Apoorva Kulkarni Sharma Roll No 21/LL.

M/2010 Assignment- Third Semester Corporate Laws Paper I

INCORPORATION FOR DOING BUSINESS AND ITS CONSEQUENCES

_____________________________________________________________________ INTRODUCTION The word Incorporation in simple words means to bring into existence. And associated with an entity under the Companies Act 1956 (the Act), it would mean bringing into legal existence an entity, called a Company. There are various types of companies that can be incorporated under the Act. Incorporation bestows upon a company both advantages and disadvantages. A Company under the Act, would mean a company formed and registered under the Companies Act1. To put it simply a company means a company of certain persons registered under the Act. Two or more persons interested in carrying on business have the choice of either forming a company or a partnership. A company needs incorporation under the Act, while a Partnership is formed under the Partnership Act, 1932. A company is treated as a better form of transacting business, as it helps limiting the personal liability for business debts; also where greater mobilisation of capital is required, this form of business organisation is on a better footing as compared to a partnership. My submissions in the following paper are limited to the Companies Act, as typically the process of Incorporation or incorporating a legal entity falls under the purview of this Act. _____________________________________________________________________ A BRIEF HISTORY OF COMPANY LAW The history of the Indian Company Law began with the Joint Stock Companies Act of 1850. The Companies Act developed through the advent of British and thus there are reflections of the English law in the Act. The reasons for such reflections are very clear- the British occupation of India AND the British introduction of the British Company and the Partnership modes of doing business in India. Since then it underwent multiple rounds of amendment and consolidation and resulted in the Companies Act 1956. The Companies Act has been subjected to many amendments.
1

Section 3(i) of the Act

3 The First Amendment of 2002 of the Act provided for producer companies. The Second Amendment replaced the Company Law Board with the National Company Law Tribunal. LEGAL PERSONALITY Before we discuss the consequences of incorporation, it is of utmost importance to understand the concept of legal personality in law; because it is on this very concept that the entire law of corporations is based. The term personality entails the possession of those characteristics belonging particularly to mankind i.e. the power of thought, speech and choice. So far as legal theory is concerned, a person is any being capable of rights or duties. Persons as so defined are of two kinds- natural and legal. A natural person is a human being and legal persons are beings, real or imaginary, who for the purpose of legal reasoning are treated in greater or less degree in the same way as human beings. Thus they are created by law only. Since it was felt that the natural persons by themselves cannot take the responsibility of all their activities, therefore, it was thought necessary to confer legal personality to not only living entities but non living ones also. Legal persons are also termed as fictitious, juristic, and artificial. Legal personality thus is solely a creation of law. Legal Personality is attained when law recognises a single entity over and above the group of individuals or the thing which though represents the groups of individuals or the thing is distinct from them. Corporation Sole and Corporation Aggregate Corporations are persons incorporate or politique created by the policy of man. Corporations are of two types Sole or Aggregate. A Corporation Aggregate is an incorporated group of co-existing persons example a registered company; and a Corporation Sole is an incorporated series of successive persons example Secretary of the State, Auditor General etc.

4 In both Corporation Sole and Aggregate, the legal person is not identical with any human being. A company, for instance, in law is different from its shareholders ( a concept that will be taken up subsequently)2 and can enter into contracts independently. While a corporation sole is a corporation because of the perpetuity of the office, the individual here has double capacity. Theories of Legal Corporate Personality The question that comes to the mind is that, when law grants personality to a group, what is the nature of the entity which is thus recognised. It is very difficult to discover a common essence which unifies all the entities on which legal personality is conferred. a) Fiction Theory3-This theory presupposes that only human beings are properly called persons. The corporation not being a real person,cannot have any personality of its own. It can have only as much as the law imputes to it by fiction. b) Concession Theory-This is allied to Fiction Theory. Its main feature is that it regards the dignity of being a juristic person as having to be conceded by the State i.e. the law. c) Bracket/Symbolist Theory-This theory propounded by R Ihering, rests on the proposition that only human beings have interests and rights and that a corporation is only a legal device or formula which will enable very complex jural relations to be understood more easily. d) Hohfelds Theory-He draws a distinction between human beings and juristic persons. The latter he says are a creation of arbitrary rules of procedure. Only human beings have claims, rights, duties, powers and liabilities. The corporate person is merely a procedural form. e) Purpose Theory- It says only human beings have personality. Juristic persons are no persons at all. They are simply subject less properties meant for certain purposes. f) Realist Theory-According to this theory a corporation is like a living organism, like a natural human being, which also possesses natural rights. A corporation is not the creation of a State or fiction. This theory builds on an
2 3

