following statement of CHINNAPPA REDDY J shows how the court guessed

that evasion was the only purpose:26

“ A new company is created, wholly owned by the principal company, with no

assets of its own except those transferred to it by the principal company and

serving no purpose whatsoever except to reduce gross profits of the principal

company. These facts speak for themselves. There cannot be direct evidence

that the second company was formed as a device to reduce the gross profits of

the principal company for whatever purpose. An obvious purpose that it

served and which stares one in the face is to reduce the amount to be paid by

way of bonus to workmen”

Government Companies- The separate existence of a company may be ignored

when it is being used as an agent or trustee. In State of UP v. Renusagar

Power Co27 , it was held that a power generating unit created by a company for

its exclusive supply was not regarded as a separate entity for the purpose of

excise.

2. Formality and expense

Incorporation is a very expensive affair and requires a number of formalities to be

completed. On the other hand, a Partnership is very easy to form and no formalities as

tedious as incorporation are required to be undergone. Then again the administration

of the company has to be strictly carried on with the mandates of the Act. The General

meetings to be conducted, accounts to be audited, resolutions to be registered, returns

to be filed with the registrar. In short there are lot of rules and regulations which are to

be followed closely for a proper and lawful functioning of a company.

3. Company is not a citizen

26 Workmen v Associated Rubber Industry Ltd ,1985 4 SCC 11427 AIR 1973 All 33

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Company though a legal person is not a citizen either under the Constitution of India

or the Citizenship Act. This has been very clearly held by a special bench of Supreme

Court in State Trading Corpn of India Ltd v CTO28-

“…if all of them (the members) are citizens of India the company does not become a

citizen of India any more than, if all are married the company would be a married

person”29

A company is however a person in he eyes of the law and can claim fundamental

rights as are available to all persons whether citizens or not.

LIFTING THE CORPORATE VEIL & THE CONFLICT

Lifting the Corporate Veil and the Status of an Independent Legal Personality of an

incorporated company cannot be discussed without discussing the landmark

judgement of Salomon v Salomon & Co30.

Brief facts of the case are- that a certain Mr Salomon was a shoe manufacturer and

formed a company for the purpose of taking over and transferring the business. The

subscribers were his family and his sons with him formed the board of directors.

Salomon had the maximum number of shares and debentures. The Company then

went into liquidation and the unsecured creditors contended that though incorporated

under the Act, the company never had an independent existence. It was also argued

that Salomon’s vast preponderance of shares made him the absolute master. The

business was his, solely conducted for and by him and the company was a mere sham

and fraud, in effect entirely contrary to the meaning of the Companies Act. Their

Lordships of the House of Lords observed:

“When the memorandum is duly signed and registered, though there be only sevenshares taken, the subscribers are a body corporate capable forthwith of exercising all

the functions of an incorporated company. It is difficult to understand how a body

corporate thus created by statute can lose its individuality by issuing bulk of its capital

to one person. The company is at law a different person altogether from 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

28 Supra note 1529 HIDAYATULLA J in State Trading Corp case30 Supra note 11

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receive 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 undertaking, 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 the company”.

In reference to one man company of Salomon type, the Bombay High Court

observed:31

“Under the law, an incorporated company is a distinct entity, and although all the

shares may be practically controlled by one person, in law company is a distinct entity

and it is not permissible or relevant to enquire whether the directors belonged to the

same family or whether it is, as compendiously described a ‘one-man company’

There is another case in the context , that of Daimler Co Ltd v Continental Tyre and

Rubber co.32This is again an English Case in which all except one of Continental Tyre

and Rubber Co Ltd’s shares were held by German residents and all directors were

German residents.Continental Tyre and Rubber Co Ltd supplied tyres to Daimler, but

Daimler was concerned that making payment might contravene a common law

offence of trading with the enemy under a statute. Daimler brought the action to

determine if payment could be made, given that it was the First World War.

Lord Reading CJ, Cozens-Hardy LJ, Phillimore LJ, Pickford LJ and Kennedy LJ, held

the company did not change its character because of the outbreak of war. “It remains

an English company regardless of the residence of its shareholders or directors either

before or after the declaration of war……..The company,is a living thing with a

separate existence which cannot be swept aside as a technicality. It is not a mere name

or mask or cloak or device to conceal the identity of persons and it is not suggested

that the company was formed for any dishonest or fraudulent purpose. It is a legal

body clothed with the form prescribed by the legislature…”

Lord Parker of the House of Lords said-

“I do not think, however, that it is a necessary corollary of this reasoning [Salomon]

to say that the character of its corporators must be irrelevant to the character of the

31 TR Pratt (Bombay) Ltd. V E.D.Sasoon & Co. Ltd, AIR 1936 Bom 6232 [1916] 2 AC 307

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company; and this is crucial, for the rule against trading with the enemy depends upon

enemy character.Just like a natural person can have enemy character though born in

the UK, so can a legal person. I think that the analogy is to be found in control, an

idea which, if not very familiar in law, is of capital importance and is very well

understood in commerce and finance. The acts of a company’s organs, its directors,

managers, secretary, and so forth, functioning within the scope of their authority, are

the company’s acts and may invest it definitely with enemy character… it must at

least be prima facie relevant… Certainly I have found no authority to the contrary.”

