A Company is a distinct and separate legal entity different from its member'. Comment. In what situations the distinct personality of the company is disregarded?

Question: A Company is a distinct and separate legal entity different from its member'. Comment. In what situations the distinct personality of the company is disregarded? [BJS 1978]

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Answer

A company is a separate legal entity as distinct from its members, therefore it is separate at law from its shareholders, directors, promoters etc. and as such is conferred with rights and is subject to certain duties and obligations.

It is a fundamental principle in law that once a company is incorporated or registered, it obtains a legal existence separate or different from its owners, directors, and officers. The company becomes a legal person that has rights and obligations. It also obtains privileges and the authority to conduct its business, acquire and own its assets, enter into any transaction, and sue and be sued in its own name.

For the company to be called a Separate Legal Entity there has to be proper incorporation and registration of the company. If the company has been properly incorporated, then only it will have a Separate Legal existence from its-

• Directors- As they regulate the working of the company.
  
• Members of the company– They are the real owners of the company
• Shareholders- They have subscribed to the shares of the company.

These central principles of company law were first laid down in very clear terms by the House of Lords in the case Salomon v. Salomon & Company Ltd, [1897] AC 2. The principle from the Salamons case firmly established that a company has a separate legal identity from that of its shareholders and has been applied over a wide range of cases.

In Battle v. Irish Art Promotion Centre Limited, [1968] IR 252, the court held that while a human person can represent himself in Court, a legal person such as a company can only be represented by a Solicitor or Barrister.

The principle set down in Salomon v. Salomon & Co. is known as the Veil of Incorporation. However, it is now been increasingly restricted in its application to an increased extent by legislation in order to prevent the abuse of limited liability protection and to ensure that liability for tax is not being avoided.

The Doctrine of Separate Legal Entity was also applied in the case of Lee v. Lee Air Farming Ltd., [(1961) A.C. 12]. In this case; Mr Lee who was a professional pilot had formed a company which had issued 3000 shares. 2999 shares were held by Mr Lee and he became the director of the company. After some time, Mr Lee died in an accident and his wife claimed compensation from the company as well as an employee of the company as well. She asked for compensation on the basis of the Employee Compensation Act but the company denied the compensation as he was the majority shareholder and the director of the company. He could not be allowed compensation as it was not covered under the definition of employee.

In this case, also, the court held that Mr Lee and the company Lee Air Farming Ltd. were two different and Separate Legal entities. Hence, the court granted compensation due to the wife of Mr Lee.

Situations in which the distinct personality of a Company may be Disregarded

There are several situations in which a company's distinct personality may be disregarded, including:

Piercing the corporate veil: This occurs when a court disregards the separate legal identity of a corporation in order to hold shareholders or directors personally liable for the company's actions. This is typically done when the company has been used to commit fraud or other illegal activities.

Alter ego theory: This is similar to piercing the corporate veil but is based on the idea that the company is merely an extension of an individual or group of individuals and that there is no real separation between the company and its owners.

Agency theory: This occurs when a company acts as an agent for its shareholders or another company and, as a result, the separate legal identity of the company is disregarded.

Single economic unit theory: This occurs when a group of companies are treated as a single economic unit because they have common ownership or control, and therefore the separate legal identities of the individual companies are disregarded.

Statutes and case law may also disregard the separate legal personality under specific circumstances. Following are some of such provisions from the Companies Act 2013:

Reduction in Membership: When the number of members is reduced below 7 in a public company or 2 in the case of a private company and the company continues to carry on business for more than 6 months after the membership has so reduced, every person who was the member of the company during the time when it carried on the business after those six months and who are aware of this fact, would be severally liable for all the debts of the company contracted after six months.

Investigation in the Affairs of a Company: If an inspector is appointed under Section 210 of the Companies Act 2013 to investigate the affairs of the company, he has the power to investigate also the affairs of any other related company in the same management or group. This is in complete disregard to the separate entities of the companies.

Misrepresentation in the Prospectus: In the case of misrepresentation in a prospectus, every director, promoter and every other person who authorizes the issue of such a prospectus incurs liability towards those who subscribe for shares on the faith of untrue statements contained therein (Section 34).

Liability under other Statutes

There are many other provisions of the company law where the director(s) of a company are personally liable for the default in complying with those provisions. Some of these are non-maintenance of proper books of accounts; default in holding annual general meetings; default in filing the annual returns; default in paying dividends after declaration; false declaration of solvency; non-cooperation with the company auditors or with the liquidators (in the event of winding up of the company); non-compliance with the regulations of the Securities and Exchange Board of India (SEBI).

Besides these, Directors may be held liable under pollution laws, social security laws (e.g. Minimum Wages Act, ESI, EPF, and Gratuity), Competition Act, Foreign Exchange Management Act (FEMA), and taxation laws.

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