CORPORATE’S LEGAL PERSONALITY: A COMPARATIVE ANALYSIS
Author(s):
Journal: International Journal for Legal Research and Analysis | ISSN: 2582-6433 | Published: 2023/12/23 | Issue: 7
CORPORATE’S
LEGAL PERSONALITY: A COMPARATIVE ANALYSIS
AUTHORED
BY - TANISHA GARG
BBA
LLB
SECTION-E
21011315
The concept
of “separate legal personality” as a fundamental tenet of the Indian Company
Law is conceived and developed in UK. The doctrine ensures that a company
exists as separate legal entity from its shareholders and owners, giving
the corporations some legal protection and shielding the owners from personal
liability for the company's debts and responsibilities. Companies benefit from
it by opening up to new markets, lower taxes, and benefit from
advantageous business conditions.[1] It
also gives the companies an advantage of perpetual succession i.e "members
may come and go, but the company stays on until it‘s winded up by due process
of law”. Section 34 of the Indian Companies Act, 1956 reflects the company's
distinct legal existence after incorporation. It is capable
of exercising its functions without the assistance of its members[2].There
are four popular theories surrounding the “separate legal personality”. Firstly,
the fiction theory holds that there are ideal persons existing in the legal
domain that have legal implications attached to them, thus, judicial
personality is a result of state legislation that bestows this ability. It is
the most accepted and commonly practiced theory. The second theory believes
that the state is the ultimate authority and that there are certain sets of
rights and obligation, not to any particular individual but are linked to goals
for which corporations, temples, churches, hospitals, etc . are created. The
third recognises that the corporations have the ability to be treated as
individuals, since they are the benefactors of the vesting rights. Fourthly, the organism theory claims that states
and corporations are being just as alive and as capable of having a will as the
human beings with subject of rights.[3]
Another concept that is recognised by the courts is
limited liability company structure that shields its members from being personally held liable for repayment
of the company's debts or liabilities[4].It
brings out the theory of corporate veil that is a privilege that shields an
individual handling the company legitimately and fulfilling all the
formalities, from his assets being held liable for the debts of the company or
any other legal obligations. However, the shareholders can be held personally
liable and their personal assets be seized if it is found that the
firm has been involved in fraudulent activity or that its operations were
not carried out in accordance with the rules.[5] Therefore,
by "piercing the corporate veil," the courts may ignore limited
liability and hold directors or investors personally liable for the acts or
debts of a company. The principle of "lifting
the corporate veil" is regarded by the
courts, as an ‘exception ‘to the
corporate personality rule of corporate law.
Before the mid-nineteenth century,
Corporation such as the unregistered Joint stock companies were governed by partnership
law, and was created either by a royal charter, common law, or parliament’s
approval to be bestowed upon rights such as limited liability and the right to
sue. The Joint Stock Companies Registration
and Regulation Act 1844 [6]in
the UK, identified a specific type of joint stock company that was distinct
from the partnership, both legally and organizationally separate, promoting the
concept of a corporate personality. Even with
legislation’s lenient provisions, the proportion of public firms incorporation
grew slowly. By 1914, only five percent of newly registered firms were
"public," compared to two to four thirds of "public"
corporations in 1890. Of the 62,762 companies on the register, 48,492 were
private by that time. The provided data demonstrates how the number of private
company incorporations increased as a result of avoiding a public flotation and
the Companies Act 1856 [7](UK)'s
removal of the majority of the 1844 disclosure requirements, which allowed
private companies to maintain the advantages of privacy and secure control over
their operations.[8]
The idea of a corporation's separate legal personality is referred
to as a fundamental principle of company law. The law pertaining to "piercing the corporate veil" intervenes
to preserve equilibrium and prevent the limited liability concept from being
misused to adversely affect the interests of third parties, particularly
creditors. The case of Salomon v. Salomon & Co. Ltd[9].
in 1897 led to the development of the “separate legal personality”, which dealt
with the validity of limited liability for a single beneficially owned business.[10] After a year of incorporation, Solomon's business failed
and he retained 20,000 of the shares, while the other seven stockholders were
all members of his own family with only one nominal share each. As a result, he
was in control of the company's corporate governance and had a priority claim
on its assets through his debentures. The case involved claims of certain
unsecured creditors in the process of liquidation of Salomon Ltd., for which he
was made personally liable for the company’s debt.[11]
The House of Lords in 1897, took note to
establish that Salomon's business was solvent at the time of
incorporation, and held that the objective of a corporation is to limit
liability legitimately through the procedure of incorporation, and Salomon
merely followed the precedent set by numerous other businesses, including
"industrial and banking concerns of the highest credit," and
Salomon's actions were not in violation of the UK's Companies Act of 1862. It
rejected the contentions of the unsecured creditors that the company was a mere
“alias” or agent for Mr Salomon. “The company is at law a different person
altogether from the subscribers to the memorandum” [12],
the judgment reinforced shareholders' limited responsibility and upheld the
sole proprietor's right to assert independent legal personality for their
business. It demonstrated an understanding of the risk of fraud[13],
and even after the mismatch between economic entity and legal personality that
may be found in many organizations due to networked and inter-firm linkages, it
did not lead to the lifting of the corporate veil.
