COMPANY LAW

ACKNOWLEDGEMENT
The success and final outcome of this project required a lot of guidance and assistance from
many people and I am extremely fortunate to have got this all along the completion of my
project report. Whatever I have done is only due to such guidance and I would never forget to
thank them. I am thankful to and fortunate enough to get constant encouragement, support
and guidance throughout the completion.
I am very much thankful to Ms. Alamdeep Kaur for her support and guidance, without
which I would not have been able to accomplish this project work.
I am thankful to my department, University Institute of Legal Studies, Panjab University,
Chandigarh, for providing such an expansive library which provided me all the relevant
material required for this project.
I also express my gratitude to the library staff for their help in the searching of the books and
whatever other help I needed.
I am also thankful to my friends who helped me in collection of material.
Lastly and most importantly, I would like to thank my parents and the almighty for moral
support and constant supervision.

AMANINDER JEET KAUR

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TABLE OF CONTENTS

1. INTRODUCTION......................................................................................................... 5
2. DEFINITION OF COMPANY ........................................................................................... 8
2.1 PURPOSES OF INCORPORATION ............................................................................. 9
3. KINDS OF CORPORATIONS .................................................................................. 10
3.1 CORPORATION AGGREGATE .................................................................................. 10
3.1.1 CHARACTERISTICS OF CORPORATE AGGREGATE .................................... 11
3.2 CORPORATION SOLE ................................................................................................ 13
4. CORPORATION WHETHER A CITIZEN ............................................................ 15
5. NATURE OF CORPORATE FORM ....................................................................... 18
6. ADVANTAGES OF CORPORATE FORM ............................................................ 22
7. LIFTING THE VEIL OF CORPORATE PERSONALITY .................................. 25
8. CONCLUSION ........................................................................................................... 28
9. BIBLIOGRAPHY ....................................................................................................... 29

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TABLE OF CASES
1. Ashoka Mktg Ltd v. Punjab National Bank ........................................................... 18
2. Associated Cement Co Ltd. v. Keshavanand ......................................................... 23
3. Bank nationalization case ...................................................................................... 16
4. Bennett Coleman & Co. v. Union of India ............................................................ 16
5. Board of Trustees v. State of Delhi ........................................................................ 10
6. D.C. & G.M. v. Union of India .............................................................................. 17
7. Dalmer Co. Ltd. v. Continental Tyre & Rubber Co. (Great Britain) Ltd. ............. 27
8. Dhulia-Amalner Motor Transport Ltd. v. Raychand Rupsi Dharamsi .................. 20
9. Dinshaw Maneckjee Petit, re ................................................................................. 25
10. Farrar v. Farrar Ltd ................................................................................................ 12
11. Govind Menon v. Union of India ........................................................................... 13
12. Heavy Engineering Mazdoor Union v. State of Bihar ........................................... 15
13. JH Rayner (Mincing Lane) Ltd. v. Deptt of Trade and Industry ........................... 22
14. Kondoli Tea Co. Ltd Re ......................................................................................... 20
15. Kondoli Tea Co. Ltd., Re ....................................................................................... 12
16. Kuemgel v. Donnersmarch .................................................................................... 27
17. Lee v. Lee’s Air Farming Ltd ................................................................................ 25
18. People’s Pleasure Park v. Rohleder ....................................................................... 12
19. Soloman v. Soloman & Co. Ltd ............................................................................. 12
20. State of Rajasthan v. Goton Lime Stone Khanij Udyog (P) Ltd. ........................... 23
21. State of U.P. v. Renusagar Power Co. ................................................................... 26
22. Sugar India Ltd. v. Chander Mohan Chadha ......................................................... 26
23. Tata Engineering & Loco-motive Co. Ltd. v. State of Bihar ................................. 26
24. Tata Engineering & Locomotive Co. v. State of Bihar.......................................... 15
25. The Deputy Commissioner v. Cherian Transport Corporation .............................. 26
26. TR Pratt Bombay Ltd. v. ED Sasoon & Co. Ltd.................................................... 20
27. Vodafone International Holdings BV v. Union of India........................................ 18

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TABLE OF ABBREVIATIONS
1. A.C.- Appeals Chamber
2. A.I.R.- All India Reporter
3. All.- Allahabad
4. A.P.-Andhra Pradesh
5. Bom.- Bombay
6. Cal.- Calcutta
7. C.J.-Chief Justice
8. Co.- Company
9. C.P.C.- Code of Civil Procedure
10. Ed.,-Edition
11. Gau.- Guwahati
12. J.- Justice
13. Ker.-Kerala
14. L.J.- Lord Justice
15. Nag.- Nagpur
16. M.P.-Madhya Pradesh
17. Ori.- Orissa
18. Ors.- Others
19. P.- Page
20. Pat.- Patna
21. P.C.- Privy Council
22. S.- Section
23. S.C.- Supreme Court
24. SCALE- Supreme Court Almanac
25. SCC- Supreme Court Cases
26. SCJ- Supreme Court Journal
27. SCR-Supreme Court Reporter
28. U.P.-Uttar Pradesh
29. V.- Versus
30. Vol.- Volume

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1. INTRODUCTION
The legal use of the word ‘person' has attracted an assortment of theories which is probably
second to none in volume. ‘Person' in law, is both the recognition of an entity as well as the
acknowledgement of such an entity's rights and interests. Granting of ‘personhood' states then
enables an entity to undertake acts and relations that are recognized in the law. In the realm of
law, the term ‘person' is nothing more than an abstraction - a representation through the form
of an entity either real or artificial, of certain attributes. These attributes come to form what is
known as ‘personality' in the law.

