Corporate Personality
A Corporate Personality also known as an ‘Artificial Juristic Person’ or simply as a legal entity, is an entity, body, or a group of members recognized by law to confer it with rights, duties, and obligations for its proper governance. It is a separate legal entity from its members, i.e., the entity conferred with such legal personality is not liable for the actions of its members, due to the veil of ‘Separate Legal Entity.’ The veil of ‘Separate Legal Entity’ is the separation of the members from the entity. It protects the entity from the actions of the members and vice versa, but when the members of the firm engage in illegal activities like fraud or other illegal activities, the veil is lifted thereby making each member liable for the actions of the other.
A corporation can be identified by comparison to many categories of objects that the law has chosen to personify. Members of a corporation are the people who make up its body. According to Section 34 of the Companies Act, 2013, certain conditions must be met for corporations to have legal personality –
- There should be the existence of a group or body of people united for a certain objective.
- The corporation must have organs through which it operates.
It has its own legal personality and can file and receive lawsuits in its own name. It is perpetual because it does not cease with the passing of any of its individual members. Contrary to natural beings, corporations can only act through their agents. The law specifies the steps to wind up a corporate organization.
Corporate Personality or the corporate veil came from the landmark case of Salomon v. Salomon & Co. Ltd., in 1897, in the United Kingdom’s House of Lords. Salomon transferred his boot-making company, which he had previously managed in single ownership and control, to Salomon & Co. Ltd., a company he and his family founded. Salomon received shares and debentures with a floating charge on the company’s assets as payment for the transfer. Salomon’s claim of recovery against the debentures stood before the claims of unsecured creditors when the company’s operations failed and it entered liquidation, i.e., they would have received nothing from the proceeds of the liquidation. The Court of Appeal declared the corporation to be false or fake and gave their justification by arguing that Salomon had formed it outside the actual intent of the Companies Act, 1862 and that it had operated as Salomon’s agent, who should be liable for any debt incurred because of that agency.
The House of Lords, on appeal, overturned the decision, concluding that the company was properly incorporated and that it has independent legal status, with its own rights and obligations, and that “the motivations of those who participated in the company’s promotion are completely immaterial in addressing what those obligations and rights are.” The Salomon case effectively established the legal fiction of the “corporate veil” between the corporation and its owners/controllers.
The legal fiction of the corporate veil asserts that a corporation has a separate legal identity that is distinct and independent from the identities of its stockholders. As a result, any rights, responsibilities, or liabilities of a corporation are distinct from that of its members, who have “limited liability” and are only accountable for their share of capital. This corporate deception was created to allow groups of people to achieve an economic goal collectively without being personally liable or exposed to hazards. As a result, a business can act independently of its members to hold property, enter contracts, raise loans, make investments, and undertake other rights and obligations. Additionally, it simplifies the legal process because businesses then can sue and be sued in their own names.
Lifting the Corporate Veil
According to the Companies Act of 2013, lifting the corporate veil entails disregarding the fact that a corporation is a distinct legal entity with a corporate personality. Lifting the corporate veil in accordance with the Companies Act of 2013 disregards the distinct identity of the firm and focuses instead on the real members that oversee it. The entire concept of incorporation is built on the concept of a corporate entity, but the company’s distinct personality and legal privileges should only be used for lawful purposes. Individuals will not be permitted to hide below under the umbrella of a separate legal entity or corporate personality when the legal entity of the corporation is being utilized for fraudulent and deceptive purposes. In certain situations, the courts will pierce the corporate veil and use the “lifting or piercing the corporate veil” principle. The court will therefore investigate the corporate entity’s background.
In India, the Corporate Personality came in through the British common law system, when the colonial government introduced common law in India. Since then, many developments have taken place with respect to corporate personality. Through Sections 45, 147, 212, 247, and 542 of the Companies Act, 2013, official recognition has been conferred upon the concept of “lifting the corporate veil”. When the court does not take the corporation into account and instead is preoccupied with the members or management, the corporate veil is said to be lifted. In the following circumstances, the courts have deemed it necessary to overlook a company’s independent personality-
- Determination of a company’s true nature– In a time of emergency or war, it could be vital to look behind a company’s corporate façade to see if it is an enemy of the state. In such a situation, the courts can review the personalities of those who govern the company’s corporate affairs. In the case of Daimler Co. Ltd. v. Continental Tyre & Rubber Co., a firm was founded in England with the intention of selling tyres made in Germany by a German company; all the company’s shares, except for one, were held by Germans in Germany. A British citizen who served as the company’s secretary held the remaining share. Germans, therefore, held actual control over the English corporation. The business started legal proceedings to reclaim trade debts during World War I. Therefore, the question was about whether the Firm had turned into an enemy corporation because of World War I. The house of lords held that it can take on an enemy character if the people who are de facto in charge of its affairs reside in either enemy nation or, wherever they may dwell, are functioning as agents of foes. It was decided that the corporation was such an enemy firm for trading purposes and therefore the action could not be continued.
