INTRODUCTION TO

Company - Historical
development of company law
– Chief Characteristics of

COMPANY LAW Company – Theories

corporate personality - Lifting
of corporate Veil.
of
 INTRODUCTION TO COMPANY
Company is the most common form of running
business around the world.
Why most people around the globe are opting for
‘company’ as their form of business?
It is because of the following legal
characteristics:
legal personality;
 limited liability;
Transferability of shares;
Perpetual Succession;
delegated management under a board structure;
and

Further, It has other business or financial
benefits also:
Easy to raise capital in the form of equity and
debt;
Raising capital without interest cost through
equity;
Possibility of easy business expansion even to
other countries;
Possibility of diversification of business, if
required;
Return for the capital investment for the
shareholders in the form of dividend;
Lowering the cost of business contracting;
Corporation/Companies: Classical American Definition by Chief Justice
Marshall in the famous Dartmouth College Case (Dartmouth College v.
Woodward, 1819, 4 Wheat. (U.S.) 518, 636 4 L. ed. 629):
“A Corporation is an artificial being, invisible, intangible and existing
only in the contemplation of law. Being the mere creature of law, it
possesses only those properties which the charter of its creation
confers upon it, either expressly or incidental to its very existence. These
are such as are supposed best calculated to effect the object for
which it was created. Among the most important are immortality, and,
if the expression may be allowed, individuality; properties by which a
perpetual succession of many persons considered at the same, and may
act as a single individual. They enable a corporation to manage its
own affairs, and to hold property, without perplexing intricacies, the
hazardous and endless necessity, of perpetual conveyances for the purpose
of transmitting it from hand to hand. It is chiefly for the purpose of
clothing bodies of men, in succession, with these qualities and
capacities, that corporations were invented and are in use. By these
means, a perpetual succession of individuals are capable of acting
for the promotion of the particular object, like one immortal
being”.
Early English court’s view on corporation can be seen in
Sutton Hospital case. In the Case of Sutton's Hospital [(1613,
K. B.) Io Co. Rep. Ia, 29b.] it was observed that, “the first
essential for a vital corporation was a lawful authority
of incorporation”, and explained this to mean that a
corporation must be created either by the common
law, by authority of Parliament, by royal charter, or by
prescription*”.
“Corporation is a body of persons or an office which is
recognised by the law has having a personality which
is distinct from the separate personalities of the
members of the body or the personality of the individual
holder for the time being of the office in question."
(Halsbury's Laws of England, 4th Edn., Volume 9, Para 1201)
In Life Insurance Corporation of India v. Escorts Ltd., (1986) 59 Com Cases 548 :
AIR 1986 SC 1370, the Supreme Court described a company as follows: “A
company is, in some respects, an institution like a State functioning
under its “basic constitution” consisting of the Companies Act and the
memorandum of association”.
Carrying the analogy of Constitutional Law a little further, GOWER describes “the
members in general meeting” and the directorate as the two primary
organs of a company and compares them with legislative and the executive
organs of a parliamentary democracy where legislative sovereignty rests with
Parliament, while administration is left to the Executive Government, subject to a
measure of control by Parliament through its power to force a change of
Government. Like the Government, the directors will be answerable to
“Parliament” constituted by the general meeting. But in practice (again like
the Government), they will exercise as much control over Parliament as that
exercises over them. Although it would be constitutionally possible for the
company in general meeting to exercise all the powers of the company, it
clearly would not be practicable (except in the case of one or two-man-
companies) for day-to-day administration to be undertaken by such a
cumbersome piece of machinery. So, the modern practice is to confer on the
directors the right to exercise all the company’s powers except such as
the general law expressly provide must be exercised in general meeting.”
In Colquhoun v Heddon, (1890) 6 TLR 153, the court held that
an incorporated company denotes a legal entity the
validity of which and the effect of which depends on
the law of the country in which it is established.