Under Advantages of Incorporation Supported by Savigny , Salmond ,Kelsen and Holland

5 analysis of human personality and regards group personality as in essence possessing the same characteristics. A corporation is a real but mysterious entity with a special type of existence. These theories are philosophical, political or analytical, but are not so much concerned with finding solutions to practical problems and with trying to explain the meaning of the word person. Thus courts have not adopted any particular theory of corporate personality and have proceeded according to policy not logic.

TYPES OF COMPANIES Broadly there are five kinds of companies that can be incorporated under the Companies Act. a) Private limited company:4 The minimum number of members is two, and the maximum is limited to 50, excluding employees and former employees who continue to be members after their employment ceases. b) Public limited company:5 A public limited company has wider membership and the number of shareholders is unlimited. It must have a minimum of seven members. c) Company limited by guarantee: Such companies may or may not have a share capital and are generally non-profit-making bodies. Only associations which
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Section 3 (iii) "private company" [means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles,-] (a) restricts the right to transfer its shares, if any; (b) limits the number of its members to fifty not including(i) persons who are in the employment of the company, and (ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; and (c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company; [(d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives:] Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this definition, be treated as a single member; 5 Section 3(iv) "public company" means a company which(a) is not a private company; (b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed; (c) is a private company which is a subsidiary of a company which is not a private company.]

6 are about to be formed as a limited company for the promotion of commerce, science, religion, charity or any other similar objects and which intend to apply their profits or any other income to the promotion of their purpose and to prohibit the payment of any dividend to their members eligible to be placed in this special class. In the case of such associations, the central government may be registered as a company with limited liability without the additional to the name of word or words limited or private. d) Government company:6 A company in which not less than 51 per cent of the paid-up capital is held by the central government or by a state government is called a government company and the provisions of the companies Act, subject to such exemptions as may be notified by the central government, apply to such companies. e) Foreign company:7 It means a body corporate incorporated outside India, and includes a firm or other association of individuals as defined under section 2(b) of the Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000. Such Foreign companies are required to obtain permission of Reserve Bank of India to carry on in India, any activity of trading, commercial or industrial nature or to establish in India, a branch, a liaison office or a project office or any other place of business by whatever name
6

617. Definition of "Government Company". For the purposes of [this Act] Government company, means any company in which not less than fifty one per cent of the [paid-up share capital] is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, [and includes a company which is a subsidiary of a Government company as thus defined]. 7 591. Application of sections 592 to 602 to foreign companies. [(1)] Sections 592 to 602, both inclusive, shall apply to all foreign companies, that is to say, companies falling under the following two classes, namely:(a) Companies incorporated outside India which, after the commencement of this Act, establish a place of business within India; and (b) Companies incorporated outside India which have, before the commencement of this Act, established a place of business within India and continue to have an established place of business within India at the commencement of this Act. [(2) Notwithstanding anything contained in sub-section (1), where not less than fifty per cent of the paid up share capital (whether equity or preference or partly equity and partly preference) of a company incorporated outside India and having an established place of business in India, is held by one or more citizens of India or by one or more bodies corporate incorporated in India, or by one or more citizens of India and one or more bodies corporate incorporated in India, whether singly or in the aggregate, such company shall comply with such of the provisions of this Act as may be prescribed with regard to the business carried on by it in India, as if it were a company incorporated in India.]

