2.
1
CORPORATE
PERSONALITY
INTRODUCTION TO THE
CONCEPT OF CONCEPT OF
COMPANY
The forthcoming slides shed light on the
Characteristic features of a Company
INTRODUCTION: CONCEPT OF COMPANY
Comes into existence on
registration
Vehicles to run a business
A COMPANY
Limited Liability to shareholders
Artificial entity recognised by law
A person with rights and liabilities
INTRODUCTION: CONCEPT OF COMPANY
SHAREHOLDERS:
■ Regarded as the “owners” of the company or Not?
■ What do shareholders actually “Own”?
DIRECTORS/ BOARD OF DIRECTORS
■ Usually given the power to control the management of the
company
■ Involved in the operations and governance of the Company
CHARACTERISTIC FEATURES OF
COMPANY
PERPETUAL SEPARATE
SUCCESSION LEGAL ENTITY
1 3
INCORPORATED
ASSOCIATION 2 LIMITED
LIABILITY
4
INCORPORATED ASSOCIATION
REGISTRATION LEGAL CAPACITY
1. Comes into existence on 1. Own property
registration (s/2) 2. Contract
2. On registration, a company
3. Sue and be sued
becomes a separate legal person
SHARES Authority
1. Issue Shares In conclusion, can do
2. Grant a Security anything it is lawfully
Interest authorised to do
PERPETUAL SUCCESSION
MEANING CASE LAW
Corporation continues to exist despite: Even when during the war, all the
1. Death members of a private company, while in
2. Bankruptcy general meeting were killed by a bomb,
3. Insanity the company survived. Not even a
4. Change in membership or exit of any hydrogen bomb could have destroyed
shareholder or member it. (K/9 Meat Suppliers (Guildford)
5. Or transfer of shares Ltd., Re [1996] 1 W.L.R. 112]
LIMITED LIABILITY
50 % 20 % 30 %
1. Liability of shareholders is limited to the amount unpaid on their shares
2. Limited risk and sharing of risks was (and still is) necessary to mobilise such needed
capital for large projects and entrepreneurial development of economies
SEPARATE LEGAL ENTITY
Is there anything Special about being a Separate Legal Entity?
ADVANTAGES:
■ Company’s obligations and liabilities are its own, and not those of its
shareholders or directors or managers and employees
■ Company can sue and be sued in its own name
■ Company has perpetual succession
■ Company’s property is not the property of its participants
■ Company can contract with its participants
■ A company may concurrently have a variety of legal relationships
with others ( eg directors, shareholders & employees)
ILLUSTRATION
● A and B each own 505 of the shares in AB Co
Pvt Ltd
● There are no other shareholders
● AB Co owns property worth $! Million
● What is A’s interest in the property?
Salomon v Salomon & Co Ltd [1897] AC 22
The importance and some consequences of the company as a
separate legal entity:
Salomon v Salomon & Co Ltd
Salomon v Salomon & Co Ltd [1897] AC 22
Directors
Mr Salomon (MD) & 2 sons
Mr Salomon
Consideration:
– “sole”
Shares & Secured debt A Salomon & Co Ltd
trader Sold
business
Mr Salomon Salomon
(20,001 Family
shares) (6 shares)
Debentures secured
Debentures to the by a bond over the
value of £ 10 000 company’s property
The Case
• Mr S was the sole trader of a
shoe and leather business
Co Act 1862 (UK) required 7
shareholders
Salomon & Co Ltd incorporated
Mr S 99% shareholder and
managing director
Mr S sold business to Co for
shares and secured debt
Business failed, assets of Co
insufficient to repay secured
(Mr S) and unsecured creditors
Liquidator argued that because the business
operated by the Company was the same as
that operated by Mr S, and because Mr S had
effective control of the Company, the court
should hold Mr S liable for the loss suffered by
the Company
Lee v Lee’s Air Farming Ltd [1961] AC 12
●
Majority
Incorpora
Directo sharehold Solicitor 1
Lee ted a
r er 2999 share
company
shares
Lee V Lee Lee, a trained pilot
Lee flew the plane Lee was the
for top dressing Executive Director
Lee was the
majority
shareholder
Lee’s plane crashes Lee dies in the crash
Lee’s widow claims compensation
Decision in Lee v Lee
A company is a separate entity from its controller – who may also be
its sole employee
A company is a separate legal entity and a person may concurrently
have different legal relationships with the company
According to Lord Macnaughten
“the company is at law different person
altogether from the subscribers and though it
may be that after incorporation is precisely
the same as it was before and same persons
are managers and same hands receive the
proceeds, the company is not in law the
agent of the subscribers or trustees for them.
