Corporate Personality is the creation of law

Corporate personality is the fact stated by the law that a company is

recognized as a legal entity distinct from its members. ... Proprietary
interest is another principle of corporate personality. Proprietary
interest refers to the ability of a company to own property like a land
or building.Feb 2, 2018
Macaura v. Northern Assurance Co. (1925
Colonial Bank v. Whilley, (1885) 30 Ch. D. 261
Saloman v. Saloman & Co 1887
 Corporate Personality is the creation of law
•Colonial Bank v. Whilley, (1885) 30 Ch. D. 261
Held: The Court discussed the history and nature of choses in action. Chose In
Action means a property right in something intangible, or which is not in one's
possession, but enforceable through legal or court action.
Cotton and Lindley LJJ held that shares were not choses in action for the purposes
of the statute, although they both regarded them as a form of intangible personal
property.
•Saloman v. Saloman & Co 1887: Court held ‘ruling that a company is a separate
legal entity distinct from its members and so insulating Mr. Salomon, the founder
of A. Salomon and Company, Ltd., from personal liability to the creditors of the
company he founded.”
 Meaning of Corporate Personality
The legal use of the word ‘person' has attracted an assortment of
theories which is probably second to none in volume. ‘Person' in law,
is both the recognition of an entity as well as the acknowledgement
of such an entity's rights and interests. Granting of ‘personhood'
states then enables an entity to undertake acts and relations that are
recognized in the law. In the realm of law, the term ‘person' is
nothing more than an abstraction - a representation through the
form of an entity either real or artificial, of certain attributes. These
attributes come to form what is known as ‘personality' in the law.
Corporate personality is the fact stated by the law that a company is
recognized as a legal entity distinct from its members. A company
with such personality is an independent legal existence separate from
its shareholders, directors, officers and creators.Feb 2, 2018
 Case Law on corporate personality
Proprietary interest is another principle of corporate personality. Proprietary
interest refers to the ability of a company to own property like a land or building. A
company as a body corporate has every right to acquire, hold and dispose of as
well as transfer property in its own name. Since a company gain full ownership of
property, any changes among individual membership would not affect the title.
According to the case of Macaura v. Northern Assurance Co. (1925), the property
of a company is not the property of the shareholders; it is the property of the
company. Each shareholder has no legal rights on the capital and assets held by the
company (Lee, 2005).
 The Concept of Dual Personality
Here, it has been dealt with part of the subject-matter itself by elaborating on
the meaning and theoretical underpinnings of the concept of dual personality
and the attributes of corporate personality along with a jurisprudential
understanding of the same.
Persons in law are seen to be of only two kinds: real/natural and artificial.
Human beings are considered ‘real' or ‘natural' persons because they are ipso
facto persons. The other kind of person is the artificial person, which is a fiction
of law invested with limited legal capacity. At this juncture, it is necessary to
clarify the meaning of the term ‘capacity' in law. Capacity is the primary
attribute of personality and denotes the ability to commit acts and undertake
relations that are recognized in the law. Capacity is what enables a person to
have a ‘standing' in law, be it in the person's ability to claim-possess-exercise
rights, property, enter into contracts, sue and be sued, commit legal injury or be
the victim thereof. In other words, capacity in law is the medium through which
personality expresses itself.
 1.Corporation Aggregate (Body Corporate)

[4] Colonial Bank v. Whilley, (1885) 30 Ch.