7 _____________________________________________________________________ Procedure for Registration & Incorporation 1. Registration8 To obtain registration of a company an application has to be filed with the Registrar of Companies and must be accompanied with the following documents 1. Memorandum of Association 2. Articles of Association, if necessary 3. The Agreement, if any the company wishes to enter into with any individual for his appointment as its managing or whole time director or manager. These documents are to be supported by a declaration that all the requirements of the Act are satisfied. After making a thorough check the Registrar registers the company in the Register of Companies. A Certificate of Incorporation is then issued by the Registrar which certifies under his hand that the company is incorporated and in the case of a limited company, that the company is limited. 2. Certificate of Incorporation9
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Section 33. Registration of memorandum and articles- 1) There shall be presented for registration, to the Registrar of the State in which the registered office of the company is stated by the memorandum to be situate (a) the memorandum of the company; (b) its articles, if any; and [(c) the agreement, if any, which the company proposes to enter into with any individual for appointment as its managing or whole-time director or manager.] (2) A declaration by an advocate of the Supreme Court or of a High Court, an attorney or a pleader entitled to appear before a High Court, or [a Secretary or a chartered accountant in whole-time practice in India] who is engaged in the formation of a company, or by a person named in the articles as a director [***] manager or secretary of the company, that all the requirements of this Act and the rules thereunder have been complied with in respect of registration and matters precedent and incidental thereto, shall be filed with the Registrar; and the Registrar may accept such a declaration as sufficient evidence of such compliance. [Explanation.For the purposes of this sub-section, chartered accountant in whole-time practice in India means a chartered accountant within the meaning of clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949) who is practising in India and who is not in full-time employment.] (3) If the Registrar is satisfied that all the requirements aforesaid have been complied with by the company and that it is authorised to be registered under this Act, he shall retain and register the memorandum, the articles, if any, and the agreement referred to in clause (c) of sub-section (1), if any.
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Section 34. Effect of Registration- (1) On the registration of the memorandum of a company, the Registrar shall certify under his hand that the company is incorporated and, in the case of a limited company that the company is limited. (2) From the date of incorporation mentioned in the certificate of incorporation, such of the subscribers of the memorandum and other persons, as may from time to time be members of the company, shall be a body corporate by the name contained in the memorandum, capable forthwith of exercising all the functions of an incorporated company, and having perpetual succession and a common seal, but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is mentioned in this Act.

8 The certificate of incorporation brings the company into existence as a legal person. Upon its issue the company is born. The companys life commences from the date mentioned in the certificate of incorporation and the date appearing on it is conclusive, even if it is wrong. 3. Commencement of Business A private company can commence business right from its incorporation. But in the case of public company, a further certificate for the commencement of business has to be obtained. This becomes mandatory where a company has issued a prospectus inviting the public to subscribe for its shares. The certificate is subject to certain conditions stated in Section 149(1). _____________________________________________________________________ CONSEQUENCES OF INCORPORATION Like any juristic person, a company is legally an entity apart from its members, capable of rights and duties of its own, and endowed with the potential of perpetual succession10. In common law a company is a legal person or legal entity separate from, and capable of surviving beyond the lives of its members.11 Though a company is not merely a legal institution, it is a combined political, social and economic and legal institution. It is a means of co-operation in the conduct of an enterprise.12 Thus once a certificate of incorporation is given to a company, it can commence its business. Incorporation brings upon certain advantages to a company, as compared to other business forms. I shall now deal with these advantages one by one. 1. Independent Corporate Existence Unlike partnership, which has no separate existence from its members; a company has a separate legal existence. Section 3413 of the Act clearly provides that on registration the Registrar shall certify under his hand that the company is incorporated. And from such instance onwards the company shall be a body corporate14 having perpetual
10 11

Hahlos CASEBOOK ON COMPANY LAW;42( 2nd Edition by Hahlo and Trebilock) Salomon v Salomon& Co [1895-99] All ER Rep 33 12 Woodrow Wilson , The New Freedom, 26( 1968) Jaico 13 Supra note 9 14 "body corporate" or "corporation" includes a company incorporated outside India but [does not include-

