DR.

RAM MANOHAR
LOHIYA

NATIONAL LAW
UNIVERSITY

PROJECT REPORT

ON

Domicile of corporations and pseudo

corporations

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SUBMITTED TO: -
SUBMITTED BY:-

Mr. Prem Kumar Gautam ANKUR

GUPTA

B.A
.LL.B. (HONS) 7th Sem.

ROLL NO. 26

LIST OF CONTENTS

1. Hypothesis

2. Methodology

3. Issues Seeked

4. Introduction

5. What is Domicile?

6. What is Corporation?

7. Domicile And Residence Of Corporation In Common Law

8. Indian Position

9. What Is a Pseudo-Foreign Corporation?

10. American Position

11. Lex Incorporationis (Law Of State Of Incorporation)

12. The Place Of Business

13. Indian Position

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 14. Origin of a Company

15. Indian Law On Corporate Insolvency

16. Conclusion

17. Bibliography

ACKNOWLEDGMENT

This project entitled “Domicile of Corporations and Pseudo Corporations” has been
prepared for the fulfillment of the paper on Conflict of Laws, which forms the part of the
curriculum of the study in the Dr. Ram Manohar Lohiya National Law University, Lucknow.

This project venture has been made possible due to the generous co-operation of various
persons. To list them all is not practicable, even to repay them in words is beyond the domain of
my lexicon. I would like to express my sincere thanks and deep gratitude to Mr. Prem Kumar
Gautam Sir, without whose through and insightful guidance this project work would have not
been a success.

It is a great pleasure to acknowledgement the contribution of my friends for their moral and
material support.

I express my sincere thanks to the library staff of RMLNLU for their cooperation in my
endeavor.

MADE BY: ANKUR GUPTA

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 B.A.LL.B (Hons). 7TH
Semester.

HYPOTHESIS OF PROJECT

The applicability of Conflict of laws rules to corporations have always been of importance
and their importance in any country can only grow as with liberalisation and the growth of
international investment and trade. In such it becomes important to determine the domicile of the
corporate body so that the courts can apply correct laws.

RESEARCH METHODOLOGY

The project is mainly doctrinal and is a compilation of established principles and rules in
this field of Conflict of Laws.

ISSUES SEEKED

• What is the Domicile of Corporation if it functions in more than one country?

• Where the income tax would be paid?

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 • What is done in winding up?

• What are the positions in Common Law countries and in India?

• What is domicile of pseudo Corporate?

INTRODUCTION

Following on the success of the corporate model at a national level, many corporations
have become transnational or multinational corporations: growing beyond national boundaries to
attain sometimes remarkable positions of power and influence in the process of globalizing. The
typical “transnational” or “multinational” may fit into a web of overlapping ownerships and
directorships, with multiple branches and lines in different regions, many such sub-groupings
comprising corporations in their own right.

In the spread of corporations across multiple continents, the importance of private

international laws has grown many folds. Conflict of laws, or private international law, or
international private law, in common law system, is that branch of international law and interstate
law that regulates all lawsuits involving a “foreign” law element, where a difference in result will
occur depending on which laws are applied.

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 WHAT IS DOMICILE?
In Conflict of Laws and for purposes of diversity jurisdiction, domicile is the basis of the
choice of law rule operating in the characterisation framework to define a person's status,
capacity and rights. The international term for this as a connecting factor is the lex domicili, i.e.
the law of the domicile. Generally, a person is domiciled in the state or country where he has his
permanent home and intends to reside. Domicile is more demanding than habitual residence
where there is much less focus on future intent.1

In Williams v Osenton2 Oliver Wendell Holmes J. Said:

“The very meaning of domicile is technically pre-eminent headquarters that every person
is compelled to have in order that certain rights and duties that have attached to it by the law
may be determined.”

1
http://en.wikipedia.org/wiki/Domicile_(law) accessed on 27.10.2209
2
(1914) US 619, pg 620, quoted in Atul M Setalvad,Conflict of laws, 1st ed. Pg. 122

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 WHAT IS CORPORATION?
A ‘corporation’, for the purpose of conflict of laws, is a body of individuals, or even a
single individual, regarded by law being distinct from individuals who have created it, and who
own, run and manage it. Such entities have distinct personalities, and have separate legal status
from their owners or members. Usually, they have limited liability, means separate liability of
members or shareholder and company, while members are liable only for capital share each of
them has or has agreed to contribute, and on other hand the company is liable for its debts.
Corporations are also perpetual in the sense that the death of the owner or members doesn’t affect
the continued existence of the company. It continues to exist until it is not ‘dissolved’ by, or
under some law.3