Thus this concept of Separate Legal Personality created by these judgements is often

described as a fundamental principle of company law. This principle serves as a

powerful metaphor and a judicial reality.33 The concept of company as a separate legal

person is a metaphor used to justify law’s social and economic aims; it helps in

facilitating a company’s modern and traditional attributes. But the metaphor cannot be

so rigidly applied that it starts overpowering the reality of an incorporated company.

The metaphor so wonderfully used by the court in the Salomon case though clarifies

nothing as far as real issues are concerned. The analogy with, the metaphor of, a

person creates some problems which exhibit the typical dangers of metamorphical

thinking as Dan-Cohen writes:

“By inducing misplaced analogies between individuals and organisations, the

metaphor of person easily leads to anthropomorphism: the attribution to organisations

of traits and the adoption toward them of attitudes that properly pertain to

individuals.”34

The conception of company as a separate legal personality leads to two issues-

1. A tendency to treat the normative status of the corporations in a similar way as

we tend to treat human beings to determine their legal rights,

2. A tendency to divert the judicial attention from the distinctive features of

organisations, which usually do not confirm with the idea of a person and from

the normative implications of these features.

33 James Nicholas, Separate Legal Personality: Legal Reality and Metaphor, Article 6, Bond LawReview, Volume 5 – Issue 234 Ibid note 31

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The point that is being made is that, nothing is violated if the courts so called pierce

the veil, as the effects of piercing such veil would not lead to any different

consequences and make somebody else liable for the wrongs of the company, because

ultimately it is humans who run the company and it is only they who could be

penalised.

It is also believed that the doctrine of piercing of corporate veil is in a way a method

to fulfil the concept of separate legal personality created by law. It is not the part of

legal personality to dictate conclusions. To insist that because it has been decided that

a corporation is a legal person for some purposes, it must therefore be a legal person

for all purposes…is to make of..corporate personality…a master rather than a servant,

and to decide legal questions on irrelevant considerations without enquiring into their

merits.35

CONCLUSION

Of the list of consequences of incorporation, the most important and controversial one

is that of separate legal personality. This fiction created by law, has its advantages as

well as disadvantages. The entire doctrine of piercing of the corporate veil revolves

around the fact of balancing the fiction of a separate legal personality against the

policies that justify piercing such veil. Though this fiction of separate corporate

existence in a way helps in limiting the liability, giving a perpetual succession etc, but

stretching the concept beyond its specific advantages that it gives to a company, it

would be definitely a needless exercise. We cannot translate our metaphors because

the particular reality seen through the metaphor is a new reality. 36

We have seen cases in Indian context where the courts have pierced the veil of this

separate corporate personality to ascertain the real identity of the company. The only

submission that is being made here is, that let not the piercing of veil become such a

reality that it overpowers the fact that, in the end, a company is run by human beings,

and however much the fiction of separate corporate existence is advantageous to the

incorporation of a company, the fact of a separate legal existence shall only be an

aspect of a corporation and not the reality of it.

35 Smith Bryant, Legal Personality, 37 Yale Law Journal 283-29836 Ross T, Metaphor and Paradox, 23 Georgia Law Review 1053

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It is true that whenever men act in concert for a common purpose, they tend to create

a body, from no fiction of law, but from the very nature of things, differs from the

individuals from whom it is created. The salient features of a corporate are its unity,

its distinctiveness and its identity in succession. And it is to justify and hold good

these very characteristics that are bestowed upon a company on incorporation that the

courts have to adhere to the doctrine of lifting of the corporate veil. When faced with

actual legal decisions, courts should look into practical consequences and not some

abstract legal theory. The doctrine thus, according to me acts as a check n balance for

the concept of Separate Corporate Existence or a Separate Legal Personality of a

Company. Though popularly Separate Legal Personality could be treated as an

advantage of incorporation and Lifting of the Veil as a disadvantage, but when we

look at the larger picture, both these need to co-exist to give meaning to the fiction of

separate legal personality created by law.

I would conclude by quoting Justice Cardozo –

“Metaphors in law are to be narrowly watched, for starting as devices to liberate

thought they end often by enslaving it”37

37 Supra Note 31

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