It transforms a corporation into a "Legal Person". The corporation is a
separate legal entity from the owner. The owner and the company are 2 distinct
legal entities that can be held separately accountable for the crime. The
corporation has its own obligations, legal rights, and existence that are
distinct from the individual who founded it.
The company must be properly incorporated and registered in order to be referred
to as a Separate Legal Entity. Only if the company has been lawfully
incorporated will it have a legal existence separate from its directors, who are
in charge of the company's operations; Members of the company, who are the
company's true owners and Shareholders who have purchased the company's stock.
In the case of HL Bolton Engineering Co Ltd v TJ Graham Sons Ltd
court concluded that a company can be equated to a living creature in some
circumstances. There are few things that firms could have done if the concept of
a Separate Legal Entity had not exist. All of this was detailed in the case.
Importance: Any offence is the responsibility of the company, not its owner,
shareholders, or directors. The firm should be held responsible for the crime it
has committed. The company's founders are solely accountable to the extent of
their engagement in the business. Investors in the firm are not entirely liable
for any commercial loans, and lenders are unable to seize their personal assets
to satisfy financial obligations. The corporation must pay company tax on its
own, which is levied on earnings or any additional profits at a lesser corporate
Applicability of the doctrine:
- Salomon v A Salomon & Co Ltd: According to the court, when the
company was incorporated, it became a separate legal entity & not an agent
of Salomon. Salomon, as the company's debenture holder, was entitled to
priority in payment over the unsecured creditor. In this case, the concept
of a company's separate legal personality was established, allowing
stockholders to continue trading with little risk of personal insolvency in
the event of a collapse. In the case of Salomon, two principles are
established: artificial person and limited liability.
- Lee v. Lee's Air Farming Ltd: The case backed up Salomon's
principle. Mrs Lee's claim was granted by the Privy Council, which stated
that while Lee may have been the company's controller in reality, they were
separate legal entities in law, and the concept of a separate legal entity
was clarified. As a result, Mr. Lee might enter into a contract with the
company and be deemed an employee. As a result, his wife was eligible to a
workmen's compensation payout. The Privy Council's Judicial Committee
further stated that because a corporation is a different legal entity, a
director might nevertheless be employed by the firm he alone controlled.
A Company, unlike a Partnership Firm or a Proprietorship company, is not reliant
on its members. The death of a company member or members will not bring it to an
end. The company's operations are completely separate from those of its members.
Regardless of whether the Company's shares are sold or its shareholders die, all
of the Company's assets continue in the name of the Company.
liquidation under the statutes can put an end to a corporation. The Company's
corporate existence is unaffected by the death or insolvency of its independent
members. Gower has said, "Members may come and go but the Company can go on
In the case of Gopalpur Tea Co. Ltd. v. Peshok Tea Co. Ltd
., the Court
concluded that neither the company nor anyone's right to take action against it
was terminated, when the entire firm was taken over by an Act that ostensibly
terminated the power to take action against it. The Court has ruled that a
corporation has perpetual succession until and unless it is formally liquidated,
and that its existence is unfettered by the financial situation and existence of
In the case of PNB vs. Lakshmi Industrial & Trading Co
., The Allahabad High
Court ruled that perpetual succession means that a company's membership may
change from time to time but that this does not impact the company's continuity.
A corporation has an eternal existence, meaning it has no soul to save or a body
to kick. Because a corporation does not have a physical presence, it must act
through its agents, and all contracts entered into by its agents should be
sealed by the corporation.
A company's common seal serves as a mark of its formation. It is the firm's
signature on any document to which it is affixed, and it commits the company to
all of the document's duties. A business may or may not have a common seal,
according to a 2015 change to the Companies Act.
Section 9 has been amended:
phrase "common seal" shall be deleted from section 9 of the main Act. A
corporation may, under its common seal, authorise any individual to act as an
attorney to execute other deeds on behalf of the company, whether in or outside
India. The approval shall be produced by two directors or by a director and
company secretary if a corporation does not have its seal as of the 2015
Any document bearing the company's seal and officially signed by an authorised representative of the company becomes legally binding. The Board
should adopt the Common Seal by a resolution. At the first Board meeting, the
Common Seal is usually adopted. The Common Seal imprint should be included in
the minutes of the meeting at which it is adopted. When used on company
documents, the common seal has various purposes and benefits.
The key benefit is
that the documents and deeds become completely authentic and authoritative. The
seal ensures that the documents are difficult to falsify. Every company should
keep a register including details of documents on which the company's Common
Seal has been affixed, that should be preserved at the company's registered
office. The Common Seal should be kept in the custody of a director/ secretary
or any other official,
as authorized by the Board.
Company not a citizen
Citizenship, as stated in Part II of the Indian Constitution, refers only to
natural beings, not juristic entities such as companies. A company is a person
who is artificial, legal, and judicial. A corporation is a fictitious person. On
the negative side, it is not a natural human. It exists in the eyes of the law,
yet it is powerless to act.
