Principle of Corporate Personality

Principle of Corporate Personality

Introduction

A company is an association incorporated by law. Company is a corporate body which holds a separate entity with separate legal rights. A series of individuals or groups of people which form the corpus of a corporation, are known as directors. A corporation is an artificial person enjoying rights and duties and holding property and is different from its members. Since the corporation is an artificial person, hence it requires human beings for its functioning. The director’s function in the name of the corporation. A corporation holds a legal personality on its own. It can be sued and can sue on its own. A corporation does not end with the death of any of its members. It can go as long as it flourishes. The principle of Corporate Personality was laid down in the case of Salomon v. Salomon. The winding-up of a company is completed through a full-fledged legal procedure. For the existence of a corporation, three ingredients are necessary:1.  A group or body of human being must be associated with the corporation for certain purpose;2. There must be an existence of organ which through which body or group of human acts;3.  A corporation holds a separate entity distinct from its members and is attributed will by legal fiction. 

There are certain cases where the corporation of a legal person must have some funds reserved for special usage. There are 2 types of corporations:


1. Corporate Aggregate: It is a group of human beings united for the purpose of the same interest. Number of people come together to form a corporation and their liability is restricted to the extent of their shareholdings. People forming a company are its shareholders and contribute to the capital of the company towards the common goal. The property does not belong to shareholders and rights and liabilities of it are different from its shareholders. Shareholders hold the right to receive dividends from the company but not the actual company. 

2. Corporate Sole: As the name suggests, a corporation which has a single legal person. Corporation sole refers to a corporation where the rights and duties lie in the hands of a single person. He solemnly holds the legal capacity to exercise in the office. These are the holders of the public office recognized by law. Since in a sole corporation there is a single owner and thus the right and liabilities on the property does not extinguish with his death, instead they are vested on the person succeeding to them. It can thus be concluded that the legal personality in a sole corporation never destroys even if the natural personality does. 

Advantage of incorporation

A. Independent Corporate Existence: A company is separate from its members, i.e., it has a separate legal entity. The existence of the company does not depend on its members. Section 34(2) of the Companies Act states that upon the incorporation of the company, any person who becomes a member or subscribes to the memorandum of the company becomes a body corporate, can exercise all the functions of an incorporated company, having perpetual succession and common seal. The company after incorporation acquires its own identity. It was in the case of Mangilal v. KrishnRao, the court held that the company cannot be considered as a business of an individual or of chairman of the Board of Directors. A company has its own existence and separate entity which is distinct from its members and thus the shareholders can’t be held liable for the acts of the company, as held in case of Salomon v. Salomon.The principle of Limited liability was also recognized in the same case. 

B. Corporate Finance: The company being incorporated holds the transferable shares, i.e., the shares of the company can be transferred from an individual to other. The company raises capital by the issuance of shares. A registered company enjoys the privilege of raising its capital by issuance of shares and debentures to the general public. The company can be granted loans by the public financial institutions which are secured by floating charges. Any member cannot claim his rights over the property of the company, during its existence or the winding up.

C. Limited Liability: A body incorporated under law holds the privilege of limited liability. Any shareholders who hold shares in a company are restricted to the amount of the shares. The shareholders at the time of winding up of the company, are entitled to the liability, in respect of nominal value of the shares held by them.  Thus, the liability is limited by the share whether held by the original shareholders or the transferee. In the case of a company limited by guarantee, each member is liable to contribute a certain amount to the assets at the time of winding up. In an unlimited company, the liability of the company is unlimited. In case of J.H. Rayner Ltd. V. Dept. of Trade and Industry, court held that the members are not liable for anything more than the nominal value of the shares held by them. 

D. Separate Property: Company being a separate legal entity holds the property of its own. The property is vested in the company as a body corporate and thus the activity of any member does not affect its title. The company being a real person holds the right to enjoy, manage and dispose of its property i.e., assets and capital, on its own. 

E. Transferability of Shares: A corporation incorporated by law grants shareholders the right to transfer the shares. Section 82 of the Companies Act, 2013 empowers the shareholders to transfer their movable property or any interest, in the manner prescribed    by the articles of the company. A shareholder can sell their shares ensuring liquidity for investors and stability in the company. However, the transferability does not affect the management of the company. It helps the shareholders to transfer his liability to someone else. 

F. Perpetual Succession: There is a saying, “members may come and go but the company lives on forever.” In general, this means, even if the members of the company stay or not, the company will stay forever. Company holds the personality of perpetual succession. If any of the members dies, or sell off his shares, this won’t affect the life of the company. It’s not that with the death of the shareholder, the company will also die. The company will not wind up in any conditions except if the law feels the need to 
do so and allows it to wind up.