D. 261
[5] Saloman v. Saloman & Co 1887
 Corporation Sole
A corporation sole is a legal entity consisting of a single ("sole") incorporated
office, occupied by a single ("sole") natural person. A corporation sole is one
of two types of corporation, the other being a corporation aggregate.
In re Moore’s Estate, 223 P.2d 393 (Or. 1950) (relying upon Blackstone’s
Commentaries in noting that the king is a corporation sole at common law).
The intent behind this provision was to adopt the common law of England
“as it existed, modified and amended by English statutes passed prior to the
Revolution.” Peery v. Fletcher, 182 P. 143, 146-47 (Or. 1919). In re Moore’s
Estate, 223 P.2d 393, 396 (Or. 1950) (citing cases). Such rules of decision
provisions arguably mean that many states could recognize a common law
corporation sole because English common law recognized both lay and
religious corporations sole. I Blackstone’s Commentaries on the Laws of
England 458 (1765-1769).
 2.Continuation of Corporate Sole
• Reid v. Barry, 112 So. 846, 859-60 (Fla. 1927); see also Willard v. Barry, 152 So.
411 (Fla. 1933); Hurley v. Werly, 203 So.2d 530 (Fla. Ct. App. 1967). Similarly,
the U.S. Supreme Court held that Puerto Rico’s “rules of decision” act
incorporating the laws of Puerto Rico which existed before it affiliated with the
United States bound Puerto Rico to the “fundamental code of ancient Spanish
law” known as the Partidas. The Partidas recognized that the institutions of
the Catholic Church, by virtue of their ecclesiastical status alson, had “juristic
personality” and the “general right to hold and acquire property in its
corporate capacity” and, further, that:
“As to England, the concept of the church as a corporation was worked out by
the English canonists and fully recognized by the ordinary law courts before the
end of the fourteenth century and Pollock and Maitland show that the English
ecclesiastical law was practically similar to that of continental Europe in its
recognition of the property rights of the church.”
 In View of Advantage of Corporate Personality
a) Independent Corporate Existence:
• Salomon & Co Ltd : A corporate person shall have an
independent corporate existence.
• Re Kondoli Tea Co. Ltd, (1886): In this case, the members
transferred a Tea Estate to a company and claimed exemption
from ad valorem duty on the ground that they themselves being
the shareholders in the company, it was in fact a transfer to
themselves in another name. The Court, however, rejected their
contention and ruled that in the eyes of law the company was
a distinct independent person, separate from its shareholders.
 2) Limited Liability
• J.H. Rayner Ltd v. Deptt of Trade and Industry,
(1989) :
In the event of the company being wound up, the
members shall have liability to contribute to the assets of
the company in accordance with the Act, In the case of
limited companies, no member is bound to contribute
anything more than the nominal value of shares held by
him. The privilege of limiting the liability is one of the
main advantages of carrying on business under a
corporate organization.
 3) Perpetual Succession
In Gopalpur Tea Co. Ltd. v. Penhok Tea Co, Ltd., (1982) [10], the court while
applying the doctrine of company's perpetual succession observed that though
the whole undertaking of a company was taken over under an Act which
purported to extinguish all rights of action against the company, neither the
company was thereby extinguished nor any body's claim against it.
(Dartmouth College v. : Woodward, 17 U.S. Reports 518 [1819]):
The Court subordinated a state legislature to an "artificial being": the college
corporation. The Court held that a charter from the British Crown creating the
college was a contract protected from legislative impairment by the federal
constitution. The Court said that the college corporation provided for the
maintenance of property rights by "a perpetual succession of individuals…
capable of acting… like one immortal being." The Court's comment that "[i]ts
immortality no more confers on it political power… than immortality would confer
such power… on a natural person" denied human experience as it postulated an
artificial world of legal "being."
 4) Transferability of shares
• 4) Transferability of shares : Section 82 of the Companies Act, 1956, specifically
provides that the shares or other interest of any member in a company shall be
movable property, transferable in the manner provided by the articles of association
of the company. Thus the member of an incorporated company can dispose of his
share by selling them in the open market and get back the amount so invested. The
transferability of shares has two main advantages, namely it provides liquidity to
investors and at the same time ensures stability of the company. The transfer of
shares of a company does not in any way affect its existence or management and
the shareholder can conveniently get relieved of his liability by transferring his
shares to some other person.
Western Maharashtra Development Corpn. Ltd. v. Bajaj Auto Ltd: the held that right
of free transferability of shares as provided in the Act as the unfettered right. The
principle of free transferability must be given a broad dimension in order to fulfill the
object of the law. Imposing restrictions on the principle of free transferability, is a
legislative function, simply because the postulate of free transferability was
enunciated as a matter of legislative policy when Parliament introduced Section 111A
into the Companies’ Act, 1956.
 5) Separate Property
• In Bacha F Guzdar v. CIT Bombay, (1955) [11] it
was held that the company is a real person in
which all its property is vested , and by which it is
controlled , managed and disposed of”.
• In Macaura v. Northern Assurance Co Ltd, (1955)
[12] it was held that “ the property of a company
is not the property of the shareholders ; it is the
property of the company”.
 6) Corporate Finances

