Company' law - Chapter I - Corporate Personality part 1

 Corporate Personality

Definition of “Company”. Under Indian law, a company is an incorporated association of persons. Section 2(20) of the Companies Act, 2013 defines “company” as “a company incorporated under this Act or under any previous company law”. In other words, any corporate entity registered under the present Act or earlier companies acts qualifies as a company. By fiction of law, such a corporation is treated as an artificial person distinct from its members, possessing rights and obligations of its own.

Extent of Application (s.1(4)). Section 1(4) makes clear that the Companies Act, 2013 applies broadly to modern corporate bodies, with specified exceptions. It expressly covers “companies incorporated under this Act or under any previous company law”. It also extends (subject to inconsistency) to insurance companies, banking companies, electricity companies, and other special acts. Thus the Act governs virtually all corporations in India, except where a special law (like the Banking Regulation Act or Insurance Act) expressly prevails.

Evolution of Company Law in India

The law of corporate personality in India has deep historical roots, evolving through colonial and post-Independence statutes. The first Indian joint-stock legislation was the Companies Act of 1850, modelled on the British Companies Act 1844. This Act provided a framework for registering companies but did not initially allow limited liability. A key change came in 1857, when limited liability was introduced by amendment – allowing shareholders to cap their liability at the amount unpaid on their shares. (Initially banking companies were excluded, but by 1858 limited liability was extended to banks as well.) In 1866 the Indian Companies Act was consolidated into a comprehensive code regulating incorporation, governance and winding-up. This 1866 Act was largely modelled on Britain’s Companies Act 1862. Two decades later, the law was rewