Corporate personality is the fact stated by the law that a company is recognized as a legal entity distinct from its member. A company with such personality is an independent legal existence separate from its shareholder, directors, officers and creditors.
Corporate personality is the creation of law. And as per the law, a corporation is an artificial person created by the personification of a group of individuals. The theory of corporate personality mainly states that a company has a legal identity different from its member. Both English and Indian laws follow the concept of corporate personality. The creditors of the company can recover their money only from the company and they cannot sue individual members. In the same way, the company is not in any way liable for the individual debts of its shareholders/members and the property of the company is only used for the benefit of the company.
It enjoys certain rights and duties such as the right to hold property, right to enter into contracts, to sue and be sued in the name of the company. The rights and liabilities of the members are different from the company.
In short, corporate/legal personality, which the company acquires on incorporation, confers legal personality and independent status to the company.
To run any business why people make a company?
Because apart from any individual company has many rights and advantages.
Whenever any company is formed or it is incorporated, it has its separate legal personality & independent status apart from its members. Means after incorporation members & company both are separate from each other and becomes two separate legal entity. And this separation concept is known as corporate personality.
Nature and Advantages of Corporate Personality
Incorporation offers certain advantages to the business community as compared with all other kinds of business organisation.
- Independent corporate existence [S. 9)
The outstanding feature of a company is its independent corporate exist-ence. A partnership has no existence apart from its members. It is nothing but a collection of the partners. A company, on the other hand, is in law a person. It is a distinct legal persona existing independent of its members.
By incorporation under the Act, the company is vested with a corporate personality which is distinct from the members who compose it. One of the effects of incorporation as stated in Section 9 is that upon the issue of the certificate of incorporation, the subscribers to the memorandum and other persons, who may from time to time be the members of the company, shall be a body corporate capable forthwith of exercising all the functions of an incorporated company and having perpetual succession and common seal. Thus, the company becomes a body corporate which is capable immediately of functioning as an incorporated individual. The enterprise acquires its own entity. It becomes impersonalised. No one can say that he is the owner of the company.
A well known illustration of this principle is the decision of House of Lords in Salmon vs Salmon and Co. Ltd 1897 .
Mr. Aron Salomon was a businessman & was specialized in manufacturing leather boots. He formed a company named Salomon & co ltd. and sold his business for 38000 pounds. Total share capital of company-40000 ( 1 pound each). As per Memorandum. This company has 7 subscribers-
- Salomon 1
- Wife 1
- Daughter 1
- Sons 4
All of them have one share & Salomon have 20000 shares& 10000 debentures (pounds). After 1 year… this company goes into liquidation.
- Assets – 6000 pounds
- Liabilities – 17000 pounds
- Division of liabilities:-
- 17000:- 10000 Salomon
- 7000 unsecured creditor
Company has limited pounds, so the question was to whom he gives the first. If only one family manages, administer & controls business than the identity of the family & business will be same or separate.
Considering the same & making it an issue unsecured creditor believes that the money they should get first, because the company doesn’t have the separate / independent existence. The unsecured creditors, therefore, contended that, though incorporated under the Act, the company never had an independent existence; it was in fact Salomon under another name; he was the managing director, the other directors being his sons and under his control. His vast preponderance of shares made him absolute master. The business was solely his, conducted solely for and by him and the company was a mere sham and fraud, in effect entirely contrary to the intent and meaning of the Companies Act.
But it was held that Salomon & Co Ltd was a real company fulfilling all the legal requirements. It must be treated as a company, as an entity consisting of certain corporators, but a distinct and independent corporation.
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. After incorporation the company itself becomes the independent legal person and as Salomon was the debenture holder he gets the priority first above the unsecured creditors. So, the money Salomon gets first.
- Limited liability
The privilege of limiting liability for business debts is one of the principal advantages of doing business under the corporate form of organisation. The company, being a separate person, is the owner of its assets and bound by its liabilities. Members, even as a whole, are neither the owners of the company’s undertaking, nor liable for its debts. Where the subscribers exercise the choice of registering the company with limited liability, the members’ liability becomes limited or restricted to the nominal value of the shares taken by them or the amount guaranteed by them. No member is bound to contribute anything more than the nominal value of the shares held by him. In a partnership, on the other hand, the liability of the partners for the debts of the business is unlimited. They are bound to meet , without any limit , all the business obligations of the firm. The whole fortune of a partner is at stake, as the creditors can levy execution even on his private property.
