Is Company a legal person? What are the advantages of legal personality of a company? Discuss the circumstances when the veil of a company can be lifted.
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Question: Is Company a legal person? What are the advantages of legal personality of a company? Discuss the circumstances when the veil of a company can be lifted. [BJS 2006]Find the question and answer of Company Law only on Legal Bites. [Is Company a legal person? What are the advantages of legal personality of a company? Discuss the circumstances when the veil of a company can be lifted.]AnswerA company is a legal person, which means that it is considered a separate legal entity from...
Question: Is Company a legal person? What are the advantages of legal personality of a company? Discuss the circumstances when the veil of a company can be lifted. [BJS 2006]
Find the question and answer of Company Law only on Legal Bites. [Is Company a legal person? What are the advantages of legal personality of a company? Discuss the circumstances when the veil of a company can be lifted.]
Answer
A company is a legal person, which means that it is considered a separate legal entity from its shareholders and directors. This means that a company has the capacity to enter into contracts, own property, and sue or be sued in its own name.
According to Halsbury's Laws of England, on incorporation, a company is a legal entity the nationality or domicile of which is determined by its place of registration. The concept of nationality is applicable to corporations and it depends upon the country of its incorporation. A corporation incorporated in England has a British nationality, irrespective of the nationality of its members. So far as domicile is concerned, the place of incorporation fixes its domicile, which clings to it throughout its existence.
This legal personality is granted to companies by the laws of the country where the company is incorporated. The concept of legal personality for companies was first established by the case of Salomon v. Salomon & Co., (1897) AC 22, where the House of Lords held that a company is a separate legal person from its shareholders and that the shareholders' liability is limited to the value of their shares.
This principle was later confirmed by the Privy Council in the case of Lee v. Lee's Air Farming Ltd.,[1961] AC 12, where it was held that a company is a legal person with a separate identity from its shareholders and that its actions are not the actions of its shareholders.
In India, the Apex Court has made its stance clear way before in the case of The State Trading Corporation of India Ltd. & Others v. The Commercial Tax Officer, 1963 AIR 1811. The case dealt with the issue of whether the State Trading Corporation of India (STC), a government-owned company, was a separate legal entity from the government and thus, whether it could be taxed as a separate entity.
In this case, the Supreme Court held that the STC was a separate legal entity from the government, and as such, it had the capacity to enter into contracts, own property, and sue or be sued in its own name. The Court observed that the STC was incorporated under the Companies Act, and had a distinct legal personality separate from the government and its shareholders. Therefore it was capable of being taxed as a separate entity.
This case further confirms the principle that a company is a separate legal entity from its shareholders and directors and it has the capacity to enter into contracts, own property, and sue or be sued in its own name. This principle is fundamental in company law and it's been confirmed by the courts in various jurisdictions including this case in India.
In conclusion, a company is considered as a separate legal person from its shareholders and directors. This legal personality is granted to companies by the laws of the country where the company is incorporated. It has the capacity to enter into contracts, own property, and sue or be sued in its own name. This principle was established by the courts in various jurisdictions and it's a fundamental aspect of company law.
Advantages of the Legal Personality of a Company
The legal personality of a company has several advantages, which include:
Limited liability: One of the main advantages of the legal personality of a company is that the shareholders' liability is limited to the value of their shares. This means that shareholders are not personally liable for the debts of the company.
Perpetual existence: A company has a perpetual existence, which means that it continues to exist even if its shareholder's change. This allows the company to outlive its founders and shareholders.
Ability to raise capital: A company can raise capital by issuing shares to the public, which allows it to grow and expand its operations.
Ability to enter into contracts: A company has the capacity to enter into contracts in its own name, which allows it to conduct business and enter into agreements with other parties.
Separation of ownership and management: The legal personality of a company allows for a separation of ownership and management. Shareholders can appoint directors to manage the company on their behalf, which allows them to focus on other matters.
Easier transfer of ownership: The shares of a company can be easily bought and sold, which allows for the transfer of ownership without disrupting the company's operations.
Tax benefits: Companies are often taxed at a lower rate than individuals, which can provide tax benefits to shareholders.
Legal protections: A company has legal protections, such as limited liability and perpetual existence, that can provide a level of security and stability for shareholders, directors, and employees.
The legal personality of a company allows shareholders to participate in the business without exposing them to unlimited liability, it provides a sense of stability as the company has a perpetual existence and it allows the company to raise capital, enter into contracts, separate ownership and management, transfer ownership easily and enjoy tax benefits, and legal protections.
Circumstances, when the veil of incorporation may be lifted, include:
The veil of a company refers to the concept that a company is considered a separate legal entity from its shareholders and directors, and that the company's actions should not be attributed to its shareholders or directors. In some cases, however, the courts may "lift the veil of incorporation" and treat the company as if it were not a separate legal entity. This is known as "piercing the corporate veil".
Fraud or illegal conduct: If a company is used to commit fraud or other illegal conduct, the courts may lift the veil of incorporation to hold the shareholders or directors personally liable for the company's actions.
Sham or alter-ego: If a company is a sham or an alter-ego of an individual shareholder or a group of shareholders, the courts may lift the veil of incorporation to treat the company as if it were not a separate legal entity.
