The Company as a Legal Person
Chapter Two
Syllabus topic 1, "FORMATION OF COMPANY"
Pages 6 to 10 of 998
In one line
When a company is registered, the law brings into existence a new person, separate from every human being connected with it, and everything distinctive in company law flows from that one act of legal imagination.
In exam wording: under section 2(20) of the Companies Act 2013 a company means a company incorporated under this Act or under any previous company law, and by section 9, from the date of incorporation the subscribers and all later members become a body corporate, capable of exercising all the functions of an incorporated company, having perpetual succession, with power to acquire, hold and dispose of property, to contract, and to sue and be sued in its own name.
Why the law has this at all
Consider what business would look like without it. Every trader's whole fortune stands behind every venture. Property bought for a common undertaking must be held in the names of individuals, re-conveyed each time one dies or retires. A creditor of the venture must sue a shifting body of persons. Nobody can invest without becoming liable without limit for the acts of managers they have never met. Each of these frictions has a legal solution, and the corporate person is all of them at once.
Section 9 is the hinge. Its short catalogue answers each friction in order: a body corporate gives outsiders one debtor and one contracting party; perpetual succession means death, insolvency or exit of members leaves the person unchanged, so title never needs re-conveyance; the power to acquire, hold and dispose of property locates ownership in the company alone; the power to contract and to sue and be sued gives litigation and commerce a single name to deal with. Limited liability, the investor's protection, is technically separate, conferred by the choice of a limited company under s.2(21) or 2(22), but it is only workable because the debts belong to the separate person in the first place.
The definition in s.2(20) adds one quiet point worth stating in an answer: Indian law defines a company by registration, not by economic character. Whatever the size, motive or family structure behind it, an entity registered under this Act or a previous company law is a company, with everything that follows. That is why the leading case, decided under a Victorian statute, still governs.
The cases that made the person real
Facts. Salomon v. A. Salomon and Co. Ltd., [1897] AC 22, arose from the failure of a Whitechapel boot business. Aron Salomon had sold his established business to a company he formed for the purpose, the statutory minimum of members being made up from his own family, and took the bulk of the shares along with debentures secured on the company's assets. When the company failed, the liquidator and the unsecured creditors contended that the company was Salomon in another form, an agent or trustee for him, so that he should either lose his security or answer for the debts.
The Company as a Legal Person
Held. The House of Lords held the company validly incorporated and a person entirely distinct from Salomon. Once the statute's requirements were met, the motives of the promoters and the one-man character of the enterprise were irrelevant; there was no agency or trusteeship to be implied from control alone, and Salomon's secured debentures stood ahead of the unsecured creditors.
Why it matters here. Every later doctrine in this book is a footnote to this holding. The veil-piercing cases of [Lifting the Veil: the Judicial Doctrine] are exceptions carved out of it; the group-structure reasoning of Vodafone International Holdings B.V. v. Union of India, (2012) 6 SCC 613, applies it to a modern multinational; and the fetched Indian judgments from the 1950s to the 2010s quote it as the governing rule rather than as foreign persuasion. State it as the rule, not as history.
Facts. Bacha F. Guzdar v. Commissioner of Income-Tax, Bombay, AIR 1955 SC 74, tested the same principle from the shareholder's side. Mrs. Guzdar held shares in tea companies. Income from tea is, in defined proportion, agricultural income and exempt from income tax in the growers' hands, and sixty per cent of the companies' income enjoyed that character. She claimed that the dividends she received should carry the same proportionate exemption, as income derived from agriculture.
Held. The Supreme Court rejected the claim. A shareholder acquires no interest in the assets of the company by purchasing shares; the right is to participate in the profits if and when the company declares a dividend. The dividend reached her as income from her shareholding, not from land, whatever the company's own income had been.
Why it matters here. This is the Indian statement of the proposition English lawyers take from Macaura, named below: the company's property belongs to the company alone, and a member, even the only member, has no proprietary interest in it. It converts s.9's abstraction into an answer about tax, insurance, succession and everything else that turns on who owns what.
Two English decisions are traditionally named beside these and are named here without report references, their citations not having been read in this book's sources. Lee v. Lee's Air Farming Ltd. held that the controller of a company could also be its employee, so his widow recovered workmen's compensation: one man can stand on both sides of the company's contracts because there are genuinely two persons. Macaura v. Northern Assurance Co. Ltd. held that a sole owner who insured company timber in his own name had no insurable interest in it: the timber was the company's, and its loss was legally not his. Their teaching survives intact in Guzdar and in s.9.
