Characteristic of a Company

The essential characteristic of a Company are as follows:

a) Separate Legal Entity

The essential characteristic of a company is that it possesses a personality distinct from that of its members. This doctrine
(meaning principle or concept) was first approved by the House of Lords (highest court of appeal in England at that time) in
Aron Saloman V A. Saloman & Co. Ltd., (1897).The legal fiction (concept) of corporate veil states that the rights,
obligations or liabilities of a company are discrete (different or separate) from those of its shareholders, where the
shareholders are responsible only to the extent of their capital contributions, known as "limited liability".
As a Company is a separate legal entity, it means that:
o a company can own property in its own name;
o a company can sign contracts in its own name;
o a company may sue (file a case) and be sued in its own name;
o its existence does not depend on the existence of its members; (even if any or all members die, Company will go on)
o raise debt, make investments and assume other rights and obligations, independent of its members. (Company can take
loan, invest the money, etc.)

b) Artificial Person
LEGAL PERSON/ARTIFICIAL PERSON/JURISTIC PERSON:

In the eyes of law there are two types of persons, they are:
(a) Natural persons
-eg Human Beings

(b) Artificial persons such as companies, institutions etc.

-created by law, that is, a process other than natural birth
-Status of person-hood given to a non-living thing
-Legal fiction
-Capable of rights & duties
Legally, a company has got a personality of its own. Like human beings it can buy, own or sell its property. It can sue others
for the enforcement of its rights and likewise be sued by others.

c) Limited Liability
A company incorporated (created/made) under the Act may be either:
-a company limited by shares; or
-a company limited by guarantee; or
-an unlimited company.
Most of the companies are companies limited by shares. The liability of the members of such a company is limited to the
extent of the face value of shares held by them. This means that if the assets of a company are less than the liabilities, the
members cannot be asked to contribute more than the unpaid amount on the shares held by them. Unlike the partnership
firms, the private property of the members cannot be utilized to pay the company's creditors.
If the shares are fully paid, the shareholder does not need to pay any additional amount to the company, even if the
company faces financial difficulties. If shares are only partly paid, the shareholder still owes the company the remaining
amount and could be called upon to pay it if needed.
d) Perpetual Existence
A company enjoys a continuous existence. Retirement, death, insolvency and insanity of its members do not affect the life
of the company.
"During the war all the members of one private company, while in general meeting, were killed by a bomb. But the company
survived; not even a hydrogen bomb could have destroyed it".
The common saying in this regard is "members may come, members may go, but the company goes on forever". Law
creates it and only law can dissolve (end) it.
However, sole proprietorships and partnerships do not enjoy uninterrupted life. The proprietary business almost comes to
an end if anything happens to the proprietor.

e) Voluntary Association
Under Section 3 of the Act, a company can be formed for a lawful purpose by:
seven or more persons in case of a public company;
two or more persons in case of a private company; or
one person in case of a One Person Company

Thus, except in case of a One Person Company, a company is a voluntary association of two or more persons. The
maximum membership of a private company is limited to two hundred maximum, but, no upper limit has been laid down for
public companies.

f) Incorporation:

A company comes into existence the day it is incorporated/ registered. In other words, a company cannot come into being
unless it is incorporated and recognised by law. This feature distinguishes a company from partnership which is also a
voluntary association of persons but in whose case, registration is optional. (In Maharashtra, it is mandatory to register a
Partnership firm)

g) Transferability of Shares

The capital of the company is contributed by its members. It is divided into shares of fixed value. The members of a public
company are free to transfer their shares to anyone else without any restriction.
In case of private companies, however, do impose some restrictions on the transfer of shares by their members.

h) Separation of Ownership from Management

Shareholders of a company are its owners, but every shareholder, unlike a partner or a sole proprietor, does not have a
right to take an active part in the day to day management of the company. A company is managed by the elected
representatives of its members. The elected representatives are individually known as Directors and collectively as ‘Board
of Directors’.
Note: A shareholder can be a director, but that is not always the case. If he is elected by the members, then he can be a
Director.
 Doctrine of Corporate Veil

A Company after incorporation becomes a legal person separate and distinct from its members. It has a corporate
personality of its own with rights, duties and liabilities separate from those of its individual members.

Thus, a veil of incorporation exists between the company and its members. In order to protect themselves from the
liabilities of the company, its members often take the support of the corporate veil.

1. Salomon v. A Salomon & Co Ltd (1897) is one of the most important cases in company law, establishing the principle
that a company is a separate legal entity from its owners.