In Carrying Co Ltd v Asiatic Petroleum Co Ltd, (1914-15) All
ER Rep 280; (1915) AC 705, the court observed that, “a
company is an abstraction of law. It has no mind of its
own any more than it has a body of its own; its active
and directing will must consequently be sought in the
person or somebody who for some purposes may be
called an agent but who is really the directing mind
and will of the corporation, the very ego and centre of
the personality of the corporation”.
 COMPANY
Section 2(20) of the Companies Act, 2013: “company means a company
incorporated under the Companies Act, 2013 or any other previous
company law”
Section 2(67) - ‘Previous company law’ means any of the laws specified
below:—
Acts relating to companies in force before the Indian Companies Act,
1866;
the Indian Companies Act, 1866;
the Indian Companies Act, 1882;
the Indian Companies Act, 1913;
the Registration of Transferred Companies Ordinance, 1942;
the Companies Act, 1956; and
any law corresponding to any of the aforesaid Acts or the Ordinances.
the Portuguese Commercial Code, in so far as it relates to sociedades
anonimas; and
the Registration of Companies (Sikkim) Act, 1961(Sikkim Act 8 of 1961).
 Legal characteristics of Company
1. legal personality: As an economic entity, a company
has to enter into series of contracts or to hold
property. The first and most important contribution of the
company law, is to permit a company to serve this role by
itself, by enabling for the creation of the company as a
separate legal person than its shareholders.
The core element of legal personality is what the civil law
refers to as ‘separate patrimony.’
 This is the ability to enter into contract by its own with
third parties, to hold property in its own name distinct
from others, and to sue and be sued in its own name.
The effect of this legal personality is ‘a priority rule’ that
grants to the creditors of the company, a security for the
company’s debts, a claim on the company’s assets that
Priority rule give protection to the creditors of the
company. At the liquidation stage the assets of the company
will be distributed based on the waterfall payment system,
where the creditors will be on top compared to the
shareholders.
The second rule with respect to the separate legal entity
principle is the rule of ‘liquidation protection’.
This rule provides that the shareholders of a company
cannot withdraw their share of company assets at will,
thus forcing partial or complete liquidation of the company.
Similarly, the personal creditors of an individual owner
foreclose on the shareholders share of company assets.
This rule serves to protect the going concern value of the
company against destruction either by individual
shareholders or their creditors.
The company as a separate entity was firmly established in the
landmark decision in Salomon v. Salomon & Co. Ltd. [1897]
A.C. 22.
Salomon, a sole trader, sold his manufacturing business to
Salomon & Co. Ltd. (a company he incorporated) in
consideration for all except six shares in the company, and
received debentures worth 10 thousand pounds. The
other subscribers to the memorandum were his wife and five
children who each took up one share. The business
subsequently collapsed, and Salomon made a claim, on the
basis of the debentures held, as a secured creditor. The
liquidator argued that Salomon could not rank ahead of
other creditors because, in fact, the company and Mr.
Salomon were one and the same or alternatively, that
the company carried on business on Salomon's behalf.
On appeal, the House of Lords held that Salomon & Co. Ltd.
was not a sham; that the debts of the corporation were
In Lee v. Lee's Air Farming. [1961] A.C. 12. The
Privy Council held that Lee, as a separate and
distinct entity from the company which he
controlled, could be an employee of that
company so that Lee's wife could claim
workers' compensation following her
husband's death.
In Odyssey (London) Ltd. v. OIC Run Off Ltd. (2000)
TLR 201 CA., the court observed that “adherence
to the Solomon principle will not be doggedly
followed where this would cause an unjust result”. It
is called the lifting of corporate veil.
Theories of Corporate Personality:
Juristic or legal person is one to which law
attributes legal personality. Companies are legal
persons. About the nature of the personality of
companies, there are different theories advanced.
A. The fiction theory:- According to some jurists, a
corporation has a fictitious personality. Legal
personality of entities other than human
beings is the result of a fiction. This fictitious
personality is attributable to the necessity
for forming an individual organization
existing by itself and managing for its
beneficiaries, that is to say, the members of it
and its affairs.
 Juridical persons are those who exist only for juridical
purposes.