9 succession and a common seal. An incorporated company has a separate existence and the law recognizes it as a legal person separate and distinct from its members. A new legal personality emerges from the moment of incorporation but the members who form the incorporated company do not pool their status or their personality 15. The business belongs to an institution. The entity of an enterprise becomes institutionalised. The Benefits following from incorporation can hardly be exaggerated. It is because of this incorporation that the owner of the business ceases to trade in his own person. The company carries on the business, the liabilities are the companys liabilities and the former owner is under no liability for anything that the company does, although as principal shareholder, he is able to take full advantage of profits which the company makes.16 2. Limited Liability The privilege of doing business with limited or restricted liability is the most important advantage of doing business under such form of business organisational set up. The Members of a company are neither the owners of the company nor liable for its debts. Incase where the subscribers register the company with limited liability, the members liability is still restricted to the nominal value of shares taken by them or guaranteed by them. Whereas in a Partnership, the liability of a partner for the debts of the business is unlimited. Speaking of the advantage of trading with limited liability, BUCKLEY J observed:17 The Statutes relating to limited liability have probably done more than any legislation of the last fifty years to further the commercial prosperity of the country. They have, to the advantage of the investor as well as of the public, allowed and encouraged aggregation of small sums into large capitals which have been employed in undertakings of great public utility largely increasing the wealth of the country.

(a) a corporation sole; (b). a co-operative society registered under any law relating to co-operative societies; and (c) any other body corporate (not being a company as defined in this Act) which the Central Government may, by notification in the Official Gazette, specify in this behalf;]
15

State Trading Corporation of India v. The Commercial Tax Officer, (1963) 33 Comp. Cas. 1057: AIR 1963 SC 1811 16 Palmers Private Companies, 13 (42nd Edition, 1961) 17 London Globe Finance Corpn, Re, [1903] 1 Ch 728, 731

10 One of the primary and accepted motivations behind incorporating a company is to limit personal risks by obtaining the benefit of limited liability. 3. Perpetual Succession An incorporated company can in a way said to be immortal. One of the benefits of incorporation is Perpetual Succession. It is irrespective of the fact whether the entire composition of a company changes; still the company remains the same entity as it was at the time of its incorporation. Perpetual Succession would thus mean that, membership of a company may keep changing from time to time, but that does not affect the companys continuity. The death or insolvency of a member does not affect, in any way, the corporate existence of the company. In Gopalpur Tea Co Ltd. V Penhok Tea Co Ltd 18 , where the whole undertaking of a company was taken over under an Act which purported to extinguish all rights of action against the company, the court held that neither the company was thereby extinguished nor any bodys claim against it. In Punjab National Bank v Lakshmi Indisutrial & Trading Co(P) Ltd19 , it was held that the guarantors of a companys loan could not claim to be relieved of liability by reason of the fact that the companys management had totally changed including the managing director. Such changes do not affect the continuity of the company or its commercial and contractual relations. 4. Separate Property A company, post its incorporation is capable of owning and disposing property in it own name. Since it is a separate legal entity than its members, the members thus, are not several or joint owners of the property that the company owns. In Bacha F Guzdar v CIT, Bombay20 , 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 RT Perumal v John Deavin,21 the court held no member can claim himself to be the owner of the companys property during its existence or winding up. Also in Regional
18 19

(1982) 52 Comp Cas 238 Cal AIR 2001 All 26 20 1955 1 SCR 876 21 AIR 1960 Mad 43

11 Provident Fund Commr v Narayani Udyog22 it was very clearly held that property is that of the company and not of its members, nor directors nor the companys employees. Thus incorporation helps the property of the company to be clearly distinguished from that of its members. On the other hand, in a Partnership, the distinction between the joint property of the firm and the private property of the partners is often not clear. 5. Transferable Shares Joint Stock Companies were formed with the intention that their shares could be easily transferrable. The Act in Section 82 states The shares or debentures or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company. Thus incorporation enables a member to sell his shares in a share market and get back his investment without actually withdrawing money from the company. investor and stability to the company. In a Partnership, a partner cannot transfer his share in the capital of the firm against the will of the partners; the transferee does not become a partner, although he has some rights in the dissolution of the firm. 6. Capacity to Sue and be Sued A company being a body corporate can sue and be sued in its own name. A company has a right to protect its name. It can sue for defamatory remarks against it as are likely to damage its business. Similarly a company has a right to seek damages where a defamatory material has been published about it affects its business. 7. Professional Management A company is capable of attracting professional managers. It is due to the fact that being attached to the management of the company gives them the status of business or executive class.With the financial backing that companies are able to provide, they are capable of developing the business to a considerable extent. This provides liquidity to the