Lets understand it with the case :-
Lee v Le Air Farming Co. Ltd
A Company is their named LEE AIR FARMING.
Total share capital– 3000 shares
Lee – 2999 shares
Lee himself made him company’s Managing Directors- Chief Pilot
At the time work of the company LEE’s plane crashes & LEE dies. Let’s understood the relationship of MASTER & SERVANT of the company. Between the company & company’s employees there is relation of MASTER- SERVANT means at the time of course of action if anything happens that master will compensate for the same. Master-Servant -Compensation Issue
Lee’s widow now demands compensation from Lee v Le Air Farming Co.Ltd.
ISSUE- Was there a separate legal entity? Whether Mrs. LEE can claim compensation?
Insurance company said lee was managing director & master+ employee. They both entity are same & widow will not get compensation for the same.
Whether LEE was holding the whole company but they are separate legal personality and to have both the personalities power of master & servant. And this compensation LEE was demanding as the position of the servant which he will be getting. was the concept of corporate or legal personalities. Which says after incorporation, company & member became two different legal entity.
- Perpetual Succession
An incorporated company never dies. It is an entity with perpetual succession. A, B and C are the only members of a company, holding all its shares. Their shares may be transferred to, or inherited by X, Y and Z, who may, therefore, become the new members and managers of the company.
But the company will remain the same entity. In spite of the total change in membership, “the company will be the same entity, with the same privileges and immunities, estates, and possessions” 35 Perpetual succession, therefore, means that the membership of a company may keep changing from time to time, but that does not affect the company’s continuity “in the like manner as the river Thames is still the same river, though the parts which compose it are changing every instant” 3 The death or insolvency of individual members does not, in any way, affect the corporate existence of the company. “Members may come and go but the company can go on forever.”
- Separate property
A company, being a legal person, is capable of owning, enjoying and disposing of property in its own name. The company becomes the owner of its capital and assets. The shareholders are not the several or joint owners of the company’s property. “The company is the real person in which all its property is vested, and by which it is controlled, managed and disposed of. A member does not even have an insurable interest in the property of the company. A person was the holder of nearly all the shares, except one, of a timber company and was also a substantial creditor. He insured the company’s timber in his own name. The timber having been destroyed by fire, the insurance company was held not liable to him. “No shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein.” ‘The property of the company is not the property of the shareholders; it is the property of the company’.”
Thus, incorporation helps the property of the company to be clearly distinguished from that of its members.
The property is vested in the company as a body corporate, and no changes of individual membership affect the title. The property, however much, the shareholders may come and go, remains vested in the company, and the company can convey, assign, mort-gage, or otherwise deal with it irrespective of these mutations.
- Transferable shares
When joint stock companies were established, the great object was that their shares should be capable of being easily transferred. Accordingly, the Companies Act in Section 44 declares: “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 the open market and to get back his investment without having to withdraw the money from the company. This provides liquidity to the investor and stability to the company. In a partnership, on the other hand, a partner cannot transfer his share in the capital of the firm except with the unanimous consent of all the partners. If a transfer is made against the will of the partners, the transferee does not become a partner, although he has some rights in the dissolution of the firm.
- Capacity to sue and be sued
A company, being a body corporate, can sue and be sued in its own name. Criminal can be filed by a company but it must be represented by a natural person. It is not necessary that the same person should act as a representative throughout. The complaint by a company is liable to be dismissed because of the absence of the representative in the same way in which an individual complaint is liable to be dismissed for absence of the complainant.
- Professional management
The corporate sector is capable of attracting the growing cadre of professional managers. Young management graduates willingly join companies because of the feeling that they would thereby belong to a managerial class. Their independent functioning as managers is assured because of the fact that there is no human employer and the shareholders exercise only a formative control and that also for the sake of name only. Such an atmosphere of independence gives them an opportunity to develop extraordinary managerial capabilities. With the financial backing that companies are able to provide, they are able to develop the business to a considerable extent.
