CHAPTER 3:
The Corporation - Components and Characteristics
The Companies Act of Bhutan 2016 outlines the distinct components and characteristics of companies
incorporated or registered under its provisions:
1. Separate Legal Entity
Companies incorporated under the Corporate Regulatory Authority are recognized as separate legal
entities. Upon receiving a Certificate of Incorporation, a company gains:
● Perpetual succession and limited liability for its shareholders.
● Rights such as:
○ Conducting business activities with necessary licenses.
○ Suing or being sued in its own name.
○ Acquiring, holding, or transferring property and assets.
○ Engaging in contracts, negotiable instruments, and other legal deeds.
This status allows companies to act as independent legal persons, owning assets and entering contracts
distinct from their members.
2. Centralized Management Structure
While shareholders technically own the company, its management is entrusted to the Board of Directors
and managers, who are elected by shareholders to:
● Make decisions focused on maximizing shareholder profits.
● Delegate responsibilities through a structured chain of command.
For small companies, shareholders often assume the roles of directors, performing all management
functions without centralized structures. Larger companies, however, typically adhere to centralized
management.
3. Transferable Shares
Incorporated companies allow for the transfer of share ownership without disrupting business
operations.
● Unlike partnerships, where ownership changes can impact continuity, companies ensure:
○ Shares can be sold, bought, or inherited without affecting the company’s status.
○ The Royal Securities Exchange of Bhutan facilitates share transfers.
● Companies Act 2016, Section 50: Shares and securities can be issued and transferred to
individuals or entities as stipulated by the company’s Articles.
4. Shareholder Ownership and Control
Shareholders retain ownership rights, including:
● Electing directors to manage the company on their behalf.
● Receiving the company’s net earnings.
In small companies, shareholders actively participate in management as directors. In major
corporations, while shareholders focus on broad governance, such as during Annual General Meetings
(AGMs), they still influence company direction through voting.
Limited Liability
One of the defining features of companies incorporated or registered under the Companies Act of
Bhutan 2016 is the limitation of liability. Shareholders’ liabilities are restricted to the amount of shares
they own, ensuring that their personal assets are not at risk for the company's debts.
Key Points of Limited Liability
1. Corporate Ownership:
The company, as a separate legal entity, owns its assets and is responsible for its liabilities.
Shareholders are protected from being personally liable for corporate debts.
2. Contrast with Partnerships:
Unlike companies, partnerships expose all partners to unlimited liability, risking their personal
assets. This distinction makes incorporated companies more attractive for individuals seeking to
safeguard personal finances.
3. Corporate Protections:
The Act guarantees shareholders perpetual succession and limited liability, ensuring that the
company's legal structure offers significant financial security.
Exceptions to Limited Liability
In some cases, courts may set aside the principle of limited liability to address abuse or injustice. These
exceptions include:
A. Piercing the Corporate Veil
Courts may hold shareholders, directors, or officers personally liable for corporate obligations to prevent
fraud or insider abuse.
● Purpose: Protect creditors and third parties from unfair practices.
● Scope: Most cases involve closely held corporations, with rare instances involving publicly
traded corporations.
Example: If an individual uses the corporation for personal gain rather than its legitimate business
purposes, they may be held liable for corporate actions.
B. Alter Ego Doctrine
This occurs when corporate formalities are disregarded, and the corporation is used as a mere extension of
its shareholders’ personal affairs.
● Signs:
○ Commingling of corporate and personal funds.
○ Failure to hold required meetings or maintain proper corporate records.
● Outcome: Courts may treat the corporation and its shareholders as indistinguishable, holding the
latter liable for corporate actions.
C. Agency Theory (Parent-Subsidiary Relationship)
When a parent corporation dominates a subsidiary to the extent that the subsidiary functions as the
parent’s agent, courts may hold the parent corporation liable for the subsidiary’s obligations.
● Example: Creditors may seek the parent company’s assets if the subsidiary incurs debts but lacks
independent economic purpose.
D. Enterprise Theory
Under this theory, multiple corporations under common ownership may be treated as a single economic
entity for liability purposes.
● Application: Courts pool together the assets of all corporations within the enterprise to satisfy
liabilities.
● Distinction: Unlike veil-piercing, this doctrine does not target personal assets but instead merges
liabilities across affiliated companies.
Conclusion
While limited liability is a cornerstone of corporate law, it is not absolute. Legal doctrines such as
piercing the corporate veil, alter ego, agency theory, and enterprise theory ensure that the principle is
not exploited to the detriment of creditors or other stakeholders. This balanced approach fosters
accountability while maintaining the benefits of incorporation.
Cases under this:
1. Walkovszky v. Carlton
2. Kinney Shoe Corporation, a new york corporation, v. Lincoln M. Polan
3. Sea land services, Inc., v. Pepper Source