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CORPORATE PERSONALITY
Corporate personality
Corporate personality refers to the fact that as far
as the law is concerned Personality of a company
really exists apart and different from its owners.
As a result of this, a company can sue and be sued
in its own name, hold its own property and be
liable for its own debts.
this concept enables limited liability for
shareholders as the debts belong to the legal entity
of the company and not to the shareholders in that
company.
1. Corporation Aggregate :
Is an association of human beings united for the purpose of
forwarding their certain interest.
A limited Company is one of the best example. Such a company is
formed by a number of persons who as shareholders of the company
contribute to the capital of the company for the furtherance of a
common object.
Their liability is limited to the extent of their share-holding in the
company.
A limited liability company is thus formed by the personification of
the shareholders.
The property is not that of the shareholders but its own property and
its assets and liabilities are different from that of its members.
The shareholders have a right to receive dividends from the profits of
the company but not the property of the company.
The principle of corporate personality of a company was recognized in
the case of Saloman v. Saloman & Co.
2. Corporation Sole :
Is an incorporated series of successive persons. It consists of a single
person who is personified and regarded by law as a legal person.
a single person, who is in exercise of some office or function, deals in legal
capacity and has legal rights and duties.
A corporation sole is perpetual.
Post Master- General, Public Trustee, Comptroller and auditor general of
India, the Crown in England etc are some examples of a corporation sole.
Generally, corporation sole are the holders of a public office which are
recognized by law as a corporation.
chief characteristic of a corporation sole is its continuous entity endowed
with a capacity for endless duration.
A corporation sole is an illustration of double capacity.
The object of a corporation sole is similar to that of a corporation aggregate.
In it a single person holding a public office holds the office in a series of
succession, meaning thereby that with his death , his property , right and
liabilities etc., do not extinguish but they are vested in the person who
succeeds him.
Thus on the death of a corporation sole, his natural personality is destroyed,
but legal personality continues to be represented by the successive person.
Advantages of Incorporation
2) Limited Liability :
One of the principal advantages of an incorporated company is the
privilege of limited liability.
It is the main feature of registered companies which provides a
special attraction to investors.
The principle of limited liability implies that the liability of a member in
the event of the company's winding up, in respect of the shares held
by him is limited to the extent of the unpaid value on such shares.
Thus the liability does not fluctuate but remains limited to the amount
which, for the time being remains unpaid., whether from the original
shareholder or the transferee of such shares as the case may be.
limited liability of members extends only for company's debt in the
event of its winding up.
The company itself, being a legal persona, is always fully liable and
therefore its liability is unlimited.
In other words, it is liable to pay the debts so long as assets are
available.
No member is bound to contribute anything more than the value of
the shares held by them
7) Centralized Management :
The shareholders have no direct concern with the
management of the company.
They exercise, only a formative control.
management of the company is altogether different from its
ownership.
Independent functioning of managerial personnel attracts
talented professional persons to work for the
Disadvantages of Incorporation
(e) To punish the real persons in QuasiCriminal cases against the Company
The courts have sometimes applied the
doctrine of lifting the corporate veil in
quasi-criminal cases relating to companies
in order to look behind the legal person
and punish the real persons who have
violated the law.
3. Expenses and
formalism :Incorporation of a
company is an expensive affair.
Besides, it involves completion of a
number of formalities. Moreover, the
administration of a company has to
be carried on strictly in accordance
with the provisions of the company
law
Bennett Coleman & Co. V Union of India question was whether the shareholder, the editor,
the printer have right to freedom under Article 19 of
the Constitution. Relying on the Bank Nationalization
case the court held that the protection of Article was
available to a shareholder, editor, printer and
publisher of a newspaper. The court said the rights of
shareholders with regard to Article 19 (1) (a) were
protected and manifested by the newspapers owned
and controlled by the shareholders through the
medium of the corporation. The individual rights of
speech and expression of editors, directors and
shareholders are all exercised through their
newspapers through which they speak. The press
reaches the public through the newspapers. The
shareholders speak through their editor.
D.C. & G.M. V Union of India writ petition filed by a company complaining
denial of fundamental rights guaranteed
under Article 19 is maintainable.
