Concept of Corporate Personality

Corporate personality is the creation of law. And as per the law, a corporation is an artificial
person created by the personification of a group of individuals. The theory of corporate
personality mainly states that a company has a legal identity different from its member. Both
English and Indian laws follow the concept of corporate personality. The creditors of the
company can recover their money only from the company and they cannot sue individual
members. In the same way, the company is not in any way liable for the individual debts of
its shareholders/members and the property of the company is only used for the benefit of
the company. It enjoys certain rights and duties such as the right to hold property, right to
enter into contracts, to sue and be sued in the name of the company. The rights and
liabilities of the members are different from the company.
In short, corporate/legal personality, which the company acquires on incorporation, confers
legal personality and independent status to the company.
There are two types of corporations:
Corporation Aggregate
There are a number of individuals where we make a section outside individuals which means
making a group as a solitary unit. In basic words, company total is a gathering or relationship
of individuals joined for specific interests. It was at first made by the Royal Charter in
England later it was enrolled under the organizations’ act.
Corporate aggregate is a group of coexisting members who are united to promote their
common interest.
Their liability is different from that of the company i.e it has limited liability. It has
personality of its own, which is different from its members.
The organization is fundamentally made by advertisers. Production of the organization
incorporates different exercises like enrollment of organizations, arrangement of the
directorate, making an outline and so forth. At long last when the entire system of
enlistment is finished then the organization is treated as a legitimate character.
"E.g., All bodies/associations incorporated under Statute of Parliament/ State Legislature
Utility of Corporation Aggregate
The different purposes which counterfeit enterprise total might advance and protect may
momentarily be expressed as follows-
 Help and aid the administration of the country through Municipal partnerships, Local
Bodies, Panchayats, Welfare Organizations. and so forth
 Promote demonstrable skills through foundations, schools giving specialized, logical,
designing, clinical law, and other particular courses.
 Preserve and advance strict amicability by comprising strict trusts, sheets, learning
focuses, altruistic homes, etc.
  Advancement of logical and imaginative fever through suitable trusts, associations,
establishments, and so on
 General public help, through Medical clinics, Trusts, halfway houses, salvage homes,
etc.
 Promote exchange, trade, and enterprises through Corporate houses, Public area
utility foundations, Private business houses, etc.
CORPORATE SOLE
An organization sole is a legitimate substance consisting of a single sole in a corporate office,
involved by a single (sole) regular individual. The most remarkable illustration of partnership
sole is the crown (in England) It basically implies that there is a solitary individual who is
represented and viewed by law as a legitimate individual.
Single individual in his legitimate limit has a few rights and obligations while holding the
workplace or capacity. The fundamental point of organization sole is to guarantee the
coherence of an office so the inhabitant can gain property to serve his replacements or he
might agree to tie or help them and can sue for wounds to the property while it was in the
possession of his archetype.
Corporate sole is an incorporated series of successive persons. It has one member at a time,
who deals in a legal capacity and has rights and duties. This type of corporation has
perpetual succession. The corporation sole continues to exist though the human being
changes.
*E.g.: The President of India, Controller and Auditor General, Governor of RBI etc.
CASE STUDY: Salomon v A Salomon & Co Ltd [1897] AC 22
FACTS:
1. Mr. Aron Salomon was a businessman who specialized in manufacturing leather
boots. After a few years, he incorporated a limited company known as Salomon and
Co. Ltd.
2. In order to meet the requirement to incorporate a company, he needed at least
seven members/ shareholders so he decided to make his family members his
business partners by giving one share to each of them.
3. He sold his business to the limited company for $39000 out of which $10000 was a
debt to him. He was then the company’s principal shareholder and principal creditor.
4. After one year, the company went into liquidation. The assets realized were $6000
while the liability was debentures held by Salomon $10000 and unsecured creditor
$7000.
5. An unsecured creditor challenged the right of Salomon to have preference as
debenture holder over unsecured creditors.
ISSUE:
Was the formation of Salomon’s company a fraud intended to defraud the creditors?
HELD:
The court said that on incorporation, the company became an independent legal person and
not an agent of Salomon. Salomon, as a debenture holder of the company was ought to get
priority in payment over the unsecured creditor.
IMPORTANCE OF THIS JUDGEMENT:
The decision in this case established the concept of separate legal personality of a company
which allowed shareholders to carry on trading with minimal exposure to the risk of
personal insolvency in the event of a collapse. There are 2 principles laid down in the
Salomon’s case:
1. Artificial Person: Company is an artificial person created by law. Artificial in the
sense, it has no body/soul like a natural person. Created by law means formation of a
company requires fulfilment of so many legal formalities.
2. Limited Liability: The liability of the members is limited to the extent of the face
value of the shares, where the company is limited by shares. Then, the shareholder is
liable to the extent of the unpaid capital on his shares and his personal assets will not
be affected in the event of winding up of the company.
CASE STUDY: Lee v. Lee’s Air Farming Ltd. (1961) AC 12
FACTS:
This case is concerning about the veil of incorporation and separate legal personality. In this
case out of the 3000 shares in Lee’s Air Farming Ltd., L held 2999 shares. He made himself
the Managing Director and was also the chief pilot on a salary.
While working for the company he was killed in an air crash. Since his death was in the
course of employment, his widow claimed for compensation. She claimed £2,430
compensation for herself and her four infant children and she also claimed a sum for
funeral expenses.
The respondent company denied that deceased was a “worker” of the company and alleged
that at the time of the accident the deceased was the controlling shareholder and governing
director of the respondent company.
ISSUE:
Was there a separate legal entity? Whether Mrs. Lee can claim compensation?