Persons in law are seen to be of only two kinds: real/natural and artificial. Human beings are
considered ‘real' or ‘natural' persons because they are ipso facto persons. The other kind of
person is the artificial person, which is a fiction of law invested with limited legal capacity.
At this juncture, it is necessary to clarify the meaning of the term ‘capacity' in law. Capacity
is the primary attribute of personality and denotes the ability to commit acts and undertake
relations that are recognised in the law. Capacity is what enables a person to have a ‘standing'
in law, be it in the person's ability to claim-possess-exercise rights, property, enter into
contracts, sue and be sued, commit legal injury or be the victim thereof. In other words,
capacity in law is the medium through which personality expresses itself.

The law in recognising artificial persons infuses such entities with limited legal capacity. The
limitation exists in the sense that artificial persons do not possess personalities in the fullest
sense of the term. Their ability to commit legally recognizable acts is limited to the extent
that law allows for, nothing more. To provide an example, a body corporate such as a joint
stock company is undoubtedly a ‘person' but cannot be likened to a human person anymore
than an apple can be compared to an orange. While human beings as natural persons are
capable of every act and relation possible in fact, an artificial person is only capable of those
acts and relations allowed in law; the doctrine of ultra vires with respect to joint stock
companies prevents such artificial persons from committing acts/undertaking relations that
are outside their scope of activities as specified in the Memorandum and Articles of
Association.1

The familiar theoretical classification of artificial persons follows likewise -

1
https://www.lawteacher.net/free-law-essays/company-law/corporate-personality.php (visited on 28th Feb,
2018)

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1. Corporation Sole.

2. Corporation Aggregate.

Both of the above are however narrow in the sense that they contemplate only one segment of
artificial personality i.e. the body corporate. The corporation sole is nothing more than a tool
meant to ensure continuity of an office. Any office that is created in law also by implication
creates a legal personality to such office which occupies it in perpetuity till the law itself
extinguishes it. This legal personality is the Corporation Sole. Examples of it are
predominantly found in Offices of the State discharging sovereign functions, which are
always creations of the law. The proverbial example of the Corporation Sole is The English
Crown. However, the Corporation Sole is also manifest in various other instances such as the
Offices of the President, Prime Minister, Chief Justice of India, Attorney-General of India all
of which are creations of the Indian Constitution. Likewise, even localised examples where
there is a need for permanent Office implies the existence of a Corporation Sole: e.g. the
Vice-Chancellor of a University, the Postmaster General, both of which are statutorily created
Offices.

The human beings, ipso facto are persons enjoying all the attributes of legal personality. Each
human being then is vested with an independent personality in the law. However, if the same
notion were to be applied as a general rule, concerted and unified human action can have no
place in law for the simple reason that such action can only be recognised as several acts of
several persons as opposed to a single act of a group of several persons. The former
perception would lead to many difficulties including unlimited liability of such several
persons towards third parties. It is for this reason that a partnership, though an association of
persons acting in concert, renders each of those persons jointly and severally liable for acts of
any partner. This approach also has the effect of apportioning liability disproportionately in
the sense a partner who is insolvent cannot be proceeded against while a solvent partner is
satisfy the entire liability or debt that subsists between the partnership and the third party. It is
to obviate this difficulty, the law recognises certain groups of several persons as a ‘body
corporate' and thus holds the several acts of such several persons in fact, attributable to a
single person in law. In doing so what the law also does is create a veil of incorporation as
between the constituting members and the legal personality of the constituted body: the
corporation. The veil of incorporation implies the existence of a personality in the corporation
as distinct from its members. In the joint stock company, the veil of incorporation is what

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separates the acts of the company from those of its shareholders and the individual acts of its
shareholders from that of the company. The result of adopting this approach is also that there
is limited liability of the shareholders (members of the group) which renders them liable only
to the extent of their holding in the group or company.2

Going by the above description of corporations aggregate, it would logically follow that
every form of concerted activity of willing individuals aimed at a particular end, would lead
to their acts coming to known through the glass of incorporation which realises their
combined operations as one single act, performed by a single personality. However, it is in
this regard that the real limits of artificial personality are discernible. The law deems only
certain forms of concerted action as eligible for recognition through incorporation; thus while
joint stock companies are recognised as incorporated bodies, associations such as
partnerships, trade unions and other organizations are not recognised as incorporated bodies
for various reasons. These groups have come to assume the term ‘unincorporated
associations'. However the effect of such thinking has been somewhat mitigated by statutory
devices and judicial interpretation, which in certain respects have enabled such associations
to assume characteristics of a single legal person. Thus it may be said that even
unincorporated associations in certain contexts, assume the character of a legal person.

2
https://legalpoint-india.blogspot.in/2016/03/theories-of-corporate-personality.html (visited on 28th Feb, 2018)

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2. DEFINITION OF COMPANY

The word “company” has no strict technical or legal meaning. In the terms of the Companies
Act a “company means a company formed and registered under” the Companies Act. 3 A
body corporate or corporation includes a company incorporated outside India, but does not
include a co-operative society registered under the law relating to co-operative societies, and
anybody corporate (not being a company as defined in the Act) which the Central
Government may, by notification, specify for this purpose.

In common law, company law is a “legal person” or “legal entity” separate from, and capable
of surviving beyond the lives of, its members.4”Like any juristic person, a company is legally
an entity apart from its members, capable of rights and duties of its own, and endowed with
the potential of perpetual succession.”But a “company” is not merely a legal institution. It is
rather a legal device for the attainment of any social or economic end and to a large extent
publicly and socially responsible. It is, therefore, a combined political, social, economic and
legal institution. Thus, the term has been variously described. “Corporate device is one form
of associated enterprise.” It is an intricate, centralised, economic administrative structure run
by professional managers who hire the capital from the investor.”