It must function through a board of directors that has been elected by the
shareholders. "The board of directors are the brains and the sole brains of the
firm, which is the body, and the company may and does act only via them", it was
correctly stated in the case of Bates V Standard Land
However, a company, like a natural person, is a legal person for many
purposes. It can buy and sell property in its own name, enter into contracts
with third parties in its own name, and sue and be sued in its own name. Even
from citizenship act, 2005 and constitution of India, it is clear that a company
cannot be a citizen of India.
It was held in State Trading Corporation of India v C.T.O
that neither the
Constitution nor even the Citizenship Act is applicable to it. Although a
corporation does not have fundamental rights, it is considered a person in the
eyes of the law. It has the authority to make contracts with its Board of
Directors, members, and outsiders. If all of the members are Indian nationals,
the corporation does not become an Indian citizen, according to Justice Hidayatullah.
In Tata Engineering Company v. State of Bihar
, it was determined that because
a company's legal identity is distinct from that of its members and
stockholders, it cannot obtain fundamental rights protection even though all of
its members are Indian citizens.
A firm has a nationality, domicile, and
habitation even if it is not a citizen. In the case of a company's residence, it
has been held that a corporation dwells in which its real transactions are
carried on for the reasons of income tax law, and the real business of a company
shall be regarded to be conducted on where its Central administration is
Voluntary association of profit
The word "voluntarism" comes from the Latin word "voluntas" which means will
freedom or liberty. "Freedom of association" is defined by Harold Laski, a
renowned British political scientist, as "a recognised legal right on the part
of all persons to unite for the promotion of goals in which they are
Indian citizens have the freedom to form associations under Article
19 (1) (c) of the Indian Constitution. The right to form a group is correctly
regarded as one of man's most important privileges. A corporation is a
profit-making voluntary association. It is founded to achieve certain declared
objectives, and any profit earned is distributed among the company's
shareholders or kept for future expansion. Only a Section 8 corporation with no
profit motive can be founded.
The definition of voluntary organisation can be clearly understood from these
Main Characteristics of Voluntary Organisation:
- According to Lord Beveridge, A voluntary organisation, properly speaking, is
an organisation which whether its workers are paid or unpaid, is initiated and
governed by its own members without external control.
- Michall Banton defines it as a group organised for the pursuit of one
interest or of several interests in common.
- In the words of David L. Sills, Voluntary organisation is a group of persons
organised on the basis of voluntary membership without state control for the
furtherance of some common interests of its members.
- It is registered under the Societies Registration Act, 1880, the Indian
Trusts Act, 1882; the Cooperative Societies Act, 1904 or the Joint Stock
Companies Act, 1959 depending upon the nature and scope of its activities to
give it a legal status;
- It has definite aims and objectives and programmes for their fulfillment and
- It has an administrative structure and a duly constituted management and
- It is an organisation initiated and governed by its own members on
democratic principles without any external control and
- It raises funds for its activities partly from the exchequer in the form
of grants-in- aid and partly in the form of the contributions or
subscription from the members of the local community and/or the
beneficiaries of the programmes.
The members can earn without having to deal with the company's management. They
don't even have appropriate and efficient control over its operations, thus they
cast their votes to the company's Board of Directors to handle corporate
functions through their own managerial people. To put it another way, the
corporation is run and managed by its executives.
Because the firm has a big
number of members, they cannot all participate in the management of the
company's operations. As a result, the shareholders outsource actual power and
management to their elected representatives, known as directors. They are in
charge of day- to-day operations of a company.
Furthermore, because the general policy of the firm is decided by a majority of
votes cast by shareholders, the company's management is democratic. Unanimity of
action is compelled by majority choice and centralised management.
A company can possess, enjoy, and dispose of property in its own name since it
is a legal entity apart from its members. Although its shareholders contribute
funds and assets, they are not the only or joint proprietors of the company's
property. The company is the legal entity in which all of the firm's assets are
vested and through which it is controlled, managed, and dispensed of.
The shares of a public business are freely transferable. The right to transfer
shares is a statutory right that cannot be revoked by an article of
incorporation. The articles, on the other hand, must specify the way in which
such a transfer of shares will be made, as well as any bona genuine and
reasonable restrictions on members rights to transfer their shares.
extreme restrictions on members rights to transfer their shares are
unconstitutional. In the case of a private corporation, however, the articles
must limit the ability of members to transfer their shares in companies that
meet the statutory criteria. If the corporation refuses to record a transfer of
shares, the shareholder can appeal to the Central Government to make their power
to transfer shares better efficient.
A corporation might be either limited by shares or limited by guarantee. Members
responsibility in a business limited by shares is limited to the unpaid value of
the shares. For instance, if a share in a firm has a face value of Rs. 10 and a
member already has contributed Rs. 7, he can be asked to pay no more than Rs. 3
per share over the company's lifespan. A members liability in a company limited
by guarantee is limited to the amount that the member agrees to contribute to
the company's assets if the corporation is ended up.