22

(1993) 1 Raj LR 224

12 8. Finances The company is the only medium of organizing business which is given the privilege of raising capital by public subscriptions either by way of shares or debentures. Further Public Financial Institutions lend their resources more willingly to companies than to other forms of business organisation. The facility of borrowing and giving security by way of a floating charge is also an exclusive privilege of companies. There are always two sides to a coin. If there are advantages of incorporation, there are disadvantages of incorporation as well. But the above advantages of incorporation weigh heavier than the disadvantages. Nevertheless they need to be listed. 1. Lifting the corporate veil The chief advantage of incorporation is a separate legal existence that is bestowed upon a company. The chief disadvantage of incorporation also flows from this very existence of separate legal existence. Ultimately a company is run by human beings and the real beneficiaries are humans. The fact of a separate legal existence is just a fiction of law, as in reality it is the association of persons who actually run the affairs of the company. It is this theory of corporate entity on which the entire law of corporations is based. There have been many instances where the courts have had to pierce through this fictional personality which is called the corporate veil. The lifting of the corporate veil has been best depicted in Salomon v Salomon & Co23 which shall be discussed at length subsequently. In Lee v Lees Air Farming Ltd24, Lee incorporated a company of which he was the managing director. In that capacity he appointed himself as a pilot of the company. While on business of the company he was lost in a flying accident. His widow recovered compensation under the Workmens Compensation Act. In effect the magic of corporate personality made him the master and servant at the same time.

23 24

Supra note 11 1961 AC 12

13 But this theory cannot be pushed to unnatural limits. Circumstances must occur where the courts are compelled to identify the company with its members. There are situations where the courts will have to lift the veil of incorporations to examine the realities which lay behind this fiction of separate corporate existence. Sometimes this is expressly authorised by the statute and sometimes the court will lift this veil on its own. The matter when in the hands of the court will largely depend on the underlying social, economic and moral factors. Adherence to the Salomon principle would not be followed if it is leading to unjust results. Certain grounds have been established over the years where the act of lifting the corporate veil becomes necessary. a) Determination of Character- It might become necessary under certain circumstances to ascertain the character of a company, to see whether it is enemy. In such a case, the courts may in their discretion examine the character of persons in real control of the corporate affairs. Though a company can neither be a friend or an enemy, neither can be loyal or disloyal; but it may assume an 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. But if there is no danger to the public interest, the courts may refuse to pierce the veil. b) For Benefit of Revenue- the court has the power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation. In a leading case this has been demonstrated well. In Dinshaw Maneckjee Petit Re25, the assessee was a wealthy man enjoying huge dividend 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 a pretended loan. This way his income was divided into four parts to reduce the tax liability. It was 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. It did no business, but was created simple as legal entity to ostensibly receive the dividends and interests and to hand them over to the assessee as pretended loans

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AIR 1927 Bom 371

14 c) Fraud or improper conduct-The corporate entity is wholly incapable of being strained to an illegal or fraudulent purpose. The courts will refuse to uphold the separate existence of the company where it is formed to defeat or circumvent the law, to defraud creditors or to avoid legal obligations. The following statement of CHINNAPPA REDDY J shows how the court guessed that evasion was the only purpose:26 A new company is created, wholly owned by the principal company, with no assets of its own except those transferred to it by the principal company and serving no purpose whatsoever except to reduce gross profits of the principal company. These facts speak for themselves. There cannot be direct evidence that the second company was formed as a device to reduce the gross profits of the principal company for whatever purpose. An obvious purpose that it served and which stares one in the face is to reduce the amount to be paid by way of bonus to workmen Government Companies- The separate existence of a company may be ignored when it is being used as an agent or trustee. In State of UP v. Renusagar Power Co27, it was held that a power generating unit created by a company for its exclusive supply was not regarded as a separate entity for the purpose of excise. 2. Formality and expense Incorporation is a very expensive affair and requires a number of formalities to be completed. On the other hand, a Partnership is very easy to form and no formalities as tedious as incorporation are required to be undergone. Then again the administration of the company has to be strictly carried on with the mandates of the Act. The General meetings to be conducted, accounts to be audited, resolutions to be registered, returns to be filed with the registrar. In short there are lot of rules and regulations which are to be followed closely for a proper and lawful functioning of a company. 3. Company is not a citizen

26 27

Workmen v Associated Rubber Industry Ltd ,1985 4 SCC 114 AIR 1973 All 33

15 Company though a legal person is not a citizen either under the Constitution of India or the Citizenship Act. This has been very clearly held by a special bench of Supreme Court in State Trading Corpn of India Ltd v CTO28if all of them (the members) are citizens of India the company does not become a citizen of India any more than, if all are married the company would be a married person29 A company is however a person in he eyes of the law and can claim fundamental rights as are available to all persons whether citizens or not.