Conflict of laws question have generally arisen in the case of corporations or companies
engaged in trade and commerce, and corporate entities such as corporations sole do not usually
do so. The principles of law applicable would, it is submitted, be the same.4

3
Atul M Setalvad, Conflict of laws, 1st ed. 2005
4
Ibid

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 DOMICILE AND RESIDENCE OF
CORPORATION IN COMMON LAW
Common law has generally established that a company is resident in the country in which
its central management and control is exercised.5 British courts have rejected the place of
incorporation as the one test of residence of a company because this is only a circumstance like
the birth of an individual. Other factors such as the place where the principal business is done,
books and records are located, the company seal is kept, bank accounts are maintained, and
where the directors reside have been considered by British courts as useful, but not conclusive.

The Cesena Case6

The Cesena company was incorporated in England under Companies Act for the purpose
of taking over and working sulphur mines at Cesena in Italy. The practical business of
manufacturing selling the sulphur was administered by an Italian delegate, including the
Managing Director of who was permanent resident of Cesena. No products were ever sent to
England, the books of account were kept in Italy, the company was registered in Italy and two
third of the shareholders were Italian. Taken by themselves, these facts went to show that the
centre of business was Italy. As against them, however, the memorandum of association set up a
Board of Directors in London which controlled the “sale, order, direction, and management” off
‘the working of the company’s mines, the mode of the disposal thereof, and the general business
of the company”. The shareholders’ meetings were held in London, and it was there that
dividends were declared.

In the result it was held that, since almost every act of the company connected with its
management was done in London, the main place of business in London, and that therefore the

5
Cesena Sulphur Company v Nicholson (1876), I Ex D. 428
6
Ibid

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company was resident in England. By reason this residence it was liable to pay income tax upon
the whole of its profits, wherever earned.

`British courts have emphatically stated that the true rule in determining the residence of a
company for purposes of income tax is "where the company's real business is carried on." In the
opinion of the courts, "the real business is carried on where the central management and control
abides...This is a pure question of fact to be determined, not according to the construction of this
or that regulation or by-law, but upon a scrutiny of the course of business and trading."

Usually central management and control abides where the members of the board of
directors meet and hold their meetings. Relevant to the residence of a company is not where
central management and control is exercised according to the articles of incorporation, but where
it is actually exercised. It may well happen that actual control is exercised by directors resident in
one country, while directors resident in another country who ought to have exercised control
stood aside from their directorial duties.

A corporation cannot have more than one domicile.7

Winding Up Foreign Companies

English courts can wind up a company incorporated in another country as an unregistered

company if there is sufficient connection between the company and England, and if there are
people who would benefit by making the order. This rule is based on English Statutory
provisions. 8

7
Sacchrin Corp. Ltd. V Chemise Fabrik Von Heyden Akitiengesellschaft [1911] 2 KB 516
8
Atul M Setalvad, Conflict of Laws, 1st ed. Pg 538

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 INDIAN POSITION

The Law in India is essentially based on Common law system and English decisions are
generally followed.

Jurisdiction of Indian Courts

As per sec 592 of Companies Act, 1956 foreign companies can sue in India and can be
sued if the court has jurisdiction. Foreign companies which have established in India are required
to register themselves with companies’ registrar and designate a person and a place for effecting
service on the foreign company.

Domicile and Resident of Corporations

The question of the domicile of a corporation, as also the concept of its resident are notional, as a
corporation, not being a living person, can have neither domicile nor residence. The latter
question arises essentially in the field of levying Indian income tax. Under the Indian Income Tax
Act 1961 a person is liable to pay such tax if he resident in India, and under section 6(3) (ii) of
the Act, a foreign company is regarded as resident in India unless in the previous year its control
and management was situated wholly outside India.9

The Hon’ble Supreme Court quoting from De Beers Consoldiated Mines v Howe10 held
the following in the case of Subbaya Chettiar v Commr of Income Tax, Madras11:

A company cannot eat or sleep, but it can keep house and do business. We ought,
therefore, to see where it really keeps house and does business. A company resides for the

9
Atul M Setalvad, Conflict of Laws, 1st ed. Pg 547
10
[1906] AC 455, 5TC 198
11
AIR 1951 SC 101

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purpose of Income tax where its real business is carried on and the real business is carried on
where central management and control actually abides.

Winding up

It has been held in many decisions that a foreign company can be ordered to be wound up
in India.12 A court has discretion as to whether to pass an order; it will do so if the company has
assets in India.

12
RBI v. BCCIL (no 1) (1992) 78 CC 207 Bom

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 WHAT IS A PSEUDO-FOREIGN
CORPORATION?