HELD:
The Lee Air Farming case confirmed the Salomon principal. The Privy Council allowed Mrs
Lee’s claim and said that Lee might have been the controller of the company in fact but in
law, they were separate distinct persons and the concept of separate legal entity was
explained. Mr. Lee could therefore enter into a contract with the company, and could be
considered to be an employee. His wife was therefore entitled to an award in respect of
workmen’s compensation. Judicial Committee of the Privy Council also said that a company
is a separate legal entity, so that a director could still be under a contract of employment
with the company he solely owned.
Theories of Corporate Personality - Different Jurists gave various perspectives and
conclusions with respect to the idea of corporate character. Changes have happened in the
perspectives occasionally. However, there are various hypotheses to clarify the idea of a
corporate character yet none of them is supposed to be prevailing. Comprehensively we
have talked about five speculations of corporate character.
Fiction Theory
The law specialists who gave this hypothesis were Savigny, Salmond, Holland they expressed
a partnership with an imaginary characters. Company is treated as not quite the same as its
individuals The imaginary character is quality to the need for shaping an individual
association existing without anyone else and overseeing for its recipients ‘The persona ficta’-
Savigny gave the term juridical individual.
Partnership as an elite making of law having no presence separated from its individual
individuals who structure the corporate gathering and whose acts by fiction, are credited to
the corporate substance.
The Fiction hypothesis along these lines expresses that fuse is an invented expansion of
character depending on the motivation behind working with managing property claimed by
a huge assortment of individuals.( regular) this hypothesis neglects to answer the acceptably
the obligation of the corporation.
Realistic Theory
The hypothesis was given by Johannes Althusious, Gierke in German and Maitland in
England. As per this hypothesis, it declines the fiction hypothesis. The practical hypothesis
keeps up with that an organization has a genuine clairvoyant character perceived and not
made by the law. There is a genuine part in the partnership. The desire of many is not quite
the same as the desire of a person. A company subsequently has genuine presence,
regardless of the reality if it is perceived by the state.
The significant contrast between the fiction hypothesis and the pragmatist hypothesis lies in
the way that the previous rejects that the corporate character has any presence past what
the state decides to give it, the last hold that a company is a portrayal of actual real factors
which the law perceives. On account of dalme co. restricted v. mainland tire the choice was
made on the practical hypothesis where there was the upliftment of corporate cover.
Bracket Theory
The section hypothesis was given by Ihering. The section hypothesis of the character of the
enterprise keeps up with the individuals from the organization itself essentially according to
the perspective comfort. The genuine idea of enterprise and its individuals are kept in
section.
According to this hypothesis, juristic character is just an image to work with the working of
the corporate bodies. Just the individuals from the company are people in a genuine sense
and a section is put around them to show that they were treated as one single unit when
they structure themselves into a partnership.
Concession Theory
Given by Savigny, Salmond and sketchy the concession hypothesis of the character of the
partnership which is a family to fiction hypothesis not indistinguishable says that lawful
character can adhere to from law alone. It is by elegance or concession alone that the
legitimate character is in all actuality, made or perceived.
According to this hypothesis, the juristic character is a concession allowed to an organization
by the state. It is completely at the prudence of the state to perceive if it is a juristic
individual. This hypothesis is not quite the same as the fiction hypothesis in however much it
underlines the optional force of the state in the issue of perceiving the corporate character
of the partnership. A few pundits consider this hypothesis perilous in view of its over-
accentuation on State caution in the issue of perceiving organizations that are non-living
elements. This choice might prompt discretionary caution.
Purpose Theory
The principle ramifications of this hypothesis are that law ensures certain reasons and
expected to be possessed by juristic people doesn’t have a place with everything except it
has a place for a reason and that is the fundamental reality about it. All juristic or fake
individuals are only legitimate gadgets for securing or offering impact to some genuine
reason.
The beginning of this hypothesis has been brought back from German law for example
‘establishments’ which were treated as juristic people. An establishment is analogous to
trust for explicit beneficent reasons like engendering of schooling, grants and so forth In the
milestone instance of M.C Mehta v. Association of India set out the boundaries as to
corporate risk of perilous ventures and brought the private area inside the ambit of Article
12 of the Constitution, emphasizing the need to develop new procedure for corporate
responsibility of public and private endeavours for heart breaking gas spillages or ecological
corruption causing wellbeing dangers and immense harm to the property.
There was an earnest requirement for the foundation of Environmental Courts (for example
Green Tribunals) with proficient specialists from Lego-climate cum biology area and severe
activity was justified against the failing corporate bodies, what’s more, businesses for
abusing the natural laws.
Corporate Personality is the creation of law. Legal personality of corporation is recognized
both in English and Indian law. A corporation is an artificial person enjoying in law capacity
to have rights and duties and holding property.
A corporation is distinguished by reference to different kinds of things which the law selects
for personification. The individuals forming the corpus of corporation are called its
members. The juristic personality of corporations pre-supposes the existence of three
conditions:
(1) There must be a group or body of human beings associated for a certain purpose.
(2) There must be organs through which the corporation functions, and
(3) The corporation is attributed will by legal fiction. A corporation is distinct from its
individual members.
It has the legal personality of its own and it can sue and can be sued in its own name. It does
not come to end with the death of its individual members and therefore, has a perpetual
existence. However, unlike natural persons, a corporation can act only through its agents.
Law provides procedure for winding up of a corporate body. 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.

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 share-holding in the company. A limited
liability company is thus formed by the 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 company. The principle of corporate
personality of a company was recognized in the case of Saloman v. Saloman & Co.
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.
Advantages of Incorporation
1) Independent Corporate Existence: A corporate person shall have an independent
corporate existence. It is in law a person. It is s distinct legal persona existing independent of
its members. In case of a company, by incorporation it gains a corporate personality which is
separate or distinct from the members who compose it. The property of the company
belongs to it and not its members ; it may sue or be sued in its own name ; it may enter into
contracts with third parties independently and even the members themselves can enter into
contract with the company According to Section 34(2) of the Companies Act , upon issue of
the certificate of incorporation , the subscribers to the memorandum and other persons ,
who may from time , be the members of the company, shall be a body corporate, which is
capable of exercising all the functions of an incorporated company and having perpetual
succession and a common seal. Thus, the company becomes a body corporate which is
capable immediately of functioning as an incorporated individual. With the incorporation,
the entity of the company becomes institutionalized. This principle of the independent
corporate existence and the principle of corporate personality of a company was recognized
in the case of Saloman v. Saloman & Co. In this case Salomon was a boot and shoe
manufacturer. He incorporated a company named Salomon & Co Ltd, for the purpose of
taking over and carrying on his business. The seven subscribers to the memorandum were
Salomon, his wife, his daughter and four sons and they remained the only members of the
company. The company went into liquidation within a year. The unsecured creditors
contended that though incorporated under the Act, the company never had an independent
existence, it was in fact Salomon under another name; he was the managing director, the
other directors being his sons and under his control. It was held that Salomon & Co Ltd was a
real company fulfilling all the legal requirements. It must be treated as a company, as an
entity consisting of certain corporators, but a distinct and independent corporation. Thus, it
was decided in this case that a corporate body has its own existence or personality separate
and distinct from its members and therefore, a shareholder cannot be held liable for the acts
of the company even though he holds virtually the entire share capital. The case has also
recognized the principle of limited liability of a company.
The principle of distinct and independent existence of company consequent to its
incorporation was recognized in India even before the decision in Salomon case. The High
Court of Calcutta in a case observed that the company was altogether a separate person,
different from its shareholders and therefore the transfer was as much a conveyance, a
transfer of the property, as if the shareholders had been totally different persons. In this
case, the members transferred a Tea Estate to a company and claimed exemption from ad
valorem duty on the ground that they themselves being the shareholders in the company, it
was in fact a transfer to themselves in another name. The Court, however, rejected their
contention and ruled that in the eyes of law the company was a distinct independent
person, separate from its shareholders.
The Supreme Court in M/s. Electronics Corporation of India Ltd. v. Secretary, Revenue
Department. Government of Andhra Pradesh, inter-alia observed that a clear distinction
must be drawn between a company and its shareholders, even though that shareholder may
be only one i.e., the Central or a State Government. In the eyes of the law, a company
registered under the Companies Act is a distinct legal entity other than the legal entity or
entities that hold its shares.
2) Limited Liability: One of the principal advantages of an incorporated company is the
privilege of limited liability. It is the main feature of registered companies which provides a
special attraction to 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. Thus, the liability does not
fluctuate but remains limited to the amount which, for the time being remains unpaid,
whether from the original shareholder or the transferee of such shares as the case may be.
limited liability of members extends only for company's debt in the event of its winding up.
The company itself, being a legal persona, is always fully liable and therefore its liability is
unlimited. In other words, it is liable to pay the debts so long as assets are available. The
order of priority for payment of debt shall, however, depend on the class of creditors as laid
down in the Companies Act. No member is bound to contribute anything more than the
nominal value of the shares held by them [9]. Section 34(2) of the Companies Act, 1956
provides that in the event of the company being wound up, the members shall have liability
to contribute to the assets of the company in accordance with the Act, In the case of limited
companies, no member is bound to contribute anything more than the nominal value of
shares held by him. The privilege of limiting the liability is one of the main advantages of
carrying on business under a corporate organization.
3) Perpetual Succession: An incorporated company has perpetual succession, that is
notwithstanding any change in its members, the company shall retain as the same entity
with the same privileges and immunities, estate and possessions. the death or insolvency of
individual member does not in any way, affect its corporate existence and the company shall
continue its existence as usual until it is wound up in accordance with the provisions of the
Companies Act, The perpetual existence of an incorporated company is well illustrated by
proverbial saying, "members may come and members may go, but the company can go on
for ever."

In Gopalpur Tea Co. Ltd. v. Penhok Tea Co, Ltd., the court while applying the doctrine of
company's perpetual succession observed that though the whole undertaking of a company
was taken over under an Act which purported to extinguish all rights of action against the
company, neither the company was thereby extinguished nor any body's claim against it.

4) Transferability of shares: Section 82 of the Companies Act, 1956, specifically provides that
the shares or other interest of any member in a company shall be movable property,
transferable in the manner provided by the articles of association of the company. Thus the
member of an incorporated company can dispose of his share by selling them in the open
market and get back the amount so invested. The transferability of shares has two main
advantages, namely it provides liquidity to investors and at the same time ensures stability
of the company. The transfer of shares of a company does not in any way affect its existence
or management and the shareholder can conveniently get relieved of his liability by
transferring his shares to some other person.
5) Separate Property: Incorporation helps the property of the company to be clearly
distinguished from that of its members. The property is vested in the company as a body
corporate, and no changes of individual membership affect the title. In case of a company, it
being a legal person is capable of owning, enjoying and disposing of property in its own
name. The company becomes the owner of its capital and assets. The shareholders are not
the several or joint owners of company’s property. In Bacha F Guzdar v. CIT Bombay it was
held that the company is a real person in which all its property is vested, and by which it is
controlled, managed and disposed of”. In Macaura v. Northern Assurance Co Ltd it was held
that “the property of a company is not the property of the shareholders; it is the property of
the company”.
6) Corporate Finances: The shares of an incorporated company being transferable, it can
raise maximum capital in minimum possible time. That apart, an incorporated company has
the privilege of raising its capital by public subscriptions either by way of shares or
debentures. The public financial institutions willingly lend loan to companies as it is
generally secured by floating charge which is an exclusive privilege of a registered company.
In R.T. Perumal v. John Deavin, it has been observed that a company is a real person in which
all its property is vested, and by which it is controlled, managed and disposed of. Their
Lordships further observed that "no member can claim himself to be the owner of the
company's property during its existence or in its winding up."
7) Centralized Management: The shareholders have no direct concern with the
management of the company. They exercise, only a formative control. Thus, the
management of the company is altogether different from its ownership. Independent
functioning of managerial personnel attracts talented professional persons to work for the
company in an atmosphere of independence thus enabling them to achieve highest targets
of production and management leading to company's overall prosperity.
The management of the company generally vests in the directors who decide the policy
matters in the meetings of the Board of Directors. With skilled professional managers
supported by financial resources, companies are able to develop and carry on their business
efficiently. In short, professional form of management of business disassociates the
'ownership' from control of business and thus helps to promote efficiency. Besides, it
provides flexibility and autonomy to business undertakings within the framework of
company law.

