Independent Corporate Existence concept with Case Laws; Companies Act, 2013: Section 9 by Vimarsh Singh at Lexcliq

Incorporation offers certain advantages to the business community as compared with all other kinds of business organization.

Independent corporate existence [S. 9]

The outstanding feature of a company is its independent corporate existence. 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 impersonalized. No one can say that he is the owner of the company. The business now belongs to an institution. The entity of the enterprise becomes institutionalized. In the words of Palmer: “The benefits following from incorporation can hardly be exaggerated. It is because of incorporation that the owner of the business ceases to trade in his own person. The company carries on the business, the liabilities are the company’s liabilities and the former owner is under no liability for anything the company does, although, as principal shareholder, he is able to take full advantage of profits which the company makes. “The following further passage from Palmer was cited by WADHWA J:

“The principle that, apart from exceptional cases, the company is a body corporate, distinct from members, lies at the root of many of the most perplexing questions that beset company law. It is a fundamental or cardinal distinction-a distinction which must be firmly grasped. This principle is thrown into clear relief by contrasting an incorporated company with a partnership, for under English law [though not under Scottish law or that of the most Continental systems] a firm or partnership is not a separate entity from its members.”

 

In the 13th century, Pope Innocent IV espoused the theory of legal fiction by saying that corporate bodies could not be excommunicated because they existed only in abstract. The Supreme Court regarded this enunciation as the foundation of separate entity principle.

A well-known illustration of this principle is the decision of the House of Lords in Salomon v Salomon & Co Ltd. One Salomon was a boot and shoe manufacturer. His business was in sound condition and there was a substantial surplus of assets over liabilities. He incorporated a company named Salomon & Co Lid for the purpose of taking over and carrying on his business. The seven subscribers to the memorandum were Salomon, his wife, his daughter and four sons and they remained the only members of the company. Salomon and two of his sons constituted the Board of directors of the company.

The business was transferred to the company for £ 40,000. In payment, Salomon took 20,000 shares of £ 1 each and debentures worth £ 10,000. These debentures certified that the company owed Salomon £ 10,000 and created a charge on the company’s assets. One share was given to each remaining member of his family. The company went into liquidation within a year. On winding up, the state of affairs was broadly something like this: Assets £ 6000; Liabilities -Salomon as debenture holder: £ 10,000 and unsecured creditors: £ 7000. Thus, after paying off the debenture holder nothing would be left for the unsecured creditors.

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 Lid 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. It is difficult to understand how a body corporate thus created by statute can lose its individuality by issuing the bulk of its capital to one person. The company is at law a different person altogether from the 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 receive the 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.” The principle had been recognized in India even before the Salomon case. The decision of the Calcutta High Court in Kondoli Tea Co Ltd, re, seems to be the first on the subject.

Certain persons transferred a tea estate to a company and claimed exemptions from ad valorem duty on the ground that they themselves were the shareholders in the company and, therefore, it was nothing but a transfer from them in one to themselves under another name. Rejecting this, the court observed: “The company was a separate person, a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property, as if the shareholders had been totally different persons.”

 

 

References

  1. This basic difference between a company and a partnership has been explained by GHULAM HASAN J in Bacha F Guzdar v CIT, AIR 1955 SC 74: (1955) 25 Comp Cas
  2. In New Horizons Ltd v Union of India, (1997) 89 Comp Cas 785, 802 (Del) overruled by the Supreme Court on other grounds in New Horizons Led v Union of India, (1995) 1 SCC 178: (1997) 89 Comp Cas 849.
  3. Salomon v Salomon & Co Ltd 1897 AC 22 (HL).
  4. Kondoli Tea Co Ltd, re, ILR (1886) 13 Cal 43.

 

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