Hence, an artificial or juridical person whose
personality is created by the law. There being no
personality apart from this fictitious creation by the
law.
The US Court in William H Sanders v. Roselawn Memorial
Gardens, Inc., 159 S.E.2d 784, 800 (W. Va. 1968)
observed the following:
“The doctrine that a corporation is a legal entity
existing separate and apart from the persons
composing it is a legal theory introduced for
purposes of convenience and to sub-serve the
ends of justice….It is clear that a corporation is in
fact a collection of individuals, and that the idea
B. Concession Theory:- This theory is concerned with the
sovereignty of the state. It is of the view that as the
corporation is a legal person recognized by state or
law, so it is of great importance.
According to this theory, a juristic person is the
creation of the state. legal personality can follow from
law of the state alone.
The theory simply says that the corporate bodies are
having legal personality only to the extent
granted by the state.
This theory is different from fiction theory on the point
that it identifies law with the state while fiction
theory does not.
This theory can be justified, because in all civilized
societies, man can assume his rights, only through
C. Realist theory:- This theory is also known as “Organic
Theory”. This theory was propounded by Gierke and
Maitland was the supporter of this theory.
This theory says that a corporation is having all the
characteristics just like a natural person.
As per this theory, the legal or juristic person is
really just like the human beings. It further says that
juristic persons are not fictitious and also do not
require the recognition of the State.
The will of an individual is different from the will of an
association. So a corporation has a real psychic will,
and is, therefore, not a fictitious creature of the law but
a psychic personality recognized by the law.
This theory asserts that group personality has the
same features as a human personality. The groups
The organic theory expounds that the
company, like an organism, has members
(limbs), head and other organs. The individual
also has a head, a body with limbs that satisfy
inter-dependent functions.
A corporation, according to this theory, is a
subject of legal rights and is liable to duties
also.
According to this theory, a subject of legal
rights need not be a human being. Any being
or body with a will of its own and a life of its
own can have legal rights and can be
subject to legal duties and liabilities.
D.Symbolist Theory: This theory is also known
as Bracket Theory. The bracket theory is also
known as Jhering’s theory, as Jhering was its
exponent.
The theory says that the only persons who
are having rights and duties are the
members of the corporation. The granting
of legal personality means putting a bracket
on the members so that they can be treated
as a single unit when a corporation is
formed.
However, to understand the real nature of the
corporation, we must remove the bracket to
find out the actual position of the
F. The Ownership Theory: Developed by
Brinz, Bekker, Demelius, and elaborated
by Planiol.
It asserts that legal rights can be
possessed by human beings and not
by corporations.
According to this theory, the so-called
juristic person that is the corporation is
not a person at all.
He holds that fictitious personality is
not an addition to the class of
persons, but is only a matter of
G.The Purpose Theory: According to this theory
personality is only enjoyed by human
beings, they alone can be the subjects of
rights and duties.
The so called juristic persons are not
persons at all. Since they are distinct from
their human substratum, if any, and since
rights and duties can only vest in human
beings, they are simply “subject less
properties” designed for certain
purposes.
The main implication of this theory is that law
protects certain purposes and the interest
of individual beings. “The property supposed
H.The Kelsen’s Theory: According to Kelsen,
personality is “only a technical personification of
a complex of norms, a focal point of imputation
which gives unity to certain complexes of rights
and duties”.
Kelsen shows that there is no significant
difference between the legal personality of an
individual and that of corporation, for in the
case of both what is known as legal personality
is nothing but a complex of norms, that is to say,
what is constituted by the bundle of rights and
duties and liabilities centering round, and the
norms which rule the behavior of individuals
are also the norms that determine the rights
 LIFTING OF CORPORATE VEIL

As a result of incorporation, an incorporated company

wears a ‘corporate veil’, and thus acquires the ‘corporate
personality’, behind which there are shareholders who
have formed the company and directors and managers
who are managing the company.
Lord Denning in Littlewoods Mail Order Stores Ltd. v. IRC,
[1969] 1 W.L.R. 1241, 1254 observed that: " incorporation
does not fully cast a veil over the personality of a
limited company through which the courts cannot see. The
courts can, and often do, pull off the mask. They look to see
what really lies behind."