8) Capacity to sue and to be sued: A company being a body corporate can sue and can be
sued in its own name. A criminal complaint can be filed by a company, but it should be
represented by a natural person. A company has the right to protect its fair name. It can sue
for such defamatory remarks against it as are likely to damage its business or property etc. A
company has the right to seek damage where a defamatory material published about it
affects its business. In TVS Employees Federation v. TVS & Sons Ltd it was held that the
preparation of a video cassette by the workmen of a company showing their struggle against
the company's management and exhibition could be restrained only on showing that the
matter would be defamatory. In R v. Broadcasting Standards Commission the court of appeal
held that a company can complain under the Broadcasting Act, 1996 about unwarranted
infringement of its privacy. In this case the complaint was about the secret filming of
transactions in shops by the BBC and the allegation was that this constituted an
infringement of the company’s privacy.
Disadvantages of Incorporation
1) Lifting or Piercing the Corporate Veil: A corporation is cloth with a distinct personality by
fiction of law, yet in reality it is an association of persons who are in fact, in a way, the
beneficial owners of the property of the body corporate. A company being an artificial
person, cannot act on its own, it can act only through natural persons. The whole theory of
incorporation is based on the theory of corporate entity but the separate personality of the
company and its statutory privileges should be used for legitimate purposes only. Where the
legal entity of the company is being used for fraudulent and dishonest purpose, the
individuals concerned will not be allowed to take the shelter behind the corporate
personality. The court in such cases shall break through the corporate shell and apply the
principle of what is known as “lifting or piercing the corporate veil”. The corporate veil of a
company may be lifted to ascertain the true character and economic realities behind the
legal personality of the company. Undoubtedly, the theory of corporate entity of a company
is still the basic principle on which the whole law of corporations is based. But the separate
personality of the company, being a statutory privilege, it must always be used for legitimate
business purposes only. Where the legal entity of a corporate body is misused for fraudulent
and. dishonest purposes, the individuals concerned will not be allowed to take shelter
behind the corporate personality. In such cases, the court will break through the corporate
shell and apply the principle of what is known as "lifting or piercing the corporate veil". That
is, the court will look behind the corporate entity.
In New Horizons Ltd. v. Union of India and others, the appellant company when seen
through the veil covering the face of New Horizons Ltd. was found to be a joint venture
created as a result of reorganization in 1992. Sixty per cent of its share capital was owned by
an Indian group of companies and forty per cent share capital was owned by a Singapore
based foreign company. The Government had invited tenders for distribution of State
largesse. The appellant's tender was not considered on the ground that the experience of its
constituents was not the same as that of the appellant and because of inadequate
experience, the respondent's tender was accepted as they had long experience and had also
offered a much lower amount of royalty. The appellants pleaded the experience of
constituents of the joint venture company should be treated as its own experience and
corporate veil should be seen through for this purpose. Allowing the appeal, the Supreme
Court ruled that the action of the State Government in determining the eligibility of tender’s
was not in consonance with the standards or norms and was arbitrary and irrational. The
Court further observed that in case of a joint venture corporation, the Court can see through
the corporate veil to ascertain the true nature of a company. The doctrine of lifting the
corporate veil is invoked when the corporate personality is found to be opposed to justice,
convenience or interest of revenue.