The Company as a Legal Person
The consequences, itemised
One debtor, one creditor. Company debts are the company's. A member cannot be sued for them, and, the mirror image, a member cannot sue on the company's causes of action. The proper-plaintiff rule of majority-rule law in [Majority Rule and Its Limits] is this consequence wearing procedural dress.
Perpetual succession. The company outlives everyone. Membership changes by transfer and transmission, Module II's subject, without touching the company's existence, title or contracts. Only the processes of Module IV, dissolution after winding up or its statutory equivalents, end the person.
Property. What the company acquires is the company's. Guzdar states the member's position; the winding-up rules distributing the surplus only after creditors confirm that even on death the members take as claimants, not as owners.
Capacity to contract and litigate. The company sues and is sued in its own name. Procedure follows: service on the company under s.20, authentication of its documents under s.21, execution of instruments under s.22, all covered in [Service, Authentication and Execution].
Nationality, residence, and their limits. The company has a domicile and residence for many purposes, but the constitutional cases in [The Company and the Constitution] show the analogy to a natural person breaking down exactly where it matters most: citizenship.
A worked example
Return to Tiffin Express Private Limited from [Corporate Law and the 2013 Act]. Meera holds ninety per cent, Arjun ten. The company owns three delivery vans, a registered trademark and the tenancy of a kitchen. Meera, needing personal funds, offers the newest van as security to her own bank, describing it as "my company's van, effectively mine".
Every step fails on s.9 and Guzdar. The van is the company's property; Meera has no interest in it to charge, however large her holding, so the bank gets no security from her signature alone. The correct route is corporate: a board resolution authorising the company to create the charge, execution in the company's name under s.22, and registration of the charge under s.77, Module II's machinery. If instead Meera simply takes the van, she converts company property like any stranger, and the company, acting by its board, or in a proper case a member suing on the company's behalf, can recover it from her.
Now invert it. A supplier unpaid by the company writes demanding payment from Meera personally "as the real owner". The demand has no legal basis: the debt is the company's, her liability is limited to any unpaid amount on her shares, and unless a statutory or judicial ground for piercing exists, the chapters that follow, the correspondence is answered in one line citing s.9 and Salomon.
The Company as a Legal Person
What it does NOT mean
Not a licence for fraud. Separate personality is the rule; [Lifting the Veil: the Statutory Grounds] and [Lifting the Veil: the Judicial Doctrine] are the exceptions, and an answer that states the rule without knowing the exceptions is as incomplete as the reverse.
Not economic reality. The law does not pretend the company is independent in fact; it holds that dependence in fact does not destroy separateness in law. Control, even total control, is not agency: that is the exact argument Salomon rejected, and Vodafone rejected again in the group context.
Not a shield for the company's own wrongdoing. The company itself can commit torts and crimes, [Corporate Criminal Liability], and its separate personality is what makes it, rather than its officers alone, the defendant.
Quick revision
Section 2(20): company means one incorporated under this or a previous company law; registration, not economics, defines it. Section 9: body corporate, perpetual succession, property, contract, sue and be sued, from the date on the certificate. Salomon, [1897] AC 22: validly registered company is distinct even from its total controller; motives irrelevant; no agency from control. Guzdar, AIR 1955 SC 74: shareholder has no interest in company assets, only in declared dividends. Lee and Macaura, named uncited: dual capacity; no insurable interest in company property. Consequences: one debtor, perpetual succession, corporate property, corporate litigation.
Test yourself
1. A creditor of a one-member company seeks to recover from the member, proving she takes every decision and all profits. Result? Recovery fails. Under s.9 and Salomon the company is a distinct person; control and benefit do not create agency or trusteeship, and liability would need a recognised piercing ground or a statutory provision such as s.3A.
2. Why did Mrs. Guzdar's claim fail, and what single sentence of principle decides it? Because a dividend is income from shares, not from the company's land: a shareholder acquires no interest in the company's assets, only a right to participate in profits the company divides.
3. Can the same person be the company's controller and its employee, and why? Yes: as Lee v. Lee's Air Farming Ltd. illustrates, the company and the controller are two persons, so a genuine contract of service can exist between them.
4. Which words of s.9 answer the problem of an unlimited succession of owners in property law, and how? "Perpetual succession" with the power to "acquire, hold and dispose of property": title vests in the undying corporate person, so changes of membership never require conveyance.
The Company as a Legal Person
5. Ninety-per-cent shareholder pledges the company's machine for a personal loan. Advise the lender. The pledge is worthless: the machine is company property, Guzdar; the lender needs the company's own act, board authorisation, execution under s.22, and, for a charge, registration under s.77.
The rest of this subject
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