Thus, to lift, tear or pierce the corporate veil means to ignore
the corporate personality of an incorporated company
with a view to ascertaining the human personality
hiding behind the corporate veil, when especially, this
Separate legal personality is a fundamental aspect of
corporate law and generally courts hesitate to depart
from it.
However, In both common law and civil law countries, the
courts have the power to depart from it. Where the courts do
not give effect to separate personality, it is often said
that the courts “pierce” or “lift” the corporate veil.
In William H Sanders v. Roselawn Memorial Gardens, Inc.,
159 S.E.2d 784, 800 (W. Va. 1968) the court observed that,
“The doctrine that a corporation is a legal entity existing
separate and apart from the persons composing it is a legal
theory introduced for purposes of convenience and to
subserve the ends of justice….It is clear that a
corporation is in fact a collection of individuals, and
that the idea of a corporation as a legal entity or
person apart from its members is a mere fiction of the
Under What circumstances the veil can be lifted?
In a Singapore in case, Tjong Very Sumito v. Chan Sing En
[2012] SGHC 125 (Sing.) [67] court observed the following:
“Courts will, in exceptional cases, be willing to pierce
the corporate veil to impose personal liability on the
company’s controllers. While there is as yet no single
test to determine whether the corporate veil should be
pierced in any particular case, there are, in general, two
justifications for doing so at common law —
 first, where the evidence shows that the company is
not in fact a separate entity; and
 second, where the corporate form has been abused to
further an improper purpose.”
United States v. Milwaukee Refrigerator Transit Co.,
142 F. 247, 255 (E.D.Wis. 1905)., Corporate
personality will be respected unless the “legal
entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime”.
The court in Amlin SA v van Kooij, 2008 (2) SA 558
(C). stated that opening the curtains or piercing the
veil is somewhat a drastic remedy, and therefore it
must be used as a last resort especially where
it will not be just to do so for parties. Piercing
can therefore not be used as an alternative
remedy where another remedy can be applied on
the same facts.
Judicial decisions of lifting or piercing of corporate veil:
To Identify the Nationality/Enemy Character: in Dalmer Co.
Ltd. V Continental Tyre & Rubber Co. Ltd. (1916), 2 AC 307, a
company which was registered in England and which should
normally be treated as an English Company was held by the
House of Lords as 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.
Life Insurance Corpn of India v Escorts Ltd AIR 1986 SC 1370, it
was held that the lifting of the veil is necessary to discover
the nationality or origin of the shareholders and not to find
out the individual identity of each of the shareholders. The
corporate veil may be lifted to that extent only and no more.
 To Prevent Fraud:
In Gilford Motor Company Ltd v. Horne, [1933] Ch. 935
(CA), Mr. Horne was an ex-employee of The Gilford
motor company and his employment contract provided
that he could not solicit the customers of the
company. In order to defeat this he incorporated a
limited company in his wife's name and solicited the
customers of the company. The company brought an
action against him. The Court of appeal was of the view that
"the company was formed as a device, a stratagem, in
order to mask the effective carrying on of business of
Mr. Horne. “In this case it was clear that the main
purpose of incorporating the new company was to
perpetrate fraud.” Thus the court of appeal regarded
it as a mere sham to cloak his wrongdoings.
Tortious/Fraudulent activities:
In the Canadian case of Halford v. Seed Hawk Inc., 2004 FC 455,
(2004) 31 C.P.R. 4th 434 (Can. Fed. Ct.)., Pelletier J said that the
courts would not allow a corporation to be used as an
instrument of fraud. Personal liability attaches to a director
where such behavior is tortious, or when the corporation is
used as a cloak for the personal activities of the director.
Juggilal Kamlapat v Commissioner of Income Tax, Uttar Pradesh
AIR 1969 SC 932, Where the company is used as a cloak
or as a device, the court does not hesitate to ignore
the principle of legal person of the company and look
behind the veil of its incorporation to grant appropriate relief.