The principle of 'lifting the corporate veil' has found statutory recognition in certain
provisions like Sections 45, 147, 212, 247 and 542 of the Companies Act. Corporate veil is
said to be lifted when the court ignores the company and concerns itself directly with the
members or managers. The courts have found it necessary to disregard the separate
personality of a company,4 in the following situations: —
(a) Determination of Real character of a company
At the time of war, it may become necessary to lift the corporate veil of a company to
determine whether the company has an enemy character. In such a case the courts may in
their discretion examine the character of persons who are in real control of the corporate
affairs of the company.
In a case a company was incorporated in England for the purpose of selling tyres
manufactured in Germany by a German company, all the shares except one were held by the
German subjects residing in Germany. The remaining one share was held by a British subject
who was the Secretary of the company. Thus, the real control of the English company was in
German hands. During World War I, the company commenced an action to recover trade
debts. The question therefore was whether company had become an enemy company
consequent to World War I. The House of Lords, inter alia observed:
“But it can assume enemy character when persons in de facto control of its affairs are
residents in any enemy country or, wherever resident, are acting under the control of
enemies. therefore, held that the company was an enemy company for the purpose of
trading and therefore it was barred from maintaining the action.”
In an American case it was held that the Courts may refuse to pierce the corporate veil
where there is no danger to public interest. In this case certain lands were transferred by an
Englishman to another perpetually restraining the transferee from selling the said property
to coloured persons i.e., Negroes. The transferee, however, transferred the land to a
company which was exclusively composed of Negroes. Thereupon, the petitioners brought
an action against the company for annulment of the conveyance on the ground of breach of
condition. Rejecting the contention of the petitioners the court held that members
individually or employment was terminated under an agreement. Thereafter he started a
new company to carry on the business of solicitation and solicited plaintiff’s customers. The
court held that the defendant company was a mere cloak or sham and channel used by
defendant to obtain advantage of the customers of the plaintiff company for his own benefit
and therefore it ought to be restrained from carrying on the business.
The Supreme Court in Subhra Mukherjee & Another v. M/s. Bharat Coking Coal Ltd. (BCCL) &
others has observed that the Court will be justified in piercing the veil of incorporation in
order to ascertain the true nature of the transaction as to who were the real parties to the
sale and whether it was between husbands and wives behind the facade of separate entity
of the company.
(b) For the benefit of revenue: The court has the power to disregard corporate entity if it is
used for tax evasion or to circumvent the tax obligation. In this case the assessee was a
wealthy man, enjoying huge dividends and interest income. He formed four private
companies and agreed with each to hold a block of investment as an agent for it. Income
received was credited in the accounts of the company, but the company handed back the
amount to him as pretended loans. The court held that the company was formed by the
assessee purely and simply as a means of avoiding super – tax and the company was nothing
more than the assessee himself.
(c) Fraud or improper conduct: The courts will refuse to uphold the separate existence of the
company where it is formed to defeat or circumvent law, to defraud creditors or to avoid
legal obligations. In Gilford Motor Co v. Horne, Horne was appointed as a managing director
of the plaintiff company on the condition that he shall solicit or entice away the customers
of the company at any point of time. He was employed under an agreement. Shortly he
opened a business in the name of a company which solicited the plaintiff’s customers. It was
held that the company was mere cloak or sham for the purpose of enabling the defendant to
commit a breach of his covenant against the solicitation.
In P.N.B. Finance Ltd. v. Shital Prasad Jain, the court held that "the doctrine of piercing the
corporate veil may be invoked whenever necessary by the court in the interest of justice, to
prevent the corporate entity from being used as an instrument of fraud, and the
fundamental principle of corporate personality itself may be disregarded having regard to
the exigencies of the situation and for the ends of justice.
(d) Government Companies: A company at times lose their individuality in favour of its
principal and, may be treated as an agent or trustee. In Re F.G. (Films) Ltd., an American
company produced a film called 'MANSOON' in India technically in the name of a British
company. This British company had a capital of £ 100 out of which majority was held by the
President of the American company which financed the production of the film. In these
circumstances the Board of Trade refused to register the film as a British film on the ground
that in the instant case the British company acted merely as the nominee or agent of the
American company. This view was upheld by the Court. The court may, in some
circumstances, treat a holding company and its subsidiary as a single entity. This inference
does not flow automatically from the relationship of holding and subsidiary company. There
must be evidence that the business of the two is combined.
In Smith Stone & Knight Ltd. v. Birmingham Corporation, it was observed that the courts find
it difficult to go behind the corporate entity of a company to determine whether it is really
independent or is being used as an agent or trustee. If a parent company and a subsidiary
company are distinct legal entities under the ordinary rules of law and in the absence of an
agency contract between the two companies one cannot be said to be the agent of the
other. If one company is held liable as a principal for the acts of another company, the
relationship of agency should be substantially established, as was the case in the instant
decision.