LIFTING THE CORPORATE VEIL & THE CONFLICT Lifting the Corporate Veil and the Status of an Independent Legal Personality of an incorporated company cannot be discussed without discussing the landmark judgement of Salomon v Salomon & Co30. Brief facts of the case are- that a certain Mr Salomon was a shoe manufacturer and formed a company for the purpose of taking over and transferring the business. The subscribers were his family and his sons with him formed the board of directors. Salomon had the maximum number of shares and debentures. The Company then went into liquidation and the unsecured creditors contended that though incorporated under the Act, the company never had an independent existence. It was also argued that Salomons vast preponderance of shares made him the absolute master. The business was his, solely conducted for and by him and the company was a mere sham and fraud, in effect entirely contrary to the meaning of the Companies Act. Their Lordships of the House of Lords observed: When the memorandum is duly signed and registered, though there be only seven shares taken, the subscribers are a body corporate capable forthwith of exercising all the functions of an incorporated company. It is difficult to understand how a body corporate thus created by statute can lose its individuality by issuing bulk of its capital to one person. The company is at law a different person altogether from subscribers of the memorandum ; and though it may be that after incorporation the business is precisely the same as before, the same persons are managers, and the same hands
28 29

Supra note 15 HIDAYATULLA J in State Trading Corp case 30 Supra note 11

16 receive profits, the company is not in law their agent or trustee. The statute enacts nothing as to the extent or degree of interest which may be held by each of the seven or as to the proportion of interest, or influence possessed by one or majority of the shareholders over others. There is nothing in the Act requiring that the subscribers to the memorandum should be independent or unconnected, or that they or any of them should take a substantial interest in the undertaking, or that they should have a mind or will of their own, or that there should be anything like a balance of power in the constitution of the company. In reference to one man company of Salomon type, the Bombay High Court observed:31 Under the law, an incorporated company is a distinct entity, and although all the shares may be practically controlled by one person, in law company is a distinct entity and it is not permissible or relevant to enquire whether the directors belonged to the same family or whether it is, as compendiously described a one-man company There is another case in the context , that of Daimler Co Ltd v Continental Tyre and Rubber co.32This is again an English Case in which all except one of Continental Tyre and Rubber Co Ltds shares were held by German residents and all directors were German residents.Continental Tyre and Rubber Co Ltd supplied tyres to Daimler, but Daimler was concerned that making payment might contravene a common law offence of trading with the enemy under a statute. Daimler brought the action to determine if payment could be made, given that it was the First World War. Lord Reading CJ, Cozens-Hardy LJ, Phillimore LJ, Pickford LJ and Kennedy LJ, held the company did not change its character because of the outbreak of war. It remains an English company regardless of the residence of its shareholders or directors either before or after the declaration of war..The company,is a living thing with a separate existence which cannot be swept aside as a technicality. It is not a mere name or mask or cloak or device to conceal the identity of persons and it is not suggested that the company was formed for any dishonest or fraudulent purpose. It is a legal body clothed with the form prescribed by the legislature Lord Parker of the House of Lords saidI do not think, however, that it is a necessary corollary of this reasoning [Salomon] to say that the character of its corporators must be irrelevant to the character of the
31 32