G. Centralized Management: The shareholders and directors are the one who decides the policy matter of the company. The management is not the owner or is disassociate with the ownership of the company.  They are an independent organisation working for the same. The main focus of the management is to achieve targets and maintain prosperity in the company. They are supported by financial resources to ensure that the company runs effectively. This independence provides the management flexibility and improves their efficiency. 

H. Capacity to sue and be sued: Company being a body incorporated by law holds the characteristics of the separate legal entity. The company has its own name and can sue and be sued under its own. A company needs a natural person to represent itself and protect its name. Companies can claim for the damage caused to it or its name by suing them.  It was in the case of TVS Employees Federation v. TVS & Sons Ltd, the court held that the exhibition of the struggle of the workmen against the management of the company is the infringement of privacy of the company and should be restrained. The court referred to the case of R. v. Broadcasting Standards Commission. The court, in this case, held that the company can complain under the Broadcasting Act, 1996 for the broadcast of anything which is infringement of any policy of the company.

Disadvantages of Incorporation

1. Lifting or piercing of the Corporate Veil: Since a corporation is a body corporate holding a separate legal entity. The company is a non-juristic person which requires an agent for its functioning, known as members. This means the company is different from its members. The thing which separates the company from its members is called corporate veil. The members represent the company and work for the growth and development of the company. Ultimately, it’s the members who benefit from the functioning of the company. According to the doctrine of the corporate personality, the members can use this attribute of the company for legitimate purposes but in some cases, the members use it for some illegitimate purpose like fraud, illegal activity, misconduct, misuse. In case Delhi Development Authority v. Skipper Construction Co. (P.) Ltd. It was held that the corporate veil can be lifted in the case when it is essential to determine the real men behind the illegal activity or are disobeying the procedure established by law.    The court in such cases can lift up the corporate veil or pierce it to find the actual wrongdoer. The members try to hide behind the veil for their misconduct, the court in such a case can lift up the corporate veil. The veil is pierced to find the root cause of misconduct and to determine which person has done such an act and to punish them. Section 45, 147, 212, 247, 542 of the Companies Act talks about the concept of Corporate Veil.

The veil can be lifted for the following purposes:

• To determine the real character of the company. 

• For the benefit of revenue

• Fraud or improper conduct

• Government companies

• To prevent abuse of process of law

• To punish the real person in Quasi criminal cases against the company

In the case of New Horizons Ltd. Union of India and others, it was held that, in joint venture companies, the court can see through the corporate veil to determine the nature of the company. Corporate veil is lifted when the court is interested in the members of the company rather than the company itself.

2. Company is not a citizen: Company being a juristic person cannot be granted citizenship. Neither the Constitution of India nor the Citizenship Act grants citizenship to an artificial person. The company cannot claim for the infringement of fundamental rights claimed to the citizens but can claim for the fundamental rights guaranteed to all citizens or not, as held in case of StateTrading Corporation of India v. Commercial Tax Officer. The court in the case of Tata Engineering Company v. State of Bihar, held that the members of the company are the citizens of India and thus can claim for their rights but a company cannot. it doesn’t have its own domicile, nationality and residence. The residence of the company can be curbed out from the place where the central management and control of the company is located.3. Expenses and formalism: The incorporation of the company is an expensive and hectic affair. There are a lot of formalities to be completed for the incorporation. Since the provisions of the company law are to be strictly followed and the functioning is restricted to the memorandum, it hinders the growth of the company. 

One man company

This concept was accepted in the case of Salomon v. Salomon. In a one-man company, a person holds the full company or whole of share capital of i. There may or may not be the existence of other members. Hence, the central person holds full right over the company, and holds limited liability. Such a company has legal status and enjoys corporate status.

Statutory corporation or Companies

Any corporation which exists because of some law, or a corporation which has its own Act or legislature are considered as Statutory corporations. Like railways, roadways, Reserve Bank of India. Such types of corporations are financially independent. The legislature defines the power and functions, roles and regulations governing its employees.

Conclusion

A company in law is separated from its members. The corporate personality provides advantages to the company and its members.  Such advantages include right to sue and b sued, limited liability, transferability of shares, independent corporate existence, perpetual succession, etc, which are necessary for the existence of the company. But on the contrary, these rights or privileges can be questioned by the lifting of the corporate veil. Thus, the company justifies its characteristics of separate entity.