A company means a company of certain persons registered under the Companies Act. Two or
more persons who are desirous of carrying on joint business enterprises, have the choice of
either forming a company or a partnership. Partnership is a suitable device for a small-scale
business which can be financed and managed by a small group of partners who take personal
interest and there is mutual trust and confidence among them. But where the enterprise
requires a rather greater mobilisation of capital with the resources of a few persons cannot
provide, the formation of a company is the only choice. Even for a small-scale business the
choice of a company would be better as this is the only form of business organisation which
offers the privilege of limiting personal liability for business debts. Accordingly, the
company has become the most dominant form of business organisation. One of the best
assessments in reference to companies in the context of the modern economies is enshrined in
the following words: “Companies abound in the national economy. Ranging from the small
family or partnership concern to the faceless multinational corporation, they provide the
structural framework of the modern industrial society.”

3
S. 2(20) or under any previous law.
4
Salomon v. Salomon & Co. Ltd 1897 AC 22 (HL).

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2.1 PURPOSES OF INCORPORATION

The most important purpose of incorporation is to enable traders to embark upon commercial
venture with limited liability. This is possible only by the incorporation of the limited liability
company. Company is so formed by a number of persons becoming shareholders and
registering the company under The Companies Act, 1956. By becoming a shareholder, the
member contributes or promises to contribute a stated amount of money for the furtherance of
common objects of the company. His liability is limited to his share that is the contribution
made by him. If the venture of the company ends in disaster, he will not be called upon to
meet the claims of the creditors of the company from his other assets. The assets of the
company (including the share capital promised but still remaining unpaid), would alone be
answerable for the claims of the company’s creditors. In this way the shareholders are able to
trade with limited liability. This is one of the most important purposes of incorporation and it
cannot perhaps be served by any other device known to the law5.

There are other purposes also served by incorporation but those can be served by other means
as well. The fiction of corporate personality is introduced for the purpose of bestowing the
character and features of individuality on a collective and changing body of men.
Incorporation assimilates the complex form of collective ownership to the simpler form of
ownership. In case there are number of persons who are owners of the same property,
difficulty arises as to its distribution as well as to its management. To avoid this, law creates
fictitious legal person viz., the corporation or company etc. to which it attributes the rights
and duties that would ordinarily attach to the beneficiaries. This fictitious person is endowed
by law with the capacity of dealing with the property as the representative of the co-owners
and of figuring in legal proceedings on behalf of its members. This purpose of incorporation
may be served also by means of trusteeship. The trustees can represent the body of co-owners
for the purpose of suing and being sued. Thus, a corporation becomes a continuous entity
endowed with a capacity for perpetual existence. It is provided that a company has a
perpetual succession and a common seal. Trustees, on the other hand, being mortal may have
to be changed from time to time. The element of permanence is absent in trusteeship.
Incorporation, thus, secures not only the element of unity but that of permanence as well.
Incorporation can, therefore, be regarded as an indispensable legal concept of abiding value.6

5
Company Law, N.V. Paranjape, Central Law Agency, Allahabad, 2006
6
Prof. Aggrawal Nomita on Jurisprudence 8th Ed. (2010) p. 177-178.

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3. KINDS OF CORPORATIONS

Corporations are of two kinds:

I. Corporation aggregate

II. Corporation sole

4.1 CORPORATION AGGREGATE

A Corporation aggregate is a group of co-existing persons, a combination of persons who are

united together with a view to promote their common interest which is generally the business
or commercial interest.7 It has been defined as a collection of individuals united into one
body under a special denomination, having perpetual succession under an artificial form
vested by the policy of the law with the capacity of acting in several respects as an individual,
particularly of taking and granting property, of contracting obligations and of suing and being
sued, of enjoying privileges and immunities, in common and of exercising a variety of
political rights, more or less extensive, according to the design of its institution or the powers
conferred upon it, either at the time of its creation or at any subsequent period of its
existence8. Under Indian Law, corporation aggregate are all those bodies or associations
which are incorporated under a statute of Parliament or State legislature. In this category
come all trading and non-trading associations which are incorporated under the relevant laws
like the state trading corporation, Municipal Corporation, Roadways Corporations, the public
companies, State bank of India, Reserve bank of India, The life insurance corporation, the
Universities, Panchayats, Trade Unions, Co-operatives Societies. In fact these are some
examples of corporate aggregate. In Board of Trustees v. State of Delhi9, the Supreme Court
discussed in detail the characteristics of corporate aggregate. In this case the court was
examining the question, namely, whether the Board of Trustees, Ayurvedic and Unani Tibia
College is a corporation aggregate or not. The court held the Board is not a corporation. Their
Lordships observed that the most important point to be noticed in this connection is that in
the various provisions of the Societies registration Act, there are no sufficient words to
indicate an intention to incorporate. On the contrary the provisions show that there was an
absence of such intention. Hence the Board is not a corporation aggregate because the
essential characteristic of a corporation aggregate, namely, that of an intention to incorporate

7
Taxmann’s Company Law and Practice, A.K. Majumdar, Taxmann Publications (P) Ltd. New Delhi, 2009
8
Halsbury’s Laws of England, (3rd Ed.) Vol. 9 p.4.
9
AIR 1962 SC 458.