The position of law relating to the separate legal
personality of a company has been deeply entrenched in the very roots of the
common law tradition.[14]
Some other cases to determine the scope of the corporate veil is VTB
Capital PLC v. Nutritek International Corporation[15],
wherein the common position was establised that if corporate structure
was being used as a “sham” or a “fac?ade” to conceal wrongdoing, [16]then,
court can invoke the lifting of veil. The House
of Lords pierced the corporate veil of Daimler Co. Ltd. v. Continental Tyre and
Rubber Co. Ltd. to examine its character and found out that it is a foe
organization, and if allowed to continue doing business, it will be utilized to
generate cash for the enemies, and that will be against the public interest of
the country[17].
The doctrine of corporate veil was narrowed down by accommodating
changes to the Salomon principle. It was determined that under certain
conditions, the corporate veil may be lifted, making the directors or
shareholders of the business subject to liability and requests to share in the
company's debts [18]The
limited principle of English law, which states that an individual is subject to
an existing legal duty, liability, or limitation that he purposefully avoids or
whose enforcement is purposefully thwarted by interposing an organization under
his control, was upheld in the case of Prest v. Petrodel Resources Ltd[19].
A court may breach the corporate veil to prevent the company or its controller
from benefiting from the legal personality of the firm. However, this may only
be done in limited circumstances involving the beforementioned principles. The
concealment principle is applied when a business engages in a transaction in
order to disguise its true character. The Evasion principle is invoked when an
individual has a legal right against the company's controlling party, the
company will intervene in a way that will override the individual's legal right
because it is a distinct legal entity.[20]
The concerns raised in Trustor AB v Smallbone [21]validates
the position that the corporate veil cannot be lifted merely if remedy for a
plaintiff is to go under the narrow exception of fraud or avoiding an existing,
fully crystallized contractual or legal obligation as in Jones v Lipman [22]or
Gilford Motors but the justice should require it to be done. Then, in order to
stop deception, the courts must use equitable discretion. [23] The
issue that equity courts must address is how to apply the law in a fair and
reasonable manner so as to preserve the harmony between the legal principle and
the principle intended to prevent potential abuse.
Indian company law was first established by the U.K.
Companies Act, 1956, and numerous changes have been
incorporated since then to codify the Companies Act, 2013. A corporation is granted the attributes of an
independent legal body, including perpetual succession and a common seal, under
Section 9 of the Companies Act, 2013[24].
This includes the ability to purchase, hold, and dispose of property, enter
into contracts, and bring legal action under the company's name. Additionally,
a number of provisions that allows for the lifting of the corporate veil have been
introduced into the Companies Act, 2013. In Bacha F. Guzdar v. CIT, Bombay, the
honourable Supreme Court of India acknowledged that a company's legal identity
was separate from that of its stockholders. Since then, this position has been
utilized to establish the "Corporate Veil," which separates a company's
existence from its owners (individuals or entities)[25].
"The doctrine of 'piercing the corporate veil' stands as an exception to
the principle that a company is a legal entity separate and distinct from its
shareholders with its own legal rights and obligations," the court noted
in Balwant Rai Saluja v. Air India Ltd. (2006).[26]
Indian courts use the theory of "piercing the
corporate veil" or "lifting the corporate veil" based on two
theories: The theory of alter ego states that when there exists no clear line
of distinction between the company and its owners and the company simply acts
as their alter ego in order to engage in illicit activity.The instrumentality
theory describes the situation in which a company's directors or owners exploit
the company's corporate identity for personal gain rather than the company's
gain.[27]
Although the Solomon principle continues
to be upheld, India has seen a substantial developments in their legal
frameworks over time. In Life
Insurance Corporation of India v. Escorts Ltd., the Hon'ble Supreme Court observed
that, “it is neither necessary or
desirable to enumerate the classes of cases where lifting the veil is
permissible, since that must necessary depend on the relevant statutory or
other provisions, the object sought to be achieved, the impugned conduct, the
involvement of the element of public interest, the effect on parties who may be
affected, etc.[28]"
In such circumstances, the court is to lift
the corporate veil, in-order to recognize the accused at fault.