It was held that the courts are entitled to lift the mask of corporate
entity if the conception is used for tax evasion or to
circumvent tax obligation or to perpetuate fraud.
Sir Dinshaw Maneckjee Petit Case [AIR 1927 Bombay 711]
The assessee, Sir Dinshaw Maneckjee Petit, was an wealthy man enjoying
large dividend and interest income. He had formed four private companies
namely Petit Limited; the Bombay Investment Company Limited; the
Miscellaneous Investment Limited; and the Safe Securities Limited; and
agreed to hold a block of investment as an agent. Income revived was
credited in the accounts of the company but the company handed back the
amount to him as a pretended loan, like this, he divided his income into 4
parts so that he can easily escape the tax liability.
The Advocate General asserted that the disposition by the assessee in favor
of each family company is a sham, and that the transactions are only on
paper and fictitious. The family’s business is only in the nature of the agent
of the assessee and that in any event, the alleged loans are not genuine
loans. He consequently claimed that the sums in dispute represent taxable
income of the assessee under Sections 2 (15), 3, 6, 12, 55, 56, and 58 of the
Indian Income Tax Act, 1922. The newly formed companies had 38 objects in
its memorandum. Apart from entering into agreements with assessee,
it wasn’t involved in any active business.
It was held that the company was formed only with an intention to
The prevent the avoidance of taxation/welfare legislations:
Workmen Employed in Associated Rubber Industry Ltd, Bhavnagar v Associated Rubber
Industry Ltd, Bhavnagar AIR 1986 SC 1, it was held that, the corporate veil is lifted to
prevent companies to avoid welfare legislation. It has been emphasized that regard
must be had to the substance and not to the form of a transaction. Associated
Rubber Industries Ltd. had purchased shares of the company INARCO Ltd by
investing an amount of Rs. 4,50,000. The company was receiving the annual
dividends in respect of the shares in INARCO and the amount that was received was
appearing in the profit and loss account of the company year after year. This
amount was taken into consideration for calculating the bonus that was payable
to the workmen of the company. In the year 1968, the shares of INARCO Ltd. were
transferred into the subsidiary named Aril Bhavnagar Ltd which was wholly owned
by the Associated Rubbery Industry Ltd and the transferred shares of INARCO accounted as
the only capital of Aril Bhavnagar Ltd. he dividend income generated from the shares was
not being transferred to the Associated Rubber Industries Ltd and therefore, the
amount that was previously shown in the profit and loss account was not there
now and it resulted in reducing the bonus that was previously given to the
workmen of the company.
The Supreme Court lifted the corporate veil and took into account the amount of dividend
that the Aril Holdings Ltd. received from the shares of INARCO for calculating the bonus
that was rightly payable to the workmen of the Associated Rubber Industry Ltd
and held that the workmen of the company are righteously entitled to get the
bonus at the rate of 16 % for the year 1969 and not 4%.
 Tax Evasion:
Santanu Ray v Union of India (1989) 65 Comp Cas 196, it
was held that, the doctrine of lifting of corporate veil
is applied in regard to the prosecution of directors for
alleged evasion of excise duty by the company.
Contempt of Court:
Jyoti Ltd v Kanwaljit Kaur (1987) 62 Comp Cas 626 (Del),
it this case, the corporate veil of a private company is
lifted and its directors are held liable for contempt
of court. The lifting of the corporate veil has been
considered imperative to punish improper conduct as
public interest requires that the corporate veil must
be lifted to find out the persons who disobeyed the
order of the court.
Holding and Subsidiary Company:
In Turner Morrison & Co Ltd v Hungerford Investment Trust Ltd
AIR 1969 Cal 238, it was observed that the holding companies
and subsidiary companies are incorporated companies and
each is a separate legal entity. Each has a separate corporate
veil and just because a company is a holding company, it does
not mean that the holding company and the subsidiary
companies within the group, all constitute one single
company. Except to the extent the statute indicates the nature of
the holding company and the subsidiary company, the corporate
veil still subsists.