- For Revenue Benefit– As stated in the case of Juggilal Kamlapat v. Commissioner of Income Tax, the court has the authority to disregard a corporate entity if it is utilized for tax evasion or to dodge the tax obligation. The assessee in this case was a wealthy individual who earned sizable dividend and interest income. He established four private firms and agreed that each would act like an agent for a certain amount of investment. The corporation returned the money to him as fictitious loans even though the income received was recorded in the company’s books. The assessee founded the firm solely and simply to avoid paying super-tax, according to the court, and the assessee was the only shareholder.
- For Fraud or Misconduct– The courts will not uphold the company’s independent existence if it was established to violate the law, cheat creditors, or escape legal duties. The court in the case of P.N.B. Finance Ltd. v. Shital Prasad Jain stated the court, whenever it deems it necessary, may use its powers to use the principle of lifting the corporate veil to prevent a company use the corporate entity of a firm to engage in fraud or when the core values of the corporate personality have been disregarded by the members of a firm.
- State-owned Firms– Sometimes a firm loses its uniqueness to serve its principal and may be viewed as a trustee or agent. A film called “MANSOON” was made in India by an American business called F.G. Films Ltd. under the guise of a British firm. The president of the U.S.-based firm that provided the funding for the film’s production owned a controlling stake in this British corporation, which had a capital of £100. The Board of Trade declined to register the movie as a British picture under these circumstances on the grounds that the British firm in this instance just served as the trustee or representative of the U.S.-based firm. The Court agreed with this viewpoint. It was noted in the case of Smith Stone & Knight Ltd. v. Birmingham Corporation that courts find it challenging to go beneath a company’s corporate entity to ascertain if it is truly independent or is being utilized as an agent or trustee. If a holding firm and a subsidiary firm are separate legal entities under ordinary law and there is no agency agreement between the two businesses, then neither can be claimed to be the other’s agent. The connection of agency should be sufficiently demonstrated, as it was in the case of the current judgment if one corporation is held accountable as a primary for the actions of another company.
- Punish criminals in the quasi-criminal case against the firm– The courts can lift the veil of corporate personality in Quasi-criminal cases to punish actual persons who have violated laws, by analyzing the members behind an organization.
- Preventing the Process of Law abuse– The lifting of the corporate veil doctrine can also be utilized to stop judicial process abuse. Accordingly, the Court stated in the case of Bijay Kumar Agarwal v. Ratanlal Bagaria & Others that although the principle of lifting the corporate veil will be available in statutes like the Companies Act and other financial and taxing statutes, etc., one cannot rule out the appropriateness of the principle elsewhere because the situations are going to fall under the following groups; The following factors must be taken into consideration:
(a) the applicable statutory or some other laws;
(b) the goal that is being pursued;
(c) the contested conduct;
(d) the presence of a public interest aspect; and
(e) the impact on potentially affected parties.
Therefore, it follows logically that concept of lifting the corporate veil or a principle like it cannot be disregarded as a tool of the judiciary in resolving the disagreement between two parties. As a result, no specific act can claim exclusive rights to the concept of “Lifting of Corporate Veil” or a principal equivalent thereto. The judiciary or the Court may use it to stop the misuse of rule of law.
Conclusion
The doctrine or principle of corporate personhood or personality, also called an ‘Artificial Juristic Person’, was created by law to confer certain rights, duties, and obligations upon a group of people who conduct their business. It was done for the good governance of the entities these people were forming. To check for any discrepancies or misuse of the corporate veil, the courts introduced the doctrine of lifting the corporate veil, to check for the actions of the members. The courts can order the corporate veil to be lifted on various decisions including a firm being controlled by foreign enemies. Hence, we can say that the corporate personality is a real personality as the entities or groups who are conferred by these rights can operate their business with safety as well as not be liable for the collective action of other members unless the action taken is illegal or fraudulent. An entity after being conferred a corporate veil shall not be liable for the actions of its members unless such actions taken are illegal, fraud, or others, when the courts order the corporate vein to be lister.
References:
- Salomon v. Saolomon Co. & Ltd. UKHL, 1 AC, 22.
- Daimler & Co. v. Continental Tire and Rubber Company, UKHL 845, 2 AC 307.
- Guggilal Kampatlal v. Commissioner of Income Tax, 1970 AIR 529.
- P.N.B. Finance Ltd. v. Shital Prasad Jain, 19 (1981) DLT 368.
- Smith Stone & Knight Ltd. v. Birmingham Corporation, [1939] 4 All ER 116 (KB).
- Bijay Kumar Agarwal v. Ratanlal Bagaria & Others, AIR 1999 Cal 106.
This article is written by Namay Khanna, a 3rd year BBA LLB (Hons.) student at Symbiosis Law School, Pune.
