Chapter 1

1. Discuss the meaning nature and scope of corporate personality with decided case laws.
2. Corporate personality is a creation of law – Discuss the meaning nature and scope of corporate personality
with decided case laws.
3. The company is vested with a corporate personality quite distinct from individual who are its members.
Discuss with deciding case laws
4. company is an artificial person created by the law. It can enter into contracts possess properties in its own
name, sue and can be sued by others. Justify.
5. Company is a body of corporate personality distinct from its members who lies at the root of many of the
most perplexing questions that beset company law- Discuss the meaning nature and scope of corporate
personality with decided case laws.
6. Discuss Doctrine of corporate personality in the light of the judicial pronouncement.
(Decided case laws).
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Answer:

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.

For the first time, this concept was recognized in the year 1867 in the case of Oakes v. Turquand and Harding.
But it was approved and firmly established in the leading case of Salomon vs. Salomon in which it was held
that a company has its own personality which is different from the personalities of the individuals.

The decision of the Calcutta High Court in Re. Kondoli Tea Co. Ltd., (1886) ILR 13 Cal. 43, recognised
the principle of the separate legal entity even much earlier than the decision in Salomon v. Salomon &
Co. Ltd. case. Certain persons transferred a Tea Estate to a company and claimed exemptions from ad
valorem duty on the ground that since they themselves were also the shareholders in the company, it
was nothing but a transfer from them in one name to themselves under another name.

While rejecting this Calcutta High 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.
Features of corporate personality/Nature

As mentioned earlier, corporate personality is distinct from natural personality. Some of the features that make
corporate personality distinct are given as follows:

1. Artificial personhood
Corporate personality gives a fictitious or artificial personhood to corporate entities. This enables the
corporate entities to have their own presence separate from their agents and conduct day-to-day business
activities such as financial transactions in their own name. It also allows a company to engage in actions such
as opening and managing bank accounts, taking debts, lending money, hiring employees, entering into
contracts and agreements, as well as suing and being sued.

2. Rights and obligations

Once incorporated, a company gains its separate personality from its members and shareholders. This
corporate personality enables them to have their own rights and obligations since they are recognised as a
legal person in the eyes of the law.

3. Independent operations
Corporate personality enables a company to operate independently from the shareholders and its members.
This is possible due to a separation between the company and its members by creating a separate legal identity
or personality, which we will cover more in detail later in the article.

4. Collective will
While corporate personality creates a separation between the identity of the company and its members, a
company cannot quite function without its members either. As an artificial person, a company needs natural
persons to act as its agents or representatives.

The will of the natural persons forming the company; that is, its members and shareholders help create the
will of the company. Their collective will is decided by voting in general meetings and whatever decision is
made by the majority, the company would act on it. This decision would then be expressed through a common
seal, which is the physical symbol of such collective will.

Benefits of corporate personality/Scope

There are many benefits of a corporation having its own personality, some of which are mentioned below:

Independent Identity
As mentioned earlier, corporate personality allows a corporation to have a separate legal identity from its
members and shareholders, giving the corporation its own existence and presence. This separation helps
protect the shareholders from the liabilities of the actions of the company while giving the company freedom
from any arbitrariness that might be committed by its major shareholders or directors.
Such independent identity also allows easier legal proceedings in case of a lawsuit, allowing a company to
sue and be sued in its own name. Furthermore, any property that is in the name of the company is solely
owned by the company and not any of its members.

Limited liability
One of the most popular and sought-after advantages of corporate personality is the limited liability aspect.
In simpler terms, it is the privilege of a member or shareholder of a company where their liability is limited
by how much they invested in the company. None of the shareholders and investors are liable beyond the
amount they have invested in the corporation.
Thus, in the event of insolvency or winding up, none of the liability of debts and obligations of the company
falls upon the shareholders and their personal assets. This is especially beneficial given that the liability does
not fluctuate with time or price.

Perpetual Succession
As mentioned earlier, since the identity of a company is not dependent on its members and shareholders, it
can exist beyond their lifetime. Even if all the members quit, change, retire or even expire, the company would
retain its identity until it has been wound up. The assets, property and any other privileges enjoyed by the
company would continue as long as it shall exist.

Shares and their transferability

Shares of a company, like any other asset, can be treated as movable property that can be transferred and even
inherited. According to Section 44 of the Companies Act, 2013, the nature of shares, debentures and any other
interest that a member may have in the company is a movable property that can be transferred in the manner
as prescribed by the AOA of the company.

Since the shares are transferable, by selling their shares to the public, a company generates its capital and
finances. The maximum corporate finance can be generated in a very quick and easy manner by listing the
shares and debentures of the company publicly and allowing public subscriptions at a fixed rate.

Separate assets and property

As mentioned earlier, all the assets and property bought or transferred in the name of the company remain in
its name. It is not owned by the shareholders nor do they have any right on property vested in the corporation.
This not only allows a perpetual succession of the property through the company despite the changes of its
members and shareholders but also allows the company to have complete power over the property just as any
other legal person.

Centralised management
The management of any corporate entity is divided into several levels and is considered different from the
formative control that is usually exercised by the shareholders. In simpler terms, ownership and management
of a company are two completely different things. The management of a company is usually handled by the
employees of the company, including the board of directors. They are the ones who decide the policy and
actions of the company while the shareholders simply vote and give a general consensus on whether they
want the company to act upon such decisions or not.
This centralised form of management helps create more efficiency and a distinction between the identity of
the shareholders and the company, in which we can also see the corporate personality playing a vital role.
This gives the company its own autonomy and flexibility regarding its decisions and policy-making under the
guidance of the professional expertise of its directors and employees.

To sue and be sued

Due to corporate personality and the resulting separate legal identity, registered corporate entities have the
capacity to sue and be sued in their own name. And while the company needs to be represented by a natural
person, all the liabilities and rights from a lawsuit shall be of the company itself. This includes any kind of
claim, compensation, or even punishment for criminal offences. A company can even sue for defamation if
its image was hampered by any such false and/or defamatory comment.
The topic of corporate personality will be briefly described through the following landmark
judgements:

CASE STUDY 1: 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 2: Lee v. Lee’s Air Farming Ltd. (1961) AC 12

FACTS:
1. 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.

2. 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.

3. 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.

Conclusion:
From the date of its incorporation, a company becomes in law a different person altogether from the member
who composes it. Thus, an incorporated company has a legal personality distinct from that of its members
from the date of its incorporation.

A company is an artificial person according to the law. It is capable of exercising rights, carrying out
obligations, and holding property in its own name. As a result, the law was the only source of inspiration for
the idea of corporate personality. The corporate personality of a corporation under the 2013 Companies Act
is the best illustration of this. According to the legislation, such a corporation has its own legal identity. The
members and representatives of such a corporation serve as its representatives. However, unlike a regular
person, these corporations remain indefinitely.