“Prudent developments may be made, and new branches established in different places, and other concerns may be acquired.
The company is the only medium of organising 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.’
“Capital in many cases is the lifeblood of a concern, and it is always a great misfortune where the development of a business is arrested or restricted by want of capital.”
The above advantages of incorporation are by no means inconsiderable and, as compared with them, the disadvantages are, indeed very few. Yet Some of them, which are in essence complications arising out of the privilege of trading with limited liability, deserve to be pointed out.
- Lifting the corporate veil
The chief advantage of incorporation from which all others follow is the separate legal entity of the company. In reality, however, the business of the legal person is always carried on by, and for the benefit of, some individuals. In the ultimate analysis, some human beings are the real beneficiaries of the corporate advantages, “for a while, by fiction of law, a corporation is a distinct entity, yet in reality it is an association of persons who are in fact the beneficial owners of all the corporate property” 58 And what the Salomon case decides is that “in questions of property and capacity, of acts done and rights acquired or, liabilities assumed thereby … the personalities of the natural persons who are the company’s corporators is to be ignored”
This theory of corporate entity is indeed the basic principle on which the whole law of corporations is based. Instances are not few in which the courts have successfully resisted the temptation to break through the corporate veil. A landlady’s bid to regain tenanted premises for self-business could not succeed as the business was in the name of her company. The Supreme Court did not allow a shareholder to sue for the violation of the fundamental rights of his company. Where a company acquires a majority of the shares and also the assets of another company, that does not extinguish the debt of one to the other. The shareholders and creditors of a dissolved company cannot maintain an action for the recovery of its leftover assets. A managing director cannot be compelled in his personal capacity to produce books of which he has custody in official capacity.
In State of Karnataka v Selvi J. Jayalalitha, the Supreme Court emphasised that company is a separate entity from the members subject to the exception when corporate entity is a mere cloak or sham used to misdirect shareholders and authorities. A company cannot, for example, be convicted of conspiring with its sole director. In the circumstances, the court said: “where the sole responsible person in the company is the defendant himself, it would not be right to say that there were two persons or two minds.”
2. Formality and expense
Another disadvantage of incorporation is its expense and formality. incorporation is a very expensive affair and requires a number of formalities to be complied with. As compared with it, the formation of a partnership is very simple. Again, the administration of a company has to be carried on strictly in accordance with the provisions of the Act. General meetings must be held in time; accounts must be prepared and audited and then presented to the shareholders in general meetings; copies of accounts are to be filed with the Registrar; mortgages and charges and certain resolutions have to be registered with the Registrar and in many other ways companies are under Government control and regulation. As many returns have to be filed with the Registrar as there are weeks in a year and every failure is penalised. Accordingly, “corporate directors wake up each morning as potential criminals”. A partnership firm is comparatively free from all these complications. In the words of a critic who suggests that the formation of a small company should be made much simpler than at present: “Incorporation of a business as a limited company involves expense, capital duty and stamp duty, printing etc., and recurring expenditure on company registration fees and audit fees and also a not inconsiderable expenditure of time in complying with the provisions of the Companies Act. It also involves disclosure to the public of the company’s accounts and various other matters. “
3. Company is not citizen
Lastly, it may be added that a company, though a legal person, is not a citizen neither under the Constitution of India nor under the Citizenship Act. This has been the conclusion of a special Bench of the Supreme Court in State Trading Corn of India Ltd v CTO. “The State Trading Corporation of India is incorporated as a private company under the Companies Act. All the shares are held by the President of India and two secretaries in their official capacities. The question was whether the corporation was a citizen. One of the contentions put forth on behalf of the corporation was that if the corporate veil is pierced … one sees three persons who are admittedly the citizens of India’, and, therefore, the corporation should also be regarded as a citizen.”
But it was held that “neither the provisions of the Constitution, Part l, not at the Citizenship Act, either confer the right of citizenship on, or recognise as citizen, any person other than a natural person.
A company in law is separate person from its subscribers to the memorandum of association.