In India, a large number of private Companies have a tendency to register themselves as

Government companies under the Companies Act with President and few other officers as
the shareholders. They do so with a view to availing certain advantages in their commercial
ventures. The Courts are, therefore, confronted with the problem of deciding the true
nature of a government company in a number of cases. The Supreme Court has decided
once for all that a government company is neither an extension of the State, nor its agent.

The Supreme Court has ruled that Life Insurance Corporation cannot be treated as an
instrumentality of the State when it is exercising its ordinary right as a majority shareholder
in a company for removing the existing management and reconstituting the Board of
Directors of that company.
(e) To punish the real persons in Quasi-Criminal cases against the Company
The courts have sometimes applied the doctrine of lifting the corporate veil in quasi-criminal
cases relating to companies in order to look behind the legal person and punish the real
persons who have violated the law.
(f) To prevent abuse of Process of Law
The doctrine of lifting the corporate veil can also be used to prevent abuse of process of
Court. Thus in Bijay Kumar Agarwal & others v. Ratanlal Bagaria & others, the Court observed
that although broadly speaking the principle of lifting the corporate veil will be available in
the statute like Companies Act, and other financial and taxing statutes etc. but admittedly
one cannot rule out the applicability of the principle elsewhere if the situations are falling
under the following categories : (a) depend upon the relevant statutory or other provisions;
(b) the object sought to be achieved; (c) the impugned conduct; (d) the involvement of the
element of public interest; (e) the effect on parties who may be affected. It, therefore,
logically follows that the doctrine of lifting the corporate veil or principle analogous thereto
cannot be ruled out from being used as a tool of judiciary in adjudicating over the dispute
between two parties. Thus the "Lifting of corporate veil' or principle analogous thereto
cannot be monopoly of any particular statute. It can well be used by the judiciary or the
Court to prevent the abuse of process of Court of Law.
The Supreme Court in Delhi Development Authority v. Skipper Construction Co. (P.) Ltd has
observed that the lifting or piercing the corporate veil can be undertaken by Court to see the
real men behind the veil who are involved in defrauding others by corrupt and illegal means
in deliberate defiance of Court's order. In the instant case, the company was defrauding
others in deliberate disobedience of Supreme Court's orders which amounted to contempt
of Court. Disposing of the appeal, the Supreme Court observed that imposition of
punishment for contempt would not denude the Court of its power to issue directions and
make appropriate orders to grant relief to the persons aggrieved in order to do complete
justice. For this purpose, the Court can lift the corporate veil of the company to look into the
misdeeds of its officials and punish them i.e., the contemnors. That apart, the Court may
also order the contemnors to restore the illegally derived benefit to the persons who are
defrauded so that the contemnors are not able to retain the fruits of the contempt. The
Court may also order forfeiture/attachment of the properties acquired by the illegal and
corrupt means by the real men behind the corporate as also the properties of their family
members.

2. Personal Liability of Directors or Members

Secondly, the company law imposes personal liability on the directors or members of a
company in certain cases notwithstanding the cardinal principles of 'separate personality'
and 'limited liability'. There are certain statutory provisions, in the Companies Act, 1956,
apart from the liability of the company as an independent legal person, those cloaked
behind it are also made liable. Such cases are: —
(a) Reduction of membership (Section 45)
Section 45 of the Companies Act, 1956 specifically provides that if at any time the number of
members of a company falls below the statutory minimum i.e.. seven in case of a public
company and two in the case of a private company, and the company carries on business for
more than six months while the number is so reduced, every person who is a member of
that company during the time the company so carries on business after those six months
and is aware of that fact, shall be severally liable for the payment of company's debts
contracted during that time. Thus, in such cases, the privilege of limited liability is denied to
the shareholders.