Facts of the Case

• Mr. Aron Salomon was a leather boot and shoe manufacturer in England.
• He converted his business into a limited company called A Salomon & Co Ltd, with himself, his wife, and his children as
shareholders.
• The company bought his shoe business for £39,000, paying him partly in cash and partly in debentures (a type of secured
loan). This meant that Salomon became both a creditor and the main shareholder of the company.
• The amount was to be paid in-
• 20,000 shares of £ 1 each; and
• 10,000 by way of debentures secured by way of a floating charge on the assets of the Company
• The balance as cash
• Mr. Salomon and his two elder sons were appointed as the directors of the Company.
• Later, the business started failing, and the company went into liquidation (meaning it could not pay its debts and had to be
shut down).
• The company owed money to unsecured creditors, but since Salomon had secured debt (through debentures), he was
paid first, leaving almost nothing for the other creditors.
• The creditors sued Salomon, arguing that the company was just a sham or a front for his personal business, and he
should be personally responsible for its debts.
Issue

The main question before the court was:

• Was the company a separate legal entity from Mr. Salomon, or was it just an extension of himself?

Judgment (House of Lords)

• The House of Lords ruled in favor of Salomon.
• They held that once a company is properly incorporated, it is a separate legal person, even if one person owns almost all
the shares.
• This means that the company, not Salomon, was responsible for its own debts.
• The court rejected the argument that Salomon was personally liable, stating that the law allowed him to form a limited
company, and he had followed the rules correctly.

Key Legal Principle (Separate Legal Entity Doctrine)

This case established the corporate veil, meaning that:
1. A company has its own legal identity, separate from its owners or shareholders.
2. Shareholders are not personally liable for the company’s debts beyond the amount they invested.
3. Even if a company has a single or dominant shareholder, it is still a separate entity under the law.

Impact of the Case

• This case became the foundation of corporate law worldwide.
• It allowed business owners to take risks without putting their personal wealth at stake.
• However, in some cases, courts can “lift the corporate veil” if a company is used for fraud or wrongful purposes.

In short, Salomon v. Salomon confirmed that a legally registered company is independent from its owners, no matter how
small or closely controlled it is.

2. The Kondoli Tea Co. Ltd. Case (1886)

Facts:
• A group of individuals owned a tea estate.
• They transferred the tea estate to a newly formed company, Kondoli Tea Co. Ltd., in which they were the shareholders.
• They claimed that since they were the same people owning the company, this was not a real sale and should not attract
Ad Valorem duty (a type of tax on transfers).

Issue:
• Was the transfer of the tea estate to the company simply a change of name, or was it a real sale requiring tax payment?

Court’s Decision:
• The company was a separate legal entity, distinct from its shareholders.
• Even if the same people owned both the estate and the company, the transaction was still a sale.
• The shareholders and the company are not the same in law, so they had to pay the tax.

Key Principle:
• A company is legally separate from its owners, and transactions between the company and its shareholders are valid like
any other sale.
 LIFTING OF CORPORATE VEIL
Sometimes this corporate veil is used for the purpose of fraud or evasion of tax (avoid paying tax) etc. To prevent unfair
and fraud acts, it becomes necessary to lift the veil of the corporation or ignore the corporate personality to look into the
reality behind the Company and to hold the individual member of the company liable for its acts or liabilities.

Without a doubt, as a general rule, a company is a person distinct and separate from its members. But, in exceptional
cases, that veil of corporate personality can be lifted.

Situations in which Corporate Veil can be lifted:

1. Fraud or Improper Conduct

Case: Gilford Motor Co. Ltd. v. Horne (1933)
• Horne was a former employee of Gilford Motor Co. and had an agreement not to compete with them.
• To bypass this, he started a new company in his wife’s name and ran the same business.
• The court lifted the corporate veil, saying the company was just a cover to evade legal obligations.

2. Sham or Bogus Company

Case: Jones v. Lipman (1962)
• Lipman agreed to sell land to Jones but later changed his mind.
• To avoid selling, he transferred the land to a company he created.
• The court saw this as a dishonest trick and lifted the corporate veil, forcing Lipman to transfer the land to Jones.

3. Tax Evasion
Case: Dinshaw Maneckjee Petit v. Commissioner of Income Tax (1927, India)
• A wealthy man, Dinshaw, created multiple companies just to avoid paying taxes.
• The companies had no real business; they only existed to channel his personal income.
• The court lifted the corporate veil and treated his earnings as personal income, making him pay taxes.

4. Avoiding Liability for Debts

Example:
• Raj owns XYZ Ltd. and takes a big loan in the company’s name.
• Instead of using it for business, he moves the money to his personal account.
• When the company goes bankrupt, creditors are left unpaid.
• The court lifts the corporate veil and makes Raj personally repay the debt.

5. Company as a Mere Agent

Case: State of Uttar Pradesh v. Renusagar Power Co. (1988, India)
• Renusagar Power Co. was set up to supply electricity only to its parent company, Hindalco.
• The government argued that Renusagar was not an independent company but just an extension of Hindalco.
• The court lifted the corporate veil and treated them as one entity for tax purposes.

6. To determine the Legal Character of a Company

Lifting of veil may be done to ascertain whether a company is to be treated as an “Enemy Company” in times of War. Thus,
during the First World War in Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd [1916], a company
which was registered in England and which should normally be treated as an English Company was held by the House of
Lords to be an enemy company because, all its directors and its shareholders except one were Germans.