In the matter of fundamental freedom
guaranteed by Article 19, right of a
shareholder and the company which the
shareholders have formed are co-extensive
and the denial to one of the fundamental
freedom would be denial to the other
C. KIND OF CORPORATIONS
Corporations are of two kinds:
I. Corporation aggregate
II. Corporation sole
I. CORPORATION AGGREGATE
A Corporation aggregate is a group of co-existing persons, a combination of persons who are united together with a view to promote their common interest which is generally the
business or commercial interest. It has been defined as a collection of individuals united into one body under a special denomination, having perpetual succession under an artificial
form vested by the policy of the law with the capacity of acting in several respects as an individual, particularly of taking and granting property, of contracting obligations and of suing
and being sued, of enjoying privileges and immunities, in common and of exercising a variety of political rights, more or less extensive, according to the design of its institution or the
powers conferred upon it, either at the time of its creation or at any subsequent period of its existence. Under Indian Law, corporation aggregate are all those bodies or associations
which are incorporated under a statute of Parliament or State legislature. In this category come all trading and non-trading associations which are incorporated under the relevant laws
like the state trading corporation, Municipal Corporation, Roadways Corporations, the public companies, State bank of India, Reserve bank of India, The life insurance corporation, the
Universities, Panchayats, Trade Unions, Co-operatives Societies. In fact these are some examples of corporate aggregate.
In Board of Trustees V State of Delhi, the Supreme Court discussed in detail the characteristics of corporate aggregate. In this case the court was examining the question, namely,
whether the Board of Trustees, Ayurvedic and Unani Tibia College is a corporation aggregate or not. The court held the Board is not a corporation. Their Lordships observed that the most
important point to be noticed in this connection is that in the various provisions of the Societies registration Act, 1860, there are no sufficient words to indicate an intention to
incorporate. On the contrary the provisions show that there was an absence of such intention. Hence the Board is not a corporation aggregate because the essential characteristic of a
corporation aggregate, namely, that of an intention to incorporate the society is absent. The court observed in this case that a corporation aggregate has one main capacity, namely, its
corporate capacity. The corporate aggregate may be a trading corporation or a non-trading corporation. The usual examples of a trading corporation are: 1. Chartered companies
2. Companies incorporated by special Acts of Parliaments
3. Companies registered under companies Act etc.
The court further observed that an essential element in the legal conception of a corporation is that its identity is continuous, that is, that the original member or members of which it is
composed are something wholly different from the incorporation itself; for a corporation is a legal person just as much as an individual. In fact the essential of a corporation consist in
the following:
1. Lawful authority of incorporation
2. The person to be incorporated
3. A name by which the persons are incorporated
4. A place and
5. Words sufficient in law to show incorporation.
No particular words are necessary for the creation of a particular corporation; any expression showing an intention in corporation will be sufficient.
II. CORPORATION SOLE
Corporation sole is an incorporated series of successive persons. It implies two persons to exist under the same name, the one a human being and the other, the corporation sole, which
is a creature of the law and continues to exist though the human beings changes. The live official comes and goes, said Salmond in a passage which has become the classic
description of the corporation sole, but this offspring of the law remains the same for ever. The most outstanding example of Corporation Sole is the Crown (in England). Two persons
are deemed to be occupying the throne of England- one the queen in flesh and blood and the other is the Corporation sole which is the creature of law. This Queen never dies though
the Queen in flesh and blood may die.
THEORIES OF CORPORATE
PERSONALITY
Law treats a corporation aggregate and a
corporation sole as persons.
About the nature of their personality
different theories have been advanced.
courts have not followed any particular
theory in dealing with various problems
relating to corporation and have, by and
large, being guided by practical
considerations.
Classification of Companies
I. On the Basis of Mode of
Incorporation, Companies can be
classified into three categories
Chartered Company:
A Company is incorporated by a charter granted by
Monarch and is regulated by that charter.
The powers and nature of business of a chartered
company are defined by the charter which
incorporates it.
A chartered company has wide powers.
It can deal with its property and bind itself to any
contracts that any ordinary person can.
In case the company deviates from its business as
prescribed by the charted, the Sovereign can annul
the latter and close the company.
Ex.- East India Company came into being by the
grant of a Royal Charter. Such Companies do not
exist in India now.
Statutory Company:
A Company which is created by a Special Act of the
Legislature and is governed by the provisions of that Act.
Such companies do not have any memorandum or articles
of association.
They derive their powers from the Acts constituting them
Alternations in the powers of such companies can be
brought about by legislative amendments.
The provisions of the Companies Act shall apply to these
companies also, except in so far as provisions of the Act
are inconsistent with those of such Special Acts.
These companies are generally formed to meet social
needs and not for the purpose of earning profits.
Ex.- State Bank of India , Industrial Finance Corporation of
India are Statutory Companies.
Registered Company:
A Company brought into existence by
registration of certain documents under the
Companies Act.
Such companies come into existence only
when they are registered under the Act and
a certificate of incorporation has been
issued by the Registrar of Companies.
This is the most popular mode of
incorporating a company.
A new Section 76 A has been introduced for the above noncompliances. The defaulting company will be liable for fine of a
minimum amount of INR 10,000,000 and a maximum of INR
100,000,000 in addition to the amount of deposit or part
thereof, along with interest.