(b) Misdescription of name (Section 147)

Where an officer of a company signs on behalf of the company any contract, Bill of
exchange, hundi, promissory note, cheque or an order for money goods, such person shall
be personally liable to the holder if the name of the company is not fully or properly
mentioned in the instrument.
(c) Fraudulent conduct of business (Section 542): This section impose liability for fraudulent
conduct of a company’s business. According to the section if it is found that a business is
found to be carried on with the intent to defraud the creditors of the company or any other
person, or for any fraudulent purpose, those who were knowingly parties to this business
shall be personally held liable for all or any of the debts of the company.
(d) Subsidiary company (Sections 212 and 214)
As required by Sections 212 and 214 of the Act, a holding company has to disclose to its
members, the accounts of its subsidiaries. Though in the eyes of law a subsidiary company is
a separate legal entity under certain circumstances, the court may not treat the subsidiary
company as an independent entity in a particular situation. There may be two situations
when a subsidiary company may lose its independent identity to a certain extent, namely,
(1) the law may brush aside the legal forms and require companies in a group to present a
joint picture in order to give better information of the financial position of the group as a
whole to the public, creditors and shareholders ; and (2) where the control and conduct of
business of a subsidiary company rests solely in the nominees of the holding company, it
may be inferred that the subsidiary company is merely a branch of holding company and has
no separate identity of its own.
(e) Failure to Return Application Money (Section 69(5 )
The provision contained in clause (5) of Section 69 of the Companies Act, 1956 makes the
director of a public company personally liable to pay the money with interest if the
application money is not repaid within thirty days in the event of minimum subscription not
having been received or company not having obtained certificate of commencement of
business by the company.

(f) Misrepresentation in Prospectus (Section 62)

In case of misrepresentation in the prospectus of a company, every director, promoter, and
every other person who authorizes issue of such prospectus, incurs liability towards those
who subscribe for shares on the faith of untrue statement.
(g) Ultra vires acts
The directors of a company shall be personally liable for all those acts done by them on
behalf of the company if they are ultra vires the company.
(h) Non-payment of Tax
In the event of winding up of a private company, if any tax assessed on the company
whether before or in course of liquidation in respect of any income of any previous year
cannot be recovered, every person who was director of that company at any time during the
relevant previous year, shall be jointly and severally liable for payment of such tax.

3. Expenses and formalism: Incorporation of a company is an expensive affair. Besides, it

involves completion of a number of formalities. Moreover, the administration of a company
has to be carried on strictly in accordance with the provisions of the company law and
activities are limited by its memorandum which at times creates problems in its progress.

4. Company is not a citizen

Though a company is a legal person, it is not a citizen under the constitutional law of India or
the Citizenship Act, 1955. The reason as to why a company cannot be treated as a citizen is
that citizenship is available to individuals or natural persons only and not to juristic persons.
The question whether a corporation is a citizen was decided by the Supreme Court in State
Trading Corporation of India v. Commercial Tax Officer. Since a company is not treated as a
citizen, it cannot claim protection of such fundamental rights as are expressly guaranteed to
citizens, but it can certainly claim the protection of such fundamental rights as are
guaranteed to all persons whether citizens or not. In Tata Engineering Company v. State of
Bihar it was held that since the legal personality of a company is altogether different from
that of its members and shareholders, it cannot claim protection of fundamental rights
although all its members are Indian citizens. Though a company is not a citizen, it does have
a nationality, domicile and residence. In case of residence of a company, it has been held
that for the purposes of income tax law, a company resides where its real business is carried
on and the real business of a company shall be deemed to be carried on where its Central
management and control is actually located.
Statutory Corporations or Companies
Companies and undertakings concerned with public utility such as railways, roadways,
docks, electricity etc. are usually incorporated by special Acts of the Legislature. They are
mostly invested with extensive powers. The examples of statutory corporations are the
Reserve Bank of India established by the Reserve Bank of India Act, 1934, the Industrial
Finance Corporation of India established by the Industrial Finance Corporation Act, 1948, Air
India incorporated under the Air Corporation Act, 1953, the Life Insurance Corporation of
India created by the Life Insurance Corporation of India Act, 1956 and so on.
Therefore a statutory corporation is a public enterprise which comes into existence by a
special Act of Parliament. The Act would define its p[owers and functions, rules and
regulations governing its employees and its relationship with the government department.
They are financially independent.
Though the Parliament and the State Legislatures have power to create statutory trading or
non-trading corporations for even private purposes as per Entry 44 of List I and Entry 32 of
List II of Seventh Schedule of the Constitution of India, any group or association desiring to
seek incorporation for other than public purposes is generally expected to get itself
incorporated by registration under the Companies Act.
One Man Company
A one-man company means a single person owns the whole or practically the whole of share
capital. There may or may not be other members. The other members shall be
acquaintances like friends, relatives or nominees. The central person shall have the full
control over the company. These types of company enjoy a corporate status and has limited
liability of the company. They also have a legal status. The concept of one-man company was
accepted in Saloman’s case