Nor are the subscribers as members liable,
in any shape or form except to the extend
and in the manner provided by the Act”
Macaura v Northern Assurance Co Ltd [1925] AC 619
Macaura
Company Right to timber
assigned to Company
Insurance policy
Macaura
(shareholder) Insurance Company
MLL 221 Corporate Law Week 1 20
Facts
Facts:
Macaura assigned right to timber to a Company, received shares in
consideration
Timber destroyed in fire
Macaura claimed insurance – policy was in his individual name, not in
name of the Company
House of Lords:
Shareholders do not have a proprietary interest in a company’s property
Insurance legislation required policy holder to have an ‘insurable interest’
in the property
The company was the owner of the timber, not Macaura (meaning he did
not have an ‘insurable interest’ and so could not claim on the insurance for
the damaged timber)
Macaura v Northern Assurance Co Ltd [1925] AC 619
Lord Buckmaster:
“no shareholder has any right to any item of property
owned by the company, for he has no legal or
equitable interest therein. He is entitled to a share in
the profits while the company continues to carry on
business and a share in the distribution of the
surplus assets when the company is wound up”.
Established that a
company and its
participants must be
treated separately
● SOLOMON’S CASE
Veil of Incorporation
Lifting of the corporate Veil : Exception to the principle laid down
in Solomons case
Lifting the Corporate Veil Only in exceptional
means: circumstances will a court pierce
Disregarding the concept of the the corporate veil and disregard
company as a separate entity the separate legal personality of
and imposing liability a company
Common Law
Exception
Statutory
exception
Lifting the Corporate Veil
Separate legal Lifting the corporate
personality veil
Lifting the Corporate Veil
• Cotton Corporation of India Ltd v G C Odusumathd (1999) 22 SCL
228 ( Kar) : held that lifting of the corporate veil of a company as a rule
is not permissible in law unless otherwise provided y the clear words
of the statute or by very compelling reasons
• LIC V Escorts (1986) 59 Comp Cas 548: Corporate personality may
be ignored and Corporate veil may be lifted in exceptional
circumstances
Lifting the Corporate Veil
Under Statutory Under Judicial
Provision Interpretation
Under Statutory Provisions
Illustrative
list
Misrepresenta
Failure to
tion in
return
prospectus (
Application
s/34 & 35
money ( s/39) Misdiscription
Under other of name (s/
statutes ( eg 12)
IT Act)
Ultravires fraudulent Non
conduct Facilitation of
Act (S/339) inspection
Under Judicial Interpretation
• Protection of Revenue: Sir Dinshaw Maneckjee Petit, AIR 1927 Bom
37
• Prevention of fraud of improper conduct: Gilford Motor Company v
Horne (1933)1 Ch 935, Jones V Lipman [1962] 1 All ER 443
• Determination of Enemy character : Daimler Company Ltd v
Continental tyre and Rubber Co (1916) 2 AC 107
• Formation of subsidiaries to act as agents : Merchandise Transport
Ltd v British Transport commission (1982) 2 QB 173
For the benefit of Revenue
● Unlawful business
● Unlawful means of doing business will be questioned to get revenue
● Members are not allowed to claim economical identical with the
company
● Members have personal liability if involved in the ultra vires act but not
for tax dues of company (depending on case)
Radhey Mohan Sharma v. CIT, 2004
Fraud or improper conduct
● Defeat provisions of law , defraud stakeholders, avoid legal
obligations
● Workmen v. Associated Rubber Industries Ltd. 1985
Diversion of fund of the principal company avoid payment of bonus.
Lifting the corporate veil is necessary to discover the true state of affairs. It
reduces liability on the company
● Improper conduct -
● Generation of business cant be relief