The shares of an incorporated company being transferable, it

can raise maximum capital in minimum possible time. That
apart, an incorporated company has the privilege of raising its
capital by public subscriptions either by way of shares or
debentures. The public financial institutions willingly lend loan
to companies as it is generally secured by floating charge which
is an exclusive privilege of a registered company.
• In R.T. Perumal v. John Deavin, AIR 1960 Mad. 43. [13] it has
been observed that a company is a real person in which all its
property is vested, and by which it is controlled, managed and
disposed of. Their Lordships further observed that "no
member can claim himself to be the owner of the company's
property during its existence or in its winding up.“
 7) Centralized Management
The shareholders have no direct concern with the management of the company. They
exercise, only a formative control. Thus the management of the company is altogether
different from its ownership. Independent functioning of managerial personnel attracts
talented professional persons to work for the company in an atmosphere of independence
thus enabling them to achieve highest targets of production and management leading to
company's overall prosperity.
The management of the company generally vests in the directors who decide the policy
matters in the meetings of the Board of Directors. With skilled professional managers
supported by financial resources, companies are able to develop and carry on their
business efficiently. In short, professional form of management of business disassociates
the 'ownership' from control of business and thus helps to promote efficiency. Besides, it
provides flexibility and autonomy to business undertakings within the framework of
company law. Bullock v. Unit
Construction Co Ltd (1959):
Corporate residence is related to the central management and control of the business of
the company, which is exercised by the directors from the place where they meet (and not
to the control of the company itself, which is exercised by its shareholders).
 8) Capacity to sue and to be sued
A company being a body corporate can sue and can be sued in its own name in –
• Raskov v. Stapke & Harris, No. B215351, 2010 WL 522780 (Cal. App. 2 Dist. Feb. 16,
2010) (rejecting attempt to analogize State Bar’s termination of LLP’s certificate of
registration to suspended corporation for purposes of determining firm’s standing to
defend itself in declaratory judgment action because rule in corporate context is
statutory rule limited to corporations).
• Union Bank of India v. Khaders International Constructions Ltd, [1993].
“A criminal complaint can be filed by a company , but it should be represented by a
natural person. A company has the right to protect its fair name. It can sue for such
defamatory remarks against it as are likely to damage its business or property etc. A
company has the right to seek damage where a defamatory material published about
it affects its business.”
• TVS Employees Federation v. TVS & Sons Ltd, (1996) [15] it was held that the
preparation of a video cassette by the workmen of a company showing their struggle
against the company's management and exhibition could be restrained only on
showing that the matter would be defamatory.
 Previous Contd…R v. Broadcasting
Standards Commission
• In R v. Broadcasting Standards Commission the
court of appeal held that a company can complain
under the Broadcasting Act, 1996 about
unwarranted infringement of its privacy. In this case
the complaint was about the secret filming of
transactions in shops by the BBC and the allegation
was that this constituted an infringement of the
company’s privacy.
 Separate Legal Personality
• Macaura v Northern Assurance Co Ltd: “My Lords, this appeal may
be disposed of by saying that the corporator even if Macaura holds
all the shares is not the corporation, and that neither he nor any
creditor of the company has any property legal or equitable in the
assets of the corporation.”
• Cowan v Jeffrey Associates: Therefore, as consequence of the
separate legal personality, a company’s member is not entitled to
lay claim to rights on the company’s property. Thus he or she
cannot sue on behalf of the company. After these example related
to the company’s business and property, it appears to be that
company’s members do not benefit from the separate legal
personality of a company, but in reality this is not true as we will
see in the next paragraphs.
 Contd…Separate Legal Personality
• Lee v Lee’s Air Farming Ltd: the Privacy Council stated that: firstly, the
company and Mr. Lee “were two separate and distinct legal persons”
[xxxi] and consequently capable of establishing legal relations between
them; secondly, there was “no reason to doubt that a valid contractual
relationship could be created between” the company, “as a master”,
and the sole director in quality of employee, “as a servant”; [xxxii] and
lastly, “a man acting in one capacity [sole governing director] can give
orders to himself in another capacity[chief pilot of the company] than
there is in holding that a man acting in one capacity[employer] can
make a contract with himself in another capacity [employee].
• Buchan v Secretary of State for Employment: “As beneficial owner of
50 per cent of the shares in the company he was able to block any
decision by the board or of the company a general meeting with which
he did not agree, including a decision as to his own dismissal or terms
of service.”
 Disadvantages of Incorporation