Some cases in India have laid
down the grounds for lifting the corporate veil such as Fraud or Improper Conduct which are also mentioned under
section 339 and 35 of the Companies act, 2013. When a person conducts business
on behalf of a company with the intention of defrauding creditors or for any
other fraudulent purpose while the company is being wound up, Section 339 gives
the National Company Law Tribunal the authority to hold that person accountable
for fraud[29].
In Delhi Development Authority v Skipper Construction Co.
Ltd, the
Supreme Court held that “the concept of corporate entity was evolved to
encourage and promote trade and commerce : but not to commit illegalities or to
defraud people”[30],
hence the court can look beyond the corporate nature of the
company in cases where it is being utilized to conduct fraud. The case of State
of Rajasthan & Ors v Gotan Limestone Khanji Udyog Pvt. Ltd. & Anr and Kapila
Hingorani v. the State of Bihar, held similarly that the doctrine of lifting
the veil can be invoked in situations there is a claim of a legal violation or
when the public interest so demands, by using the device of a corporate entity.
[31]
The case of Vodafone International Holdings B.V. v Union
of India, has recognised the principle to “invoke the ‘substance over form’ principle
or ‘piercing the corporate veil”, if it is able to establish that the
transaction is a “sham or tax avoidant”. The facts were such that the revenue
authorities declared that a capital gain tax of ?12000 crores would be imposed
on the transfer of 67% of an Indian entity's shares that resulted from the
acquisition of shares of another offshore company. The company contends that
since it was incorporated overseas, the revenue authorities lack the authority
to seek payment of taxes. The Supreme
Court ruled that foreign investors are permitted to enter India through special
purpose vehicles (SPVs) and foreign holding companies that have been approved
by Indian corporate and tax regulations. It emphasized the rules for tax
authorities to pierce the veil in future , must focus on the purpose of the
transaction by taking into account a number of indicators such as participation
in investment, generation of taxable revenues in India etc. [32]
In the case of State Trading Corporation v C.T.O , being
a government owned company and the Tata Engineering and Locomotive company ltd[33].,
a privately owned one. In both the cases ,the court refused to pierce the
corporate veil and acknowledge that the share-holders were moving the court
under article 32, because "it would really mean that what the corporations
or the companies cannot achieve directly, can be achieved by them indirectly by
relying upon the doctrine of lifting the veil." The Supreme Court declined
to pierce the veil in the above cases not because doing so would have violated
judicial norms, but rather because doing so would have prevented corporations
from gaining fundamental rights.[34] In JB Exports, the Delhi High Court also observed that
the doctrine should be should be applied to encourage the expansion of the
industry as well as instances of fraud or avoidance of legal responsibilities[35].Thus
,the court ought to strike a balance between
respecting the independent identity of the company and permitting the flexible
use of piercing the corporate veil . As it was held In the case of State
of U.P. v. Renusagar Power Co[36].
that although it is not a generally accepted
rule, courts should only lift the corporate veil under extraordinary
circumstances in order to benefit corporations.[37]
It can be said beyond doubt
that it is not just about disregarding the corporate personality but about
placing reasonable limitations on the usage of the right of independent
capacity. Policies supporting the piercing of the veil must be weighed against
those supporting the piercing of the corporate veil. An understanding of the
English case laws reveals that the legislation is cautious when it comes to
lifting of the corporate veil, treating the principles of limited liability and
separate legal identity as unalterable. Indian courts on the other hand have
created a more liberal interpretation for piercing the corporate veil that also
takes into account the interests of all the shareholders whose interest get
affected by the company’s actions. [38] Although
the cases that have been referred demonstrate a great deal of variation in
the nuanced features of when a corporation's separate personality might be
avoided, the prevention of injustice is a valid argument in all of the cases.
The court tends to rule in favour of justice whenever it is convinced that
it would lead to prejudice or would particularly impair the functioning of
a corporation..[39]
For implementation of such an aspect, the Companies Act, 2013 grants the
Central Government the authority to designate inspectors for the purpose of
conducting investigations. Additionally, Section 212 [40]empowers
the Central Government to designate a Serious Fraud Investigation Office for
the purpose of reporting on the company's affairs and identifying the true individuals
who have a financial stake in the company's success or failure, control or
significantly influence the company's policies, or have a beneficial interest
in the company. Although judicial independence is crucial, it is acknowledged
that further statutory measures should be implemented to lessen the room for
uncertainty in regulatory law. State
intervention has been recognised as a significant factor for safeguarding not
just the company and community, but also the economy.[41]
[1] Budustour Y and Budustour L, ‘The Doctrine of
Separate Legal Personality and It’s Significance in International Business’
[2023] SSRN Electronic Journal
[2] Indian Companies Act 1956 s.34.