Non-compliance with company laws: If a company is not in compliance with company laws, the courts may lift the veil of incorporation to hold the shareholders or directors responsible for the company's actions.
Single economic unit: If a group of companies are treated as a single economic unit, the courts may lift the veil of incorporation to treat the group of companies as one entity.
Just and equitable: The courts may lift the veil of incorporation in just and equitable circumstances.
Some of the case laws that illustrate the circumstances when the veil of incorporation can be lifted include:
In the case of Jones v. Lipman, [1962] 1 WLR 832, the court held that the veil of incorporation can be lifted if a company is used as a sham to defeat the contractual rights of a third party.
In the case of Gilford Motor Co. Ltd. v Horne, [1933] Ch. 935, the court held that the veil of incorporation can be lifted if a company is used as a sham or an alter-ego of an individual shareholder or a group of shareholders.
In the case of DHN Food Distributors Ltd v. Tower Hamlets London Borough Council, [1976] 1 WLR 852, the court held that the veil of incorporation can be lifted if a company is not in compliance with company laws.
In Life Insurance Corporation of India v. Escorts Limited and Others, [1986 AIR 1370], the Supreme Court laid down two major instances when the corporate veil is lifted. These are –
1. Statutory provisions
2. Judicial grounds
Statutory Provisions
Officer in Default (Section 5 of the Act) – This Section talks about the liability of ‘officer in default’ that is those individuals who are involved in wrongful or illegal acts are liable in respect of the offences committed by them. Thus, this section talks about the joint and several liabilities of the members. The term ‘officer in default’ includes a managing director or a whole-time director.
Reduction of Membership (Section 45 of the Act) – A public company requires at least 7 members for its formation and a private company requires at least two members (Section 3 of the Act). However when a company has been formed without complying with this minimum requirement and continues to carry on its business, then each member who knows such fact is individually liable for any debts contracted by the company during that time.
Improper use of Name (Section 147 of the Act) – Sub-section 4 of Section 147 of the Act provides the liability of the officer who signs the Bill of Exchange, Hundi, Promissory note, and cheque under the improper name of the company. Such officer shall be to the holder of such Bill of Exchange, hundi, promissory note or cheque as the case may be; unless it is duly paid by the company.
Fraudulent conduct (Section 542 of the Act) – If at the time of termination of the corporation, it is found that the activities of the company were carried out to deceive the investors of the company then the individuals who had knowledge of such business would be personally liable for any loss caused to such investors as the court may direct.
Failure to refund application money (Section 69 of the Act) – If the company fails to repay the application money to the applicants who were not allotted the shares within 130 days from the date of issue of the prospectus, then the directors of a company are jointly and severally liable to repay the application money with interest. However, this won’t affect the continuance of the company and its separate existence.
Judicial Grounds
Apart from the statutory provisions, the courts in India at their own discretion also lift the corporate veil on certain grounds. Some of the cases in respect of this area-
Fraud or Improper Conduct – the most common ground when the courts lift the corporate veil is when the members of the company are indulged in fraudulent acts. The intention behind it is to find the real interests of the members. In such cases, the members cannot use the Salomon principle to escape from liability.
Tax Evasion – Sometimes, the corporate veil is used for the purpose of tax evasion or in order to avoid any kind of tax obligation. It is not possible for the legislature to fill all the gaps in the law and thus it is important for the judiciary to interfere. In such cases, the courts lift the veil of the company to find out the real state of affairs of company.
A company as an Agent – In every case where a company is acting as an agent for its shareholders, in such cases the principle of vicarious liability is applied, and the shareholders will be responsible for the acts of the company. The court in such cases would look at the facts of the cases to determine whether the company is acting as an agent for its members or not. This can be inferred either from the agreement where it has been expressly mentioned or can be implied from the circumstances of each case.
In the case of Vodafone International Holdings B.V. v. Union of India & Anr., (2012) 7 SCC 613, the Supreme Court of India considered whether the veil of incorporation of a subsidiary company could be lifted to hold the parent company liable for taxes.
The case involved Vodafone International Holdings B.V. (VIHBV), a Dutch company that had acquired a controlling stake in an Indian company, Hutchison Essar Limited (HEL), through a series of transactions involving a subsidiary company. The Indian government sought to impose taxes on the transaction, arguing that VIHBV was liable as the beneficial owner of HEL.
The Supreme Court held that the veil of incorporation of the subsidiary company could not be lifted in this case to hold VIHBV liable for taxes. The Court found that there was no evidence of fraud, sham or illegal conduct, or any other circumstances that would justify lifting the veil of incorporation. The Court ruled that the transaction was a bona fide commercial transaction and VIHBV was not the beneficial owner of HEL.
This case confirmed that the courts in India will be reluctant to lift the veil of incorporation unless there is clear evidence of fraud, sham or illegal conduct, or any other circumstances that would justify lifting the veil of incorporation. It also established the principle that a company is considered a separate legal entity from its shareholders and directors, and that the company's actions should not be attributed to its shareholders or directors unless there is clear evidence that would justify lifting the veil of incorporation.