Hackbridge-Hewittic & Easun Ltd v G E C Distribution Transformers
Ltd (1992) 74 Comp Cas 543 (Mad). It was observed that when a
subsidiary does not enjoy any real autonomy, in the
determination of its course of action in the market, it is
possible to say that it has no personality of its own and that it
has one and the same as the parent company.
US Courts applied “instrumentality doctrine” with following
three factors for lifting of corporate veil.
Lowendahl v. Baltimore & O.R. Co. 287 N.Y.S. 62, 76 (N.Y.
App. Div.), aff’d 6 N.E.2d 56 (N.Y. 1936)
First, it requires more than control of the corporate entity.
Liability must depend on “complete domination, not only of
finances, but of policy and business practice in respect to the
transaction in question, so that the corporate entity as to this
transaction had at the time no separate mind, will or
existence of its own.”
Second, the defendant must have used such control “to
commit fraud or wrong, to perpetrate the violation of a
statutory or other positive legal duty, or a dishonest and
unjust act in contravention of the plaintiff’s legal rights.”
Finally, the control and breach of duty must have caused the
injury or loss complained of.
‘Alter Ego’ ground for Lifting of corporate veil:
This ground is premised on the company carrying on the business of its
controller. [Alwie Handoyo v. Tjong Very Sumito [2013] SGCA 44]
This may arise because the company was the agent or nominee of the
controller. [NEC Asia Pte Ltd [2011] 2 Sing L. Rep. 565 [31]]
Alwie Handoyo v. Tjong Very Sumito, Alwie, [2013] 4 Sing. L. Rep. 308
[96] – [100], the Court of Appeal accepted that the appellant, Alwie,
was the alter ego of a company known as OAFL. Accordingly, the
court reasoned that OAFL’s corporate veil should be pierced. Alwie
beneficially received payments from OAFL’s bank account and
Alwie admitted that he used the account as his personal bank
account, which is an example of commingling. In Alwie’s view, he was
authorized and entitled to receive money paid to this bank account. In
addition, Alwie also actively procured a payment due to OAFL into
his personal bank account.
In the view of Lord Sumpton, the real actor was Alwie and OAFL
was merely a convenient vehicle for him to structure a
transaction to which he was the true protagonist.
In Gencor ACP v. Dalby [2000] EWHC 1560
(Ch), where a company had no sales force,
technical team or other employees capable
of carrying on any business. Its only function
was to make and receive payments. On this
basis, the court found that the controller of
the company was the alter ego of that
company.
There are many statutory instances for the lifting of
corporate veil under the Companies Act, 2013. For
example,
A. Officer in Default (Section 2(60)) - “officer who is in
default”, for the purpose of any provision in this Act which
enacts that an officer of the company who is in default
shall be liable to any penalty or punishment by way of
imprisonment, fine or otherwise, as provided under the Act.
Officer in default includes a Whole time director, key managerial
personnel, etc.
B. Reduction of membership below statutory minimum:
Under Section. 3A of the Companies Act, 2013, members are
severally liable for the payment of the whole debts of the
company (contracted during the defaulted 6 months), if the
members of the company are allowed to fall below the
prescribed statutory minimum for more than 6 months.
C. Improper use of the name (s.453): in the case of an
officer of a company who signs any bill of exchange, hundi,
promissory note, cheque wherein the name of the company is
not mentioned in the prescribed manner, such officer can
be held personally liable to the holder of the bill of exchange,
hundi etc. unless it is duly paid by the company.
D. Liability for fraudulent conduct of business (Section
300, 337 339 and 447): If in the course of the business or
winding up of a company, it appears that any business of
the company has been carried on with intent to defraud
the creditors of the company or any other person or for any
fraudulent purpose, the persons who were knowingly parties
to the carrying on of the business shall be examined and
liable to be punished, shall be personally responsible,
without any limitation of liability for all or any of the debts or
other liabilities of the company, as the court may direct.