[3] Bahadur Krishna, 'Personality of Public Corporation
and Lifting the Corporate Veil' [1972] Journal of the Indian Law Institute 207
[4] Fernando J, ‘What Is an LLC? Limited Liability
Company Structure and Benefits Defined’ (Investopedia)
accessed 31 October 2023
[5] Singh Aparajita, ‘An analysis on the Doctrine of
lifting of corporate veil’, Indian Journal of Integrated Research in law
[6] Joint Stock Companies Registration and Regulation Act ,1844
[7] The Companies Act ,1856
[8] Singh Aparajita, ‘An analysis on the Doctrine of
lifting of corporate veil’, Indian Journal of Integrated Research in law
[9] Salomon v Salomon & Co Ltd
[1897] AC 22
[10] ‘The
Concept of Separate Legal Entity in Light of Corporations’ (Academike,
30 January 2015)
[11] Ltd AA, ‘Salomon v Salomon - Case Summary’ (Law
Teacher, 31 October 2023)
accessed 31
October 2023
[12] Salomon v Salomon & Co Ltd
[1897] AC 22
[13] Ville SP, ‘Judging Salomon: Corporate Personality and
the Growth of British Capitalism in a Comparative Perspective’ (1999) 27
Federal Law Review 203
[14] Mohanty S and Bhandari V, ‘The Evolution of the
Separate Legal Personality Doctrine and Its Exceptions: A Comparative Analysis’
(SSRN, 26 May 2019)
accessed 31 October 2023
[15] VTB Capitalplc v. Nutritek
International Corp, [2012] EWCA Civ 808
[16] Dahal R, ‘Salomon v Salomon: Its Impact on Modern
Laws on Corporations’ [2018] SSRN Electronic Journal
[17] Daimler Co. Ltd v. Continental
Tyre & Rubber Co. Ltd. (1916) 2 AC 307
[18] Singh Aparajita, ‘An analysis on the Doctrine of
lifting of corporate veil’, Indian Journal of Integrated Research in law
[19] Prest v. Petrodel Resources Ltd., [2013] UKSC 34
[20] Hannigan & Brenda, wedded to Salomon: Evasion, Concealment
and confusion on piercing the veil of the one -man company, 50 IRISH JURIST,
11–39 (2013).
[21] Trustor AB V Smallbone, [2001] 1 WLR 1177
[22] Jones v. Lipman [1962] l WLR 832
[23] Mohanty
S and Bhandari V, ‘The Evolution of the Separate Legal Personality Doctrine and
Its Exceptions: A Comparative Analysis’ (SSRN, 26 May 2019)
accessed 31
October 2023
[24] The Companies Act, 2013
[25] Bacha F. Guzdar v. CIT, (1955) 1 SCR 876
[26] Balwant Rai Saluja v. Air India
Ltd., (2014) 9 SCC 407
[27] Manupatra, ‘Manupatra’ (Articles)
accessed 31 October 2023
[28] LIC of India v. Escorts Ltd., (1986) 1 SCC 264
[30] Delhi Development Authority v. Skipper Construction Co.
(P) Ltd., (1996) 4 SCC 622
[31] State of Rajasthan & Ors v Gotan Limestone Khanji
Udyog Pvt. Ltd. & Anr.
[32] Vodafone International Holdings vs. Union Of India &
Anr (2011)
[33] Tata Engineering Locomotive Co v.
State of Bihar AIR 1965 SC 40
[34] Bahadur Krishna, 'Personality of Public Corporation
and Lifting the Corporate Veil' [1972] Journal of the Indian Law Institute 207
[35] Manupatra, ‘Manupatra’ (Articles)
accessed 31 October 2023
[36] State of UP v. Renusagar Power
Co., (1991) 70 Comp Cas 127 (SC)
[37] P.M Bakshi, Lifting the
Corporate Veil , Journal of the Indian Law Institute,
(July-September 1994), Vol. 36, No. 3, pp. 383-384
[38] Varottil U, ‘The Evolution of Corporate Law in
Post-Colonial India: From Transplant to Autochthony’ [2015] SSRN Electronic
Journal
[39] Mohanty S and Bhandari V, ‘The Evolution of the
Separate Legal Personality Doctrine and Its Exceptions: A Comparative Analysis’
(SSRN, 26 May 2019)
accessed 31
October 2023
[40] The companies Act, 2013
[41] Mohanty S and Bhandari V,
‘The Evolution of the Separate Legal Personality Doctrine and Its Exceptions: A
Comparative Analysis’ (SSRN, 26 May 2019)
accessed 31
October 2023