CA Loan Bajaj Finserv
CA Final Online Classes
CA Classes

Share on Facebook

Share on Twitter

Share on LinkedIn

Share on Email

Share More

Base of Indian company law

Amitav Ganguly 
on 01 September 2015

LinkedIn


Background

In the classical U K case of Salomon – vs.- Salomon & Co., 1897  AC 22,  the legal position of  a company  was established having  far reaching consequences in corporate jurisprudence .

It was held by the Court, in that case, that a company is a separate legal entity and has independent and separate existence.  It is, thus, separate from its shareholders and can own assets that are separate and distinct from those of its shareholders. A company can sue and be sued exclusively for its own purposes. Moreover, creditors of a company cannot obtain satisfaction from the assets of   the company’s shareholders and the liability of the shareholders is limited to the capital invested by them.

Foundation of Company Legislation

This legal principle has been upheld by numerous courts in India from time to time.  This forms the back bone and the base of the Indian Company Law from the very inception.

Deviation- Lifting of Corporate Veil

However, the above legal position of a company has been deviated by the courts, from time to time, and therefore there have been lifting or piercing of Corporate Veils of companies.  In many cases the shareholders have been held liable for company’s misdemeanours/misdeeds. Thus the separate existence of the shareholders and that of the company had been ignored and they were treated as one and the same for the sake of justice.

Only in exceptional cases

Lifting of Corporate Veil, is done by the Courts in exceptional cases, where there are established frauds,  illegality and the like by the shareholders, or  by the persons associated with the company who take advantage and shelter  of the separate legal entity of the company, to perpetuate  fraud etc and escape punishment.

Pertinently, it must be established before the court that there has been commission or omission of fraud, illegality, etc. so as to enable the court to lift the corporate veil, to hold the persons liable who are actually responsible and who are taking shelter behind the corporate separate legal entity to escape liability and punishment.  If such commission or omission cannot be established, the courts will not lift the Corporate Veil and the well known legal principle of separate legal entity of a company established by the U K Court in the Salomon –vs- Salomon & Co. case in 1897, will continue to be upheld.

Principle of Salomon case reigns supreme

In the case of  Punjab National Bank –vs.- Bareja Knipping  Fasteners Ltd. (2001) 103 Com. Cases, it was held that court decree against a company cannot be satisfied by attachment and sale of properties belonging to other companies even if there are being managed by same group of persons. 

In another case of  Polly Peck International Plc, (In Administration) (No.3) Re (1996) 1 BCLC 428 (CHD), the court had held that all companies in a group are separate legal entities and have to be so regarded unless they are compelling consideration to make departure from the Salomon case  principle. 

In the case of Tate Acess Floors Inc. -vs.- Boswell (1991) CH 512, the court was of the view in the matters of property and contract the courts should be most hesitant to lift the veil in response to superficial considerations of common sense, reality, or fairness.  

In the case of Gas Lighting Improvement Co Ltd  - vs.-  Commissioners of Inland Revenue (1923) AC 723, it was held that it was the company as a separate person that owned company’s property and entered into the contracts and incurred debts. Thus shareholders or any other person/s were not to be taken into consideration for owning of company’s property etc.

Conclusion 

It is very apparent that separate existence of company is the pivot of the company jurisprudence and any interpretation of Indian company law has to be done kept this into account.  Departure from this legal principle can only be done by the courts, that too in rare cases, and not by compliance professionals of company law.      

AMITAV GANGULY


Tags :



Category Corporate Law
Other Articles by -
Amitav Ganguly 

Report Abuse

LinkedIn



Comments


update