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the society is absent. The court observed in this case that a corporation aggregate has one
main capacity, namely, its corporate capacity. The corporate aggregate may be a trading
corporation or a non-trading corporation. The usual examples of a trading corporation are:-

1. Chartered companies

2. Companies incorporated by special Acts of Parliaments

3. Companies registered under companies Act etc.

However non-trading corporations are illustrated by:-

1. Municipal corporation

2. District Boards

3. Benevolent institutions

4. Universities etc.

The court further observed that an essential element in the legal conception of a corporation
is that its identity is continuous, that is, that the original member or members of which it is
composed are something wholly different from the incorporation itself; for a corporation is a
legal person just as much as an individual. In fact the essential of a corporation consist in the
following:

1. Lawful authority of incorporation

2. The person to be incorporated

3. A name by which the persons are incorporated

4. A place and

5. Words sufficient in law to show incorporation.

No particular words are necessary for the creation of a particular corporation; any expression
showing an intention in corporation will be sufficient.

4.1.1 CHARACTERISTICS OF CORPORATE AGGREGATE

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The essential characteristic of a corporation aggregate is that it possesses a personality

distinct from that of its members. This doctrine was first approved by the House of Lords in
Soloman v. Soloman & Co. Ltd10. The facts of the case are as follows-

One Mr. Soloman was the owner of a business which he turned in to a limited liability
company. The other members of the company were his wife and children. The total number
of issued shares were 20,007 of which Soloman took 20,001 shares and his family members
took the remaining six. Soloman also took mortgage debenture to the amount of pound 1000
in part payment for the business. Later on the company became insolvent. The trial judge and
the court of appeal held that the creditors had the prior claim to the assets since the company
was a mere sham. The House of Lords reversed this, holding that the company was in law a
person distinct from Soloman and that, therefore, Soloman was preferentially entitled to the
assets as the secured creditors.

Another important case dealing with a company as a separate entity from its members is
Farrar v. Farrar Ltd11. Justice Lindley said in this case- “A sale by a person to a corporation
of which he is a member is not, either in the form or in substance, a sale by a person to
himself. To hold that it would be to ignore the principle which lies at the root of the legal idea
of a corporate body and that idea is that the corporate body is distinct from the persons
composing it.

A sale by a member of a corporation itself is in every sense a sale, valid in equity as well as at
law. The leading American case on the point is People’s Pleasure Park v. Rohleder12 where
the question was whether a restrictive covenant that title to land should never pass to a
coloured person operated to prevent a transfer to a corporation of which all the members were
Negroes. It was held that the corporation was distinct from its members and that the transfer
was valid.

Indian courts have also recognized the judicial personality of a company or corporation
distinct from the members which compose it. In fact, this principle had secured a place in
India even earlier than Soloman‟s case. The decision of the Calcutta High Court in Kondoli
Tea Co. Ltd., Re13 seems to be the first on the subject. In this case certain persons transferred
a tea estate to a company and claimed exemptions from Ad valorem duty on the ground that

10
(1897) AC 22 ).
11
(1898) 40 Ch. D 395, 409.
12
61 South Eastern Rep. 794.
13
(1886) ILR 13 Cal 43.

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they themselves were the share-holders in the company and therefore it was nothing but a
transfer from them to themselves under another name. Rejecting this, the Court observed that
“the company was a separate person a separate body altogether from the share holders and
the transfer was as much a conveyance, a transfer of the property, as if the shareholders had
been totally different persons”. In a number of other cases this principle has been recognized.

4.2 CORPORATION SOLE

Corporation sole is an incorporated series of successive persons. It implies two persons to

exist under the same name, the one a human being and the other, the corporation sole, which
is a creature of the law and continues to exist though the human beings changes. “The live
official comes and goes”, said Salmond in a passage which has become the classic
description of the corporation sole, but this offspring of the law remains the same for ever”.14

The most outstanding example of Corporation Sole is the Crown (in England). Two persons
are deemed to be occupying the throne of England- one the queen in flesh and blood and the
other is the Corporation sole which is the creature of law. This Queen never dies though the
Queen in flesh and blood may die. In India various offices like that of the Governor of the
Reserve Bank of India, the State Bank, The Post Master General, The General Manager of
Railways, the Registrar of Supreme Court and High Courts etc. which are created under
different statute are some example of Corporation sole.

In Govind Menon v. Union of India15, the Supreme Court pointed out the main characteristic
of corporation sole. The court observed the Corporation sole is not endowed with a separate
legal personality. It is composed of one person only who is incorporated by law. The same
person has a dual character, one as a natural person and the other as Corporation sole, the
later being created by Statute. In this case the court rejected the contention of the appellant
that the commissioner has a separate legal personality as corporation sole under section 80 of
the Act, ( Madras Hindu Religious and Charitable Endowment Act 19 of 1951, which states
that the commissioner shall be a corporation sole and shall have perpetual succession and a
common seal and may be sued in his corporation name) and that he is exempt from
disciplinary proceedings for any act or omission committed in his capacity as commissioner.
Their lordships observed, “In our opinion, the object of the legislature in enacting section 80
and 81 of the Act was to constitute a separate fund and to provide for the vesting of that fund

14
Indian Company Law, Avtar Singh, Eastern Book Company, Lucknow, 2009.
15
AIR 1967 SC 1274.

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in the commissioner as a corporation sole and thereby avoid the necessity of periodic
conveyance in the transmission of title to that fund. The idea of corporation sole originated
according to Maitland with a piece of land, known as the parson‟s globe, which was vested in
a parson in his official capacity. Difficulties arose as to the conveyance (legal paper
transferring ownership of property) of the Seisin to a person for the benefit of church. The
Corporation sole was invented so that the Seisin could be vested in it. Today, under English
law, there are number of bodies which can be said to be examples of Corporation sole. Noted
them are a parson, a bishop, public trustee, the postmaster General etc.