1) Lifting or Piercing the Corporate Veil :

In New Horizons Ltd. v. Union of India and others, (1995) [16] the appellant
company when seen through the veil covering the face of New Horizons Ltd. was
found to be a joint venture created as a result of reorganization in 1992. Sixty per
cent of its share capital was owned by an Indian group of companies and forty
per cent share capital was owned by a Singapore based foreign company.
Allowing the appeal, the Supreme Court ruled that the action of the State
Government in determining the eligibility of tender’s was not in consonance with
the standards or norms and was arbitrary and irrational. The Court further
observed that in case of a joint venture corporation, the Court can see through
the corporate veil to ascertain the true nature of a company. The doctrine of
lifting the corporate veil is invoked when the corporate personality is found to be
opposed to justice, convenience or interest of revenue.
 Contd…1).(a) Determination of Real character of a company
Daimler Co. Ltd. v. Continental Tyre & Rubber Co., (1916) [17] a company
was incorporated in England for the purpose of selling tyres manufactured
in Germany by a German company, all the shares except one were held by
the German subjects residing in Germany. The remaining one share was
held by a British subject who was the Secretary of the company. Thus the
real control of the English company was in German hands. During World
War I, the company commenced an action to recover trade debts. The
question therefore was whether company had become an enemy company
consequent to World War I. The House of Lords, inter alia observed :
“But it can assume enemy character when persons in de facto control of its
affairs are residents in any enemy country or, wherever resident, are acting
under the control of enemies. therefore held that the company was an
enemy company for the purpose of trading and therefore it was barred from
maintaining the action.”
 Continuation of Previous Slide a)
• In an American case People's Pleasure Park Co. v. Rohleder, (1908) [18] it was
held that the Courts may refuse to pierce the corporate veil where there is no
danger to public interest. In this case certain lands were transferred by an
Englishman to another perpetually restraining the transferee from selling the said
property to coloured persons i.e. Negroes. The transferee, however, transferred
the land to a company which was exclusively composed of Negroes. Thereupon,
the petitioners brought an action against the company for annulment of the
conveyance on the ground of breach of condition. Rejecting the contention of the
petitioners the court held that members individually or employment was
terminated under an agreement. Thereafter he started a new company to carry
on the business of solicitation and solicited plaintiffs customers. The court held
that the defendant company was a mere cloak or sham and channel used by
defendant to obtain advantage of the customers of the plaintiff company for his
own benefit and therefore it ought to be restrained from carrying on the
business.
 Contd…a)
• The Supreme Court in Subhra Mukherjee &
Another v. M/s. Bharat Coking Coal Ltd.
(BCCL) & others, AIR 2000 SC 1203. [19] has
observed that the Court will be justified in
piercing the veil of incorporation in order to
ascertain the true nature of the transaction
as to who were the real parties to the sale
and whether it was between husbands and
wives behind the facade of separate entity
of the company.
 (b) For the benefit of revenue :
• The court has the power to disregard corporate entity if it is used for tax evasion
or to circumvent the tax obligation Juggilal v. CIT , (1969) [20]. In this case the
assessee was a wealthy man , enjoying huge dividends and interest income. He
formed four private companies and agreed with each to hold a block of
investment as an agent for it. Income received was credited in the accounts of the
company, but the company handed back the amount to him as pretended loans.
The court held that the company was formed by the assessee purely and simply
as a means of avoiding super – tax and the company was nothing more than the
assessee himself.
 (c) Fraud or improper conduct
The courts will refuse to uphold the separate existence of the
company where it is formed to defeat or circumvent law, to defraud
