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.

2

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.

3

CHAPTER-1 HISTORY OF COMPANY LEGISLATION

1.1. History of Company Legislation in EnglandThe 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

4

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

5

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 IndiaAs 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

6

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 :-

7

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

8

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.

9

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 :-

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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. SummaryThe 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 basicsIncorporation 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 IndiaCorporate 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 Companies1 2

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

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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 UKOne 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

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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

a

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

9

[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 44310

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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 UKHistorically 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 USAIt 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 USAThe 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.

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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 intheology 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 IdentificationThe 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 guilty27 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 entire34 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. SummaryCorporate 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 Cal44

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 VeilThe 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 lost64 65

[1933] 1 Ex Ch 935 [1996] 4 SCALE 202. 66 (1991) 70 Comp Cas 127 SC67

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

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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.

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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.

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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.

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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

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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 accounts73

) 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.

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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

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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 Act77

(1989) 65 Comp Cas 196 (Del).

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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 respond