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4. CORPORATION WHETHER A CITIZEN

Citizenship as defined in Part II of the Constitution of India indicates only natural persons
and not juristic persons, like corporations. To throw more light on the subject case laws are as
follows:

In State Trading Corporation of India v. Commercial Tax office16r, in this case Supreme
Court held that company or corporation is not citizen of India and cannot, therefore claim
such of the fundamental rights as have been conferred upon citizens. The citizenship
conferred on a citizen as per the provisions of the Constitution is concerned only with natural
persons and not juristic persons. In this case the State Trading Corporation was sought to be
taxed in respect of sales affected by them in the course of their business operation. The
corporation contended that its transaction related to inter-state sales and was therefore,
exempted from taxation under Article 286(1).The impugned tax was therefore, an
infringement of its fundamental right under Article 19 (1) (g) of The Constitution of India,
1950. The Supreme Court, however, held that the State Trading Corporation was not a citizen
and therefore could not claim the right under Article 19(1) (g).

In Tata Engineering & Locomotive Co. v. State of Bihar17, the petition was filed by the
company and some shareholders also joined it. They argued that though the company was not
a citizen but its shareholders were citizens and if it was shown that all its shareholders were
citizens the veil of corporate personality might be lifted to protect their fundamental rights.
The court rejected this argument and held that “If this plea is upheld, it would really mean
that what the corporations and companies cannot achieve directly can be achieved by them
indirectly by relying upon the doctrine of lifting the corporate veil”.

In Heavy Engineering Mazdoor Union v. State of Bihar18, it was held that the mere fact that
the President of India and certain officers of the Central Government, in their official
capacity, held the entire share capital of the respondent company does not make the company
as an agent either of the President or the Central Government. The company and its
shareholders are distinct entity.

16
AIR 1963 SC 184 86.
17
AIR 1965 SC 40.
18
AIR 1970 SC 82.

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In Bank nationalization case19, the court held that “A measure executive or legislative may
impair the right of the company alone, and not of its shareholders: it may impair the rights of
the shareholders and not of company, it may impair the right of the shareholders as well as of
the company. Jurisdiction of court to grant relief cannot be denied when by state action, the
rights of the individual shareholders are impaired, if that action impairs the rights of the
company as well. The test in determining whether the shareholder’s right is impaired is not
formal; it is essentially qualitative, if the state action impairs the right of the shareholders as
well as of the company the court will not, only upon technical ground, deny itself jurisdiction
to grant relief. A shareholder is entitled to the protection of Article 19 of the Constitution.
The fundamental rights of the shareholders as citizens are not lost when they associate to
form a company. When their fundamental rights as shareholders are impaired by state action
their rights as shareholders are protected. The reason is that the shareholder’s rights are
equally and necessarily affected, if the rights of the company are affected”.

The above case of Bank nationalization was followed in by Supreme Court in Bennett
Coleman & Co. v. Union of India20. In that case, the question was whether the shareholder,
the editor, the printer have right to freedom under Article 19 of the Constitution. Relying on
the Bank Nationalization case the court held that the protection of Article was available to a
shareholder, editor, printer and publisher of a newspaper. The court said the rights of
shareholders with regard to Article 19 (1) (a) were protected and manifested by the
newspapers owned and controlled by the shareholders through the medium of the
corporation. The individual rights of speech and expression of editors, directors and
shareholders are all exercised through their newspapers through which they speak. The press
reaches the public through the newspapers. The shareholders speak through their editor. The
locus standi of the shareholders is beyond challenge after the ruling of this Court in the Bank
Nationalization case.

In Godhra Electric Co. Ltd. v. State of Gujarat21, the court held that though a company was
not a citizen under Article 19 but a shareholder, a managing director of a company had right
to carry on business through agency of company and if that right was taken away or abridged
he was not disabled from challenging the validity of the provisions of any Act, which affected
his right.

19
AIR 1970 SC 564.
20
AIR 1973 SC 106.
21
AIR 1975 SC 32.

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7. D.C. & G.M. v. Union of India22, following the decisions of Bank Nationalization and
Bennett Coleman’s case, the Supreme Court in this case held that writ petition filed by a
company complaining denial of fundamental rights guaranteed under Article 19 is
maintainable. In the matter of fundamental freedom guaranteed by Article 19, Desai, J held,
the right of a shareholder and the company which the shareholders have formed are
coextensive and the denial to one of the fundamental freedom would be denial to the other.
The judge pointed out that this is the modern trend and suggested that the controversy on the
point should be put to an end by passing appropriate legislation.

22
AIR 1983 SC 937.

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5. NATURE OF CORPORATE FORM

The outstanding feature of a company is its independent corporate existence. A company is in

law, a person. It is a distinct legal persona existing independent of its members. By
incorporation under the Act, the company is vested with a corporate personality which is
different from the members who compose it. One of the effects of incorporation as stated in
Section 9 is that upon the issue of the certificate of incorporation, the subscribers to the
memorandum and other persons, who may from time to time be the members of the
company, shall be a body corporate23capable forthwith of exercising all the functions of an
incorporated company and having perpetual succession and common seal. Thus, the company
becomes a body corporate which is capable immediately of functioning as an incorporated
individual. The enterprise acquires its own entity. It becomes impersonalized. No one can say
that he is the owner of the company. The business now belongs to an institution. The entity of
the enterprise becomes institutionalised. In the words of Palmer: “the benefits following from
the incorporation can hardly be exaggerated. It is because of incorporation that the owner of
the business ceases to be the trade in his own person. The company carries on the business,
the liabilities are the company’s liabilities and the former owner is under no liability for
anything the company does, although, as principal shareholder, he is able to take full
advantage of profits which the company makes.”