creditors or to avoid legal obligations. In Gilford Motor Co v. Horne,
[1944] [21] , Horne was appointed as a managing director of the
plaintiff company on the condition that he shall solocite or entice
away the customers of the company at any point of time. He was
employed under an agreement. Shortly he opened a business in the
name of a company which solicited the plaintiff’s customers. It was
held that the company was mere cloak or sham for the purpose of
enabling the defendant to commit a breach of his covenant against the
solicitation.
 (d) Government Companies
• (d) Government Companies : A
company at times loose their individuality in favour of its
principal and ,may be treated as an agent or trustee. In Re F.G. (Films) Ltd., (1953)
[23], an American company produced a film called 'MANSOON' in India
technically in the name of a British company. This British company had a capital of
£ 100 out of which majority was held by the President of the American company
which financed the production of the film. In these circumstances the Board of
Trade refused to register the film as a British film on the ground that in the instant
case the British company acted merely as the nominee or agent of the American
company. This view was upheld by the Court. The court may, in some
circumstances, treat a holding company and its subsidiary as a single entity. This
inference does not flow automatically from the relationship of holding and
subsidiary company. There must be evidence that the business of the two is
combined. Chander Mohan Khanna v. The National Council of Educational
Research and Training,
 Case Law on Government Companies
A decade after the Som Prakash’s decision came to another Supreme Court decision in
the case of Chander Mohan Khanna v. The National Council of Educational Research
and Training[viii], (1991) 4 SCC 578. This case ruled that Article 12 cannot be
stretched to cover every autonomous organization with some connection with the
Government under the purview of the expression ‘State.’ However vast and pervasive
the state control is over a body, it cannot be a deciding factor that the body is a
‘State.’ Evidently, there has been a perceptible difference in the perception of judiciary
vis-à-vis the scope of Article 12 along with the passage of time. But this has never
stopped floodgates of litigation impugning the action of public sector from the altar of
Article 12.
Mysore Paper Mills Ltd. v. Mysore Paper Mills Officers’ Association, (2002) 2 SCC 167:
the main issue was whether a Government Company as under Section 617 of India
Companies Act is a “state” with reference to Article 12. It was held that the state
government had extensive control over the working of the company and its day to day
functioning; therefore the company was agency or instrumentality of the government
thereby complying with the test which evolved in the case of R D Shetty. The Court,
therefore, held that Government Company would be State as given under Article 12.
 3. Expenses and formalism
• Incorporation of a company is an expensive affair. Besides, it
involves completion of a number of formalities. Moreover, the
administration of a company has to be carried on strictly in
accordance with the provisions of the company law and
activities are limited by its memorandum which at times
creates problems in its progress.
Lochner v New York 198 U.S. 45 (1905): Lochner v. New York,
198 U.S. 45 (1905), was a landmark U.S. labor law case in the
US Supreme Court, holding that limits to working time violated
the Fourteenth Amendment. This decision has been effectively
overturned.
 4. Company is not a citizen
• Though a company is a legal person, it is not a citizen under the
constitutional law of India or the Citizenship Act, 1955. The reason as
to why a company cannot be treated as a citizen is that citizenship is
available to individuals or natural persons only and not to juristic
persons. The question whether a corporation is a citizen was decided
by the Supreme Court in State Trading Corporation of India v.
Commercial Tax Officer, AIR 1963 SC 1811 [27]. Since a company is
not treated as a citizen, it cannot claim protection of such
fundamental rights as are expressly guaranteed to citizens, but it can
certainly claim the protection of such fundamental rights as are
guaranteed to all persons whether citizens or not.
 Prepare by

Narayan Prasad Giri

Associate Professor