E. Mis-statement in Prospectus and fraudulently
Inducing person to invest money – (Section 26, 34, 35 and
36) Attaches civil and criminal liability for mis-statement in
the prospectus issued for public offer of securities. Any
person who, either knowingly or recklessly makes any
statement, promise or forecast which is false, deceptive or
misleading, or deliberately conceals any material facts, to
induce another person to invest be liable to be punished
under section 447.
F. For investigation as to True Owner: (Section 216) The
Central Government has authority to appoint inspectors
to investigate and report matters relating to the
company, and its membership for the purpose of
determining the true persons, financially interested in the
success or failure of the company; control or to materially
influence the policies of the company.
G. Failure to return application money: (Section 39) If the
minimum stated amount has not yet been subscribed and
the sum payable on application is not received within a
period of thirty days from the date of issue of the prospectus, the
amount received under sub-section (1) shall be returned within
such time and manner as may be prescribed. If the amount not
returned or failed to file the return of allotment with
Registrar within the prescribed time, the officers in default
are fined with an amount of one thousand rupees for each day
till the time the default continues or one lakh rupees, whichever
is less.
F. Furnishing false statements: (Section 448) If in any
return, report, certificate, financial statement,
prospectus, statement or other document required, any
person makes false or untrue statements, or conceals any
relevant or material fact, then he is liable under Section
447 of the Act.
2. Limited Liability Principle: This principle imposes a
default term in contracts between a Company and its
creditors that the creditors are limited to making
claims against the assets of the company itself, and
have no further claim against the personal assets of
the shareholders or directors of the company.
This limitation of owner’s (shareholder) liability
distinguishes the company from a partnership. (exception -
Limited Liability Partnership (LLP))
Normally shareholders liability is limited by the shares
or by guarantee. But in India, a company can be
incorporated with unlimited liability to its shareholders
also. (Unlimited Company).
Even if the company has a single shareholder like One
Person Company(OPC), the limited liability principle
3. Transferability of Shares: Fully transferable
shares in ownership are yet another basic
characteristic of the company that distinguishes the
company from an ordinary partnership.
Transferability permits the company to conduct
business uninterruptedly as the identity of its
owners changes.
It is avoiding the complications of member
withdrawal that are common in partnership.
This in turn enhances the liquidity of
shareholders’ interests and makes it easier for
shareholders to construct and maintain
diversified investment portfolios.
 Fully transferable shares do not
necessarily mean freely tradable shares.
Even if shares are transferable, they may
not be tradable without restriction in
public markets. (Regulated by SEBI and
stock exchanges)
In case of a private company, its shares are
transferable only among its existing
shareholders, if unwilling, then to an
outsider with the approval of the
company.
4. Perpetual Succession:
An incorporated company never dies. It is an
entity with perpetual succession.
Shareholders may change, but the company
will remain as the same entity.
According to Canfield, “the company will be
the same entity, with the same privileges
and immunities, estates and
possessions”.
The death or insolvency of individual
shareholders does not, in any way, affect
5. Delegated management with a board
structure: Delegated management is an
attribute of companies with numerous
shareholders.
Generally, the Shareholders who are not
experts in the management of the company.
They are delegating the management of
the company to a set of periodically
elected, capable and experienced
persons in the management collectively
called Board of Directors.
Delegation permits the centralization of
management necessary to coordinate
The board is formally distinct from the
company’s shareholders.
This separation economizes on the costs of
decision-making by avoiding the need to
inform the shareholders and obtain their
consent for all but the most fundamental
decisions regarding the Company.
However, this separation of ownership
from management created agency
problem and it involved agency cost
[Berle and Means Separation Thesis]
6. Investor ownership: There are two key elements in
the ownership of a company, as we use the term
‘ownership’ here:
•the right to control the company, and
•the right to receive the company’s net earnings.
Both are to a large extend enjoyed by the shareholders.
Right to vote in the General Meeting (AGM/EGM)
of the company and right to receive the dividend
are exercised by the investor/shareholders of the
company.
But the management decisions are taken by the Board
of Directors elected by the shareholders in General
Meeting and the Board of directors can also decide not
to pay dividend for a particular Financial year.