“A pseudo-foreign Corporation is an entity which is incorporated in one state &

transacting all or most of their business in other state.”

ILLUSTRATION:

An Indian resident operates a business entity exclusively in India, dealing with Indian
Customers, but the entity is formed in America. This entity is a pseudo-foreign entity.

The pseudo-foreign corporations are awarded a different treatment from a national

company when it comes to deciding the applicable law. Various factors are considered in
determining the law applicable in piercing an entity to so called “pseudo-foreign corporation.”

AMERICAN POSITION:

If a case involving a pseudo-foreign corporation comes before an American court, the court
exercises its jurisdiction after determining the domicile of the pseudo-foreign company. There are
two conflicting opinion on what would constitute the domicile of a pseudo-foreign corporation
and they are as follows:

1. The domicile of a company would be the place where it was incorporated.

2. The domicile of a company would be the place of business or where it mostly transacts.

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 LEX INCORPORATIONIS (LAW OF STATE
OF INCORPORATION)13:

Under this approach the court decides the domicile of the pseudo-foreign company to be
the place where it was principally incorporated. The doctrine recognizes that interests of
certainty, protection of legitimate expectations and reducing the prospect of inconsistent
obligations require that only one state have the authority to regulate a corporation’s internal
affairs. Matters that qualify as internal affairs as those “which involve primarily a corporation’s
relationship to its shareholders,” including the election or appointment of directors and officers,
the adoption of by-laws, the holding of directors’ and shareholders’ meetings, mergers,
consolidations and reorganizations and the reclassification of shares, and the purchase and
redemption by the corporation of outstanding shares of its own stock. In addition, the doctrine
generally requires that the law of the sate of incorporation govern allegations of director or
officer breaches of fiduciary duty owed to the corporation and its shareholders.14 When the rights
of third parties unaffiliated with the corporation are at issue, however, the doctrine does not apply
and ordinary choice of law principles govern.

THE PLACE OF BUSINESS:

13
Also known as the Internal Affairs Doctrine
14
Walton v. Morgan Stanley & Co., 623 F.2d 796, 798 n.3 (2d Cir. 1980).

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 This approach of determining the domicile is often called the traditional approach. Under
this approach the court may exercise jurisdiction as to any cause of action, if defendant is
domiciled in the forum state or its activities there are substantial, continuous & systematic even if
unrelated to the defendant’s activities within the state.15 This form of personal jurisdiction is
known as general jurisdiction. However, even if a non-resident defendant’s contracts with a
forum state are sufficiently ‘continuous & systematic’ for general jurisdiction, it may still be
subject to jurisdiction on claims related to its activities or contracts there.16 This form of personal
jurisdiction is known as limited jurisdiction.17

As can be seen, there is no uniformity among the courts on the issue under review. This
can lead to inequitable results. In the cases of Calder v. Jones and Keeton v. Hustler Magazine,
Inc. these issues were discussed. The Supreme Court held that merely having jurisdiction over a
business entity is not tantamount to having jurisdiction over the owners or employees of the
entity. Rather, one must find the requisite “minimum contacts” as to each individual separately.
Where one owns a pseudo-foreign corporation and is domiciled in the Forum State (as in our
theoretical example), the courts there already possess general personal jurisdiction over the
owner. In such a situation, the “majority rule” is that the law of the place of formation decides the
issue.

Despite this difference of opinion, one thing is absolutely clear: “The central question in
choosing the appropriate law to govern a corporation asks whether the particular issue involved is
an internal one or one that involves third parties.

INDIAN POSITION:

The principles of Private International Law used to govern the conflict of law between
countries. But the rapid growth of international trade, commerce, investment and industries
15
Colt Studio, Inc. vs. Badpuppy Enter, 75F.Supp.2d1104, 1107. (Quoting International shoe Co. vs. Washington, 326U.S.310, 316 (1945).
16
Perkins vs.Benguet Consol Mining Co., 342 U.S.437 (1952)
17
Burger King Corp. v. Rudzewiez, 47 1 U.S. 462 (1985).

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setting the pace of globalization and opening-up of the economies of nations has added to the
need of formulating, specific legal measures for protecting Indian creditors as well. The question
of choice of law arises in all cross border transactions due to the following reasons:

(a) Development of international trade in which inter-country debtor-creditor relations across the
border develops;

(b) Development of transnational and multi- national institutions through building up transborder
structures through permanent establishment, branches or franchises;

(c) Development of business through chain organization structure of subsidiaries, and joint
venture and finally

(d) Development of complexities in modern business relations. Naturally, in all transborder

insolvency situations there are claims of national creditor against foreign debtor or national
debtor to settle dues to foreign creditors.

