LEGAL STATUS OF A CORPORATION –

ANALYSIS
WHAT IS A CORPORATION?

A corporation is an organization—usually a group of people or a company—authorized by

the state to act as a single entity and recognized as such in law for certain purposes. This
authority of corporation is derived from companies act 2013 under which company is
registered to be called as corporation. Legal status of corporation is granted by companies act
2013 which describes its various features. Legal personality of corporation is identified by
both Indian and English law. Law sees a corporation as an artificial person and grants it
certain rights and duties as of a legal person. Corporation is constituted by its members, and
are responsible for its functioning. Besides, corporations the banks, railways, universities,
colleges, church, temple, hospitals etc. are also conferred legal personality. Union of India
and States are also recognized as legal or juristic persons.

Prerequisites of a corporation-

 Certain group of human beings should act as members of corporation

 There should be some kind or organ to run corporation
 Corporation is a legal person and is different from actual person controlling it.

As a legal fiction a corporation can sue and can be sued. It has a perpetual existence which
means corporation will continue to exist in case of death of its members. Since corporation is
an artificial person it works through its agent, who are human beings .

Kinds of corporation

1. Corporation aggregate
2. Corporation sole

CORPORATION AGGREGATE

Corporation aggregate is group of people associated to attain a common purpose, mainly for
earning profit. A limited company is the best example of corporation for example ITC ltd. In
aggregate company shareholders contribute in capital of company or promise to contribute in
capital of company. Liability of company is limited to the percentage of share contributed by
shareholder in company. Personification of shareholders leads to formation of company.
Shareholders are provided with dividends but does not hold any right on property. Since
corporation and members running it are different assets and liability of corporation are
different from that of its members. Salomon v. salomon established the legal personality of
corporation.

Salomon v. salomon
FACTS – Salomon owned a company of boot making. Salomon run his business as a sole
proprietorship. sole proprietorship is simplest type of business and is not considered as legal
entity. After sometime Salomon sold his company to a company called Salomon ltd.,
Constituted by his own family members The price for such transfer was paid to Salomon by
way of shares, and debentures having a floating charge (security against debt) on the assets of
the company. Later, when the company’s business failed and it went into liquidation,
Salomon’s right of recovery (secured through floating charge) against the debentures stood
aprior to the claims of unsecured creditors, who would, thus, have recovered nothing from the
liquidation proceeds. Now the litigators filed a case on behalf of unsecured creditors and
alleged that company acted as agent and salomon being principal would be liable to pay all
debts. That means salomon ltd though a company but majority of shares are held by salomon
family hence there is no spirit of separate legal identity that company upholds.

ISSUES- Salomon ltd. Is a company wherein majority of the shares were owned by
salomon`s family members, so will Salomon be liable for paying debts as if company and
salomon are not two different entities but one or not.

JUDGMENT- The court of appeal ruled in favour of litigants and upheld that company is a
myth and intension behind building this company is not the same as of given in companies
act hence salomon will be liable for paying all the debts.

The court of lords differed and gave ruling in favour of salomon. It upheld that company was
duly incorporated and hence it is a legal person responsible for paying its own debts. Also
motives of person behind the company is totally irrelevant in deciding rights and liablities of
the company

After the Salomon case SLP that is separate legal personality of a company was given
priority as main feature of a company incorporated under proper act.

CORPORATION SOLE

Corporation sole consist of a single person who is considered as legal person by law and
holds office in succession. Main feature of corporation sole is -“continuous entity endowed
with a capacity for endless duration” that is its existence is perpetual.

ADVANTAGES OF CORPORATION

Basic feature of a corporation came out to be very advantageous for a businessman.

Corporation is highly systematic mechanism to attribute liabilities and assets proportionately.
Hence most companies stand as corporation aggregate which provides much security at time
of crisis and justified distribution of profit. Legal status provided to corporation gives one
lots of rights and power for easy business.

Independent corporate existence- As the tittle suggest corporation is independent

personality it acts as artificial person and is able to perform various tasks in it`s name for
example
  Corporation can own property that means property belongs to company and not its
member who compose it.
 Corporation can be sued and can sue even for criminal cases
 It can enter into contract with third party or for that matter with its own members
under section 34(2) of companies act.
 Members of company may be exempted from liabilities in various circumstances as
seen in Salomon case

Even Before salomon case, The Kondoli Tea Co. Ld. vs Unknown case, Calcutta high court
very well established SLP of a company wherein shareholders were transferring property (tea
estate) in name of company which belong to them. In the process shareholders were trying to
evade ad valorem tax (it is a tax whose amount is based on the value of a transaction or of
property) by arguing that they are transferring property to themselves and no other entity is
involved. But court established corporation as legal person and different from natural person
who run the company.

In M/s. Electronics Corporation of India Ltd. v. Secretary, Revenue Department supreme

court held that even for companies owned by government.

Limited liability – limited liability is the main feature of corporation which becomes the
major attraction for investors. The principle of limited liability implies that the liability of a
member in the event of the company's winding up, in respect of the shares held by him is
limited to the extent of the unpaid value on such shares. Here company being a legal person
holds unlimited liability to pay debts, till the assets are available. Priority of creditors is
clearly mentioned in companies act according to which debts have to be paid. Further no
member is bound to give more than nominal value of shares held by them. In India IBC that
is insolvency and bankruptcy act systematically lays down all rules and regulation for
winding up of company. Limited liability protects investors and hence compels investors to
adopt such a model of company.

Perpetual succession- “The show must go on” best explains this feature of perpetual
succession. Since company and its members are two different entities, any change in its
members does not hamper company in any manner. Say for example a member of company
becomes insolvent or dies still company will retain its privileges, possession, estate etc. it is
said that “members may come and members may go but company shall go on forever”.

DISADVANTAGES OF CORPORATION

Lifting or piercing the veil of incorporation – corporation is just a cloth behind which
whole body with managerial power works to execute certain purpose. Corporation being an
artificial body cannot work on its own but privilege and statutory authority should be used for
legitimate purpose and this veil of incorporation may sometime prevent this from happening.
Law does not allow any fraudulent and dishonest behaviour done by natural person under
shelter of corporation. whenever there is any kind of doubt about true character of company
law breaks through this shell to know the real attitude of company. Mainly this act is aimed at
knowing the economic realities of the company.