Further, every officer of the company in default is punishable
with imprisonment which may extend upto 7 years or with a
fine amounting to a minimum of INR 2,500,000 and maximum
of INR 20,000,000 or both. Such officer may attract additional
penalty for fraud under CA 2013 if the non-compliance was
done knowingly or with the intention to deceive the company,
shareholders, depositors, creditors or tax authorities.
b) Non-Government Companies.
All other companies, except the
Government Companies, are called
non-government companies. They do
not satisfy the characteristics of a
government company. Some of the
example of Non-Government
Companies are- Reliance Industries
Limited, WIPRO Limited etc.
MODULE 2
PROMOTERS OF A COMPANY
Managingpromoters played a
significant role in promoting new
companies and then get their
managing rights.
A promoter is neither an agent nor a
trustee of the company as it is a nonentity before incorporation.
FUNCTIONS OF PROMOTER
A promoter plays a very important role in the formation of a
company. A promoter may be an individual, an association or a
company. In their capacity as promoters, they perform the following
functions in order to incorporate a company and to set it going. To
originate the scheme for formation of the company:
Promoters are generally the first persons who conceive the idea of
business.
They carry out the necessary investigation to find out whether the
formation of a company is possible and profitable.
Thereafter they organize the resources to convert the idea into a
reality by forming a company. promoter
settles the name of the company
settles the content or details as to the Articles of the companies;
(articles implies Articles of association & Memorandum of association),
nominates the directors, bankers, auditors and etc.;
decides the place where registered office (head office) have to be
situated;
prepare the Memorandum of Association, Prospectus and other
necessary documents and file them for incorporation.
Duties:
The early companies Acts contained no provisions
regarding the liabilities or duties of promoters, and even
today legislation is largely silent on the subject, merely
imposing liability for untrue statement in listing particulars
or prospectuses to which they are parties.
promoters have certain basic duties towards the company
formed : Promoters have been described to be in a fiduciary
relationship (i.e., relationship of trust and confidence) with
the company. This relationship of trust and confidence
requires the promoter to make a full disclosure of all
material facts relating to the formation of the company.
promoter can make profits in his dealings with the company
provided he discloses these profits to the company and its
members. What is not permitted is making secret profits
i.e. making profits without disclosing them to the company
and its members.
Liabilities of promoter:
A promoter can be compelled by the company to hand over any secret profit
which he has made without full disclosure to the company. The company can
also sue for the rescission of the contract of sale by the promoter where the
promoter has not disclosed his interest therein.
A promoter is subject to the following liabilities under the various provisions of
the companies Act:
Section 56 lays down matters to be stated and reports to be set out in the
prospectus. He may be held liable for the non-compliance of the provisions of
this section.
promoter is liable for any untrue statement in the prospectus to a person who
has subscribed for any shares or debentures on the faith of the prospectus. Such
a person may sue the promoter for compensation for any loss or damage
sustained by him.
promoters are criminally liable for the issue of prospectus containing untrue
statements. Act imposes severe penalty on promoters who make untrue and
deceptive statements in a prospectus with a view to obtaining capital.
A promoter may be liable to public examination like any other director or officer
of the company if the court so directs on a liquidators report alleging fraud in
the promotion or formation of the company.
A company may proceed against a promoter on action for deceit or breach of
duty , where the promoter has misapplied or retained any property of the
company or breach of trust in relation to the company.
Position since 1963 (i.e., after passing of the specific relief Act, 1963):
Until the passing of the specific relief Act, 1963, in India the promoters found it
very difficult to carry out the work of incorporation. Since contracts prior to
incorporation were void and also could not be ratified, people hesitated to either
supply any goods or services for the cause of incorporation. Promoter also felt shy
of accepting personal responsibility. The specific relief Act, 1963 came as a relief to
the promoters.
The specific relief Act provides under the following sections:
Section 15(h) and 19(e) of the Specific Relief Act provides as follows:
The contract should have been entered into by the promoter for the purpose of the
company.
The terms of incorporation should warrant such contract.
The company should accept the contract after incorporation.
Such acceptance should be communicated to the other party to the contract.
So, preliminary contract enforced by the promoter prior to incorporation of the
company will be treated as contract between two individuals who are in existence.
if the company does not execute a fresh contract post incorporation and the
contract is not one warranted for the purposes of incorporation of the company,
what will be the legal position of the promoter who brings about such a contract?
Phonogram Limited v. Lane,- Promoters shall be liable to pay damages for failure to
perform the promises made in the name of company and this shall be so, even
where the contract expressly provides that only the companys paid up capital shall
be answerable for performance