In the 13th century, Pope Innocent IV espoused the theory of legal fiction by saying that
corporate bodies could not be excommunicated because they existed only in abstract. The
Supreme Court regarded this enunciation as the foundation of separate entity principle.24

A well-known illustration of this principle is the decision of the House of Lords in Salomon
v. Salomon & Co. Ltd.25

One Salomon was a boot and shoe manufacturer. His business was in sound condition and
there was a substantial surplus of assets over liabilities. He incorporated a company named

23
Ashoka Mktg Ltd v. Punjab National Bank (1990) 4 SCC 406. The expression body corporate as defined in S.
2(11) of the Act as including a company incorporated outside India, but as not including a cooperative society
registered under any law relating to cooperative societies, and any other body corporate which the Central
Government may, by notification, specify in this behalf. The government may by notification exclude from the
scope of the definition any other body corporate also. Thus, the expression “body corporate” is wider than the
term “company” though every company registered under the Act is a body corporate. This expression would
include all the corporations created under the special acts of Parliament. An incorporated company is a body
corporate but incorporation under the Companies Act is not the only method of creating a body corporate.
24
Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613.
25
1897 AC 22 (HL).

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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 business was transferred to the company for
£ 40,000. In payment, Salomon took 20,000 shares of £1 each and debentures worth £10,000.
These debentures certified that the company owed Salomon £ 10,000 and created a charge on
the company’s assets. One share was given to each remaining member of his family. The
company went into liquidation within a year. On winding up, the state of affairs was broadly
something like this: Assets £6,000; Liabilities- Salomon as debenture holder £10,000 and
unsecured creditors; £7,000. Thus, after paying off the debenture holder nothing would be left
for the unsecured creditors.

The unsecured creditors, therefore, 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. His vast
preponderance of shares made him absolute master. The business was solely his, conducted
solely for and by him and the company was a mere sham and fraud, in effect entirely contrary
to the intent and meaning of the Companies Act. But 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. Their
Lordships of the House of Lords observed: “When the memorandum is duly signed and
registered, though there be only seven shares taken, the subscribers are a body corporate
capable forthwith of exercising all the functions of an incorporated company. It is difficult to
understand how a body corporate thus created by statute can lose its individuality by issuing
the bulk of its capital to one person. The company is at law a different person altogether from
the subscribers of the memorandum; and though it may be after incorporation the business is
precisely the same as before, the same persons are managers, and the same hands receive the
profits, the company is not in law their agent or trustee. The statute enacts nothing as to the
extent or degree of interest which may be held by each of the seven, or as to the proportion of
interest or influence possessed by one or majority of the shareholders over others. There is
nothing in the Act requiring that the subscribers to the memorandum should be independent
or unconnected, or that they or any of them should take a substantial interest in the
undertaking, or that they should have a mind or will of their own, or that there should be
anything like a balance of power in the constitution of the company.”

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The principle had been recognised in India even before the Salomon case. The decision of the
Calcutta High Court in Kondoli Tea Co. Ltd Re26,seems to be the first on the subject.

Certain persons transferred a tea estate to a company and claimed exemptions from ad
valorem duty on the ground that they themselves were the shareholders in the company and,
therefore, it was nothing but a transfer from them in one to themselves under another name.

Rejecting this the Court observed: “The Company was a separate person, a separate body
altogether from the shareholders and the transfer was as much a conveyance, a transfer of the
property, as if the shareholders had been totally different persons.”

In reference to one-man companies of the Salomon type, the Bombay High Court observed:27
“Under the law, an incorporated company is a distinct entity, and although all the shares may
be practically controlled by one person, in law a company is a distinct entity and it is not
permissible or relevant to enquire whether the directors belonged to the same family or
whether it is, as compendiously described, a ‘one-man company’.”

Thus, one-man companies exist with the encouragement of the legislature, and “the great
majority of them are as bonafide and genuine as in a business sense they are convenient and
suitable media for provision and application of capital to industry.”

In Dhulia-Amalner Motor Transport Ltd. v. Raychand Rupsi Dharamsi28:

A partnership firm carrying on business of plying buses having worked for some time, some
of the partners formed a private limited company, which they could do under the law even
while the partnership continued to be a running concern. Such of the partners who formed the
company sold to the company their own buses which were heretofore being used by the firm.
The other set of partners who constituted the minority sued the section forming the company
for accounts and their share of profits on the ground that in reality the company was not a
different entity from the firm and that the business carried on by it was same as that of the
firm.

It was held that the plaintiffs had no legal right o sue for accounts of the business done by the
Company which was altogether a third person. Buses which the company was plying were
the property not of its shareholders but the property of the company itself. The company was

26
ILR (1886) 13 Cal 43.
27
TR Pratt Bombay Ltd. v. ED Sasoon & Co. Ltd, AIR 1936 Bom 62.
28
AIR 1952 Bom 337.

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a corporate body whose entity was entirely different from the entities of its shareholders.
Motive for becoming shareholders is not a field of enquiry. The law recognises the existence
of the company quite irrespective of the motives, intentions, schemes, or conduct of the
individual shareholders.

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6. ADVANTAGES OF CORPORATE FORM

Incorporation offers certain advantages to the business community as compared with all other
kinds of business organisations.