TR Pratt (Bombay) Ltd. V E.D.Sasoon & Co. Ltd, AIR 1936 Bom 62 [1916] 2 AC 307

17 company; and this is crucial, for the rule against trading with the enemy depends upon enemy character.Just like a natural person can have enemy character though born in the UK, so can a legal person. I think that the analogy is to be found in control, an idea which, if not very familiar in law, is of capital importance and is very well understood in commerce and finance. The acts of a companys organs, its directors, managers, secretary, and so forth, functioning within the scope of their authority, are the companys acts and may invest it definitely with enemy character it must at least be prima facie relevant Certainly I have found no authority to the contrary. Thus this concept of Separate Legal Personality created by these judgements is often described as a fundamental principle of company law. This principle serves as a powerful metaphor and a judicial reality.33 The concept of company as a separate legal person is a metaphor used to justify laws social and economic aims; it helps in facilitating a companys modern and traditional attributes. But the metaphor cannot be so rigidly applied that it starts overpowering the reality of an incorporated company. The metaphor so wonderfully used by the court in the Salomon case though clarifies nothing as far as real issues are concerned. The analogy with, the metaphor of, a person creates some problems which exhibit the typical dangers of metamorphical thinking as Dan-Cohen writes: By inducing misplaced analogies between individuals and organisations, the metaphor of person easily leads to anthropomorphism: the attribution to organisations of traits and the adoption toward them of attitudes that properly pertain to individuals.34 The conception of company as a separate legal personality leads to two issues1. A tendency to treat the normative status of the corporations in a similar way as we tend to treat human beings to determine their legal rights, 2. A tendency to divert the judicial attention from the distinctive features of organisations, which usually do not confirm with the idea of a person and from the normative implications of these features.

33

James Nicholas, Separate Legal Personality: Legal Reality and Metaphor, Article 6, Bond Law Review, Volume 5 Issue 2 34 Ibid note 31

18 The point that is being made is that, nothing is violated if the courts so called pierce the veil, as the effects of piercing such veil would not lead to any different consequences and make somebody else liable for the wrongs of the company, because ultimately it is humans who run the company and it is only they who could be penalised. It is also believed that the doctrine of piercing of corporate veil is in a way a method to fulfil the concept of separate legal personality created by law. It is not the part of legal personality to dictate conclusions. To insist that because it has been decided that a corporation is a legal person for some purposes, it must therefore be a legal person for all purposesis to make of..corporate personalitya master rather than a servant, and to decide legal questions on irrelevant considerations without enquiring into their merits.35

CONCLUSION Of the list of consequences of incorporation, the most important and controversial one is that of separate legal personality. This fiction created by law, has its advantages as well as disadvantages. The entire doctrine of piercing of the corporate veil revolves around the fact of balancing the fiction of a separate legal personality against the policies that justify piercing such veil. Though this fiction of separate corporate existence in a way helps in limiting the liability, giving a perpetual succession etc, but stretching the concept beyond its specific advantages that it gives to a company, it would be definitely a needless exercise. We cannot translate our metaphors because the particular reality seen through the metaphor is a new reality.36 We have seen cases in Indian context where the courts have pierced the veil of this separate corporate personality to ascertain the real identity of the company. The only submission that is being made here is, that let not the piercing of veil become such a reality that it overpowers the fact that, in the end, a company is run by human beings, and however much the fiction of separate corporate existence is advantageous to the incorporation of a company, the fact of a separate legal existence shall only be an aspect of a corporation and not the reality of it.
35 36

Smith Bryant, Legal Personality, 37 Yale Law Journal 283-298 Ross T, Metaphor and Paradox, 23 Georgia Law Review 1053

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It is true that whenever men act in concert for a common purpose, they tend to create a body, from no fiction of law, but from the very nature of things, differs from the individuals from whom it is created. The salient features of a corporate are its unity, its distinctiveness and its identity in succession. And it is to justify and hold good these very characteristics that are bestowed upon a company on incorporation that the courts have to adhere to the doctrine of lifting of the corporate veil. When faced with actual legal decisions, courts should look into practical consequences and not some abstract legal theory. The doctrine thus, according to me acts as a check n balance for the concept of Separate Corporate Existence or a Separate Legal Personality of a Company. Though popularly Separate Legal Personality could be treated as an advantage of incorporation and Lifting of the Veil as a disadvantage, but when we look at the larger picture, both these need to co-exist to give meaning to the fiction of separate legal personality created by law. I would conclude by quoting Justice Cardozo Metaphors in law are to be narrowly watched, for starting as devices to liberate thought they end often by enslaving it37

37

Supra Note 31

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