The present Indian legal system does not contain any specific provision on any cross –
border relations, but is spread over various legislations.

ORIGIN OF A COMPANY:

The domicile of origin in the case of a company is the country where it is registered, i.e.,
the place or country of its incorporation. Thus, a company formed under the English Companies
Act has an English domicile if it is registered in England. Similarly, a company incorporated
under the Indian Companies Act will have an Indian domicile. This has been recognized by the

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Indian Supreme Court in the case Technip SA v. SMS Holding (Pvt.) Ltd. & Ors, the court
observed that:

“Questions as to the status of a corporation are to be decided according to the laws of its
domicile or incorporation subject to certain exceptions including the exception of domestic public
policy. This is because a corporation is a purely artificial body created by law. It can act only in
accordance with the law of its creation. Therefore, if it is a corporation, it can be so only by virtue
of the law by which it was incorporated and it is to this law alone that all questions concerning
the creation and dissolution of the corporate status are referred unless it is contrary to public
policy.”

In addition according to Indian Income Tax Act, a company registered outside India but
having its management and control in India, is considered an Indian Company for the purpose of
corporate taxation.18 The domiciles of the shareholders have no influence in determining the
domicile of the company.

INDIAN LAW ON CORPORATE

INSOLVENCY:

Under the Indian Companies Act, the Indian courts have jurisdiction to entertain winding
up proceedings in respect of the following two categories of companies:
(a) When the company has been incorporated in India, and

18
Section 2(26) of the Income-tax Act, 1961

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(b) When it is an unregistered company.19

In respect of the former the Indian courts have jurisdiction irrespective of the fact that the
entire business of the company is carried on abroad, or that all its members are foreigners. In such
winding up proceedings, Indian as well as foreign creditors can prove their debts. There is no
discriminative treatment of ‘foreign’ creditors in the sense that only the creditors of the Indian
branch are able to lodge proof of claim. The claims are treated equally as per the provisions of
section 530 of the Companies Act. Part X of the Indian Companies Act deals with the winding up
of the unregistered company. Section 584 of the Act relates to dissolved foreign companies.
Foreign companies in India fall within the meaning of unregistered companies. A bank
incorporated in a foreign country is an unregistered company and winding up proceedings can be
filed in India. Winding up proceedings in respect of a foreign company not falling under section
584 of the Companies Act can be filed under section 582 as an unregistered company.

Indian courts have the jurisdiction to wind up a foreign company whatever be the number
of its members, provided it has assets and an office in India. It would make no difference, even if
an order for its winding up has been made by a court of competent jurisdiction of the place of the
company’s domicile. However, just because a winding up order has been made by the court of
domicile of a foreign company, it does not mean that the Indian courts are bound to entertain its
winding up proceedings. The court may decline to exercise jurisdiction on practical
considerations.

Though the jurisdiction of the Indian court is ‘territorial’ as opposed to ‘universal’ in the
sense that if the assets of the company are outside the jurisdiction of India, then the Indian courts
and the liquidator will need to obtain the consent of the relevant courts in that jurisdiction for
their actions to have effect.

19
Part X of the Indian Companies Act

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 CONCLUSION

The nature of the corporation continues to evolve through existing corporations pushing
new ideas and structures, courts responding, and governments regulating in response to new
situations. A question of long standing is that of diffused responsibility: for example, if the
corporation is found liable for a death, then how should the blame and punishment for this be
allocated across the shareholders, directors, management and staff of the corporation, and the
corporation itself?

The present law differs among jurisdictions, and is in a state of flux. Some argue that the
owners of the business - the shareholders - should be ultimately responsible for such
circumstances, forcing them to consider issues other than profit when investing, but the modern
corporation may have many millions of small shareholders who know nothing about its business

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activities. In addition, traders — especially hedge funds — may rapidly turn over their partial
ownership of a corporation many times a day.

BIBLIOGRAPHY

Literary Sources

• Adrian Briggs, The Conflict of Laws, Oxford University Press, Oxford (2008)

• Atul M Setalvad, Conflict of Laws, Lexis Nexis Butterworths Wadhwa Nagpur, New
Delhi (2008)

• C.M.V. Clarkson and Jonathan Hill, The Conflict of Laws, Oxford University Press,
Oxford (2006)

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 • Dicey, Morris and Collins, The Conflict of Laws- Vol 1, Sweet & Maxwell, London
(2006)

• G C Cheshire, Cheshire’s Private International Law, Butterworths, London (1970)

• Martin Wolf , Private International Law, Oxford University Press, Great Britain (1950)

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