 Limited Liability

The privilege of limiting liability for business debts is one of the principal advantages of
doing business under the corporate form of organisation. The company, being a separate
person, is the owner of its assets and bound by its liabilities. Members, even as a whole are
neither the owners of the company’s undertaking, nor liable for its debts. Where the
subscribers exercise the choice of registering the company with limited liability, the
members’ liability becomes limited or restricted to the nominal value of the shares taken by
them or the amount guaranteed by them. No member is bound to contribute anything more
than the nominal value of the shares held by him.29

 Perpetual Succession

An incorporated company never dies. It is an entity with perpetual succession. In spite of the
total change in membership, “the company will be the same entity, with the same privileges
and immunities, estates and possessions.” Perpetual succession, therefore, means that the
membership of a company may keep changing from time to time, but that does not affect the
company’s continuity “in the like manner as the river Thames is still the same river, though
the parts which compose it are changing every instant.” The death or insolvency of
individual members does not, in any way, affect the corporate existence of the company.
“Members may come and go but the company can go on forever.”

 Separate Property

A company, 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 the company’s property. “The company is the real person in
which all its property is vested, and by which it is controlled, managed and disposed of.” A
member does not even have an insurable interest in the property of the company. The
property of the company is not the property of the shareholders, it is the property of the
company.

29
JH Rayner (Mincing Lane) Ltd. v. Deptt of Trade and Industry, (1990) 2 AC 418.

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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. The property, however much, the shareholders may
come and go, remains vested in the company, and the company can convey, assign,
mortgage, or otherwise deal with it irrespective of these mutations.”

Properties of a company including licenses, permits, concessions and leases are not the
property of shareholders, only of company. Transfer of shares, change of management,
company being subsidiary of another company, rights belonging to the company remain as
they were before.30

 Transferable Shares

When joint stock companies were established the greatest object was that their shares could
be capable of being easily transferred. Accordingly the Companies Act in Section 44
declares: “The shares or debentures or other interest of any member in a company shall be
movable property, transferable in the manner provided by the articles of the company.” Thus,
incorporation helps a member to sell his shares in the open market and to get back his
investment without having to withdraw the money from the company. This provides liquidity
to the investor and stability to the company.

 Capacity to sue and be sued

A company, being a body corporate, can sue and be sued in its own name.

Criminal complaint can be filed by a company but it must be represented by a natural person.
It is not necessary that the same person should act as a representative throughout. The
complaint by a company is liable to be dismissed because of the absence of the representative
in the same way in which an individual complaint is liable to be dismissed for absence of the
complainant.31

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.

 Finances

30
State of Rajasthan v. Goton Lime Stone Khanij Udyog (P) Ltd.2015 SCC Online Raj 780.
31
Associated Cement Co Ltd. v. Keshavanand, (1998) 1 SCC 687.

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The company is the only medium of organising business which is given the privilege of
raising capital by public subscriptions either by way of shares or debentures. Further, public
institutions lend their resources more willingly to companies than to other forms of business
organisation. The facility of borrowing and giving security by way of a floating charge is
also an exclusive privilege of companies.

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7. LIFTING THE VEIL OF CORPORATE PERSONALITY

As we know that after incorporation a company becomes a legal person separate and distinct
from its members. It has a corporate personality of its own with rights, duties and liabilities
separate from those of its individual members32. Thus, a veil of incorporation exists between
the company and its members and due to this a company is not identified with its members.
In order to protect themselves from the liabilities of the company, its members often take the
shelter of the corporate veil. Sometimes this corporate veil is used as a vehicle of fraud or
evasion of tax etc. To prevent unjust and fraudulent acts, it becomes necessary to lift the veil
of the corporation or disregard the corporate personality to look into the realities behind the
legal façade and to hold the individual member of the company liable for its acts or
liabilities33.

In Lee v. Lee’s Air Farming Ltd34, Lee incorporated a company of which he was the
managing director. In that capacity he appointed himself as a pilot of the company. While on
the business of the company he was lost in a flying accident. His widow recovered
compensation under the Workmen Compensation Act. “In effect the magic of corporate
personality enabled him to be master and servant at the same time.”

In Dinshaw Maneckjee Petit, re35, the assessee was a wealthy man enjoying huge dividend
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 a pretended loan. This way he divided his
income into four parts in a bid to reduce his tax liability. But it was 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. It did no business, but was created
simply as a legal entity to ostensibly receive the dividends and interests and to hand them
over to the assessee as pretended loans.”

32
Company Law: Piercing the Corporate Veil, D.S. Chopra and Nishant Arora, Eastern Law House, New Delhi,
2013
33
Rai Kailash on Company Law 10th ed. 2006 p.47.
34
1961 AC 12.
35
AIR 1927 Bom 371.

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In State of U.P. v. Renusagar Power Co.36, the court held that the concept of lifting the
corporate veil is a changing concept. Its frontiers are unlimited. However, it depends
primarily on the realities of the situation.

In The Deputy Commissioner v. Cherian Transport Corporation37, the court has held that the
company is a legal person distinct from its members. It is capable of enjoying rights and
being subject to duties which are not the same as those enjoyed or borne by its members. In
certain exceptional cases the court is entitled to lift the veil of corporate entity and to pay
regard to the economic realities behind the legal façade. The corporate veil has been lifted by
the courts and legislatures both in the interests of justice, equity and good conscience.

In Sugar India Ltd. v. Chander Mohan Chadha38, the Supreme Court has made it clear that it
is not open to the company to ask for unveiling its own cloak and examine as to who are the
directors and shareholders and who are in reality controlling the affairs of the company. The
doctrine of the lifting the veil of corporate personality is a doctrine that advocates going
behind and looking behind the juristic or corporate personality of a body corporate.
Undoubtedly, as a general rule, a company is a person distinct and separate from its members.
But, in exceptional cases, that veil of corporate personality can be lifted; and looking behind
the veil, one could see the corporate personality fading away.

Law courts have, in exceptional cases, cracked the shell of corporate personality and have
looked upon a corporation and its members from a different point of view. Courts have lifted
the veil, with the objective of preventing fraud. In such cases the members of the corporation
are considered as persons working for the corporation.

In Tata Engineering & Loco-motive Co. Ltd. v. State of Bihar39, although the veil was not
lifted, however the doctrine of lifting the veil of the corporation was considered at great
length. The law is complicated by the facts that the courts do not always take account of the
distinct personality of a company. It renders impossible to any consistent theory as to the
nature of personality and emphasizes more strongly than anything else the need to proceed
empirically in understanding the law. The courts do in some cases pierce (lift) the veil of
legal personality in order to detect and redress frauds upon creditors; the evasion of
obligations or statutes or to suppress tax evasion. In England, the problem was faced soon

36
(1992) 74 Comp. Case 128 (SC).
37
(1992) 74 Comp. Case 563 (Mad).
38
AIR 2004 S.C. 4368.
39
1964 1 S.C.J. 666.

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after War. The court may lift the veil of personality for a number of reasons. Firstly- it may
be done to ascertain whether a company is to be treated as an „Enemy Company‟ in times of
War. Thus during the First World War in Daimler Co. Ltd. v. Continental Tyre & Rubber Co.
(Great Britain) Ltd.40, a company which was registered in England and which should
normally be treated as an English Company was nevertheless held by the House of Lords to
be an enemy company because, all its directors and its shareholders except one were
Germans. This is, however, not a departure from the general rule that a company is distinct
from its members, it only shows that its character whether friendly or enemy is to be
ascertained by looking behind the veil.

A different view has been expressed in case of Kuemgel v. Donnersmarch41, where it was
held that a company which acquires enemy character in this way still remains An English
Company, if it had been registered in England. Secondly, public policy may make it
necessary to lift the veil of a legal personality to look at the realities of a situation. Thirdly, it
may become necessary to disregard corporate personality in order to prevent fraud.

40
(1916) 2 AC 307.
41
(1965) 1 All ER 46.

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8. CONCLUSION

Being merely a metaphor or an analogy, corporate personality is not entirely arbitrary and
therefore must respond to the organizational realities of the corporation as well as conform
with the treatment of organization as legal actors. As such, conception of a corporation
should be analytical and ideological, descriptive and prescriptive. The metaphor of
personality is indeed useful in describing many of the corporation's traditional and modern
corporate attributes, namely, perpetual succession, ability to own property, rights to take its
own legal proceedings, ability to create floating charge, limited liability and compliance with
the formalities of the Companies Act. Placing these attributes under the head of separate legal
entity has resulted to selection of these few salient feature existence of the concept of a
fictitious person. Nevertheless, the use of the metaphor is mainly to describe and not to
dictate the reality of corporation. As Bryant Smith pointed out:

“It is not the part of legal personality to dictate conclusions. To insists that because it has
been decided that a corporation is a legal person for some purposes it must therefore be a
legal person for all purposes… is to make of…corporate personality…a master rather than a
servant, and to decide legal questions on irrelevant considerations without inquiring into their
merits. Issues do not properly turn on a name.”

It is abundantly clear that incorporation does not cut off personal liability at all times and in
all circumstances. Honest enterprises are by means of companies allowed but the public are
protected against kiting and humbuggery. The sanctity of a separate corporate entity is upheld
so far as the ntity is consonant with the underlying policies which give it life. Those who
enjoy the benefits of the machinery of the incorporation have to assure a capital structure
adequate to the size of the enterprise. They must mot withdraw the corporate assets or mingle
their own individual accounts with those of the corporation or to represent to third parties that
no difference exists between themselves and the company.

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9. BIBLIOGRAPHY

BOOKS

Company Law, N.V. Paranjape, Central Law Agency, Allahabad, 2006 ................................ 10
Company Law: Piercing the Corporate Veil, D.S. Chopra and Nishant Arora, Eastern Law
House, New Delhi, 2013 ...................................................................................................... 26
Dr. Paranjape N.V. on Studies in Jurisprudence, legal theory .................................................. 8
F. Hallis Corporate Personality............................................................................................... 22
Fitzerald P.J.; Salmond on Jurisprudence 1988......................................................................... 8
Halsbury’s Laws of England .................................................................................................... 11
Indian Company Law, Avtar Singh, Eastern Book Company, Lucknow, 2009. ..................... 14
Maitland F.W, Introduction to Gierke‟s Political Theories of the Middle Age ...................... 21
Michoud; La theorie se la Personalite Morale ......................................................................... 20
Paton, G.W. A Text Book of jurisprudence 1972 ..................................................................... 20
Prof. Aggrawal Nomita on Jurisprudence ................................................................................ 11
Rai Kailash on Company Law ................................................................................................. 26
Sethna Jehangir M.J., on jurisprudence ................................................................................... 20
Taxmann’s Company Law and Practice, A.K. Majumdar, Taxmann Publications (P) Ltd.
New Delhi, 2009 .................................................................................................................. 11
STATUTES

The Companies Act, 1956........................................................................................................ 10

The Constitution of India, 1950 ............................................................................................... 16
WEBSITES

https://legalpoint-india.blogspot.in/2016/03/theories-of-corporate-personality.html (visited on
28th Feb, 2018) ...................................................................................................................... 7
https://www.lawteacher.net/free-law-essays/company-law/corporate-personality.php (visited
on 28th Feb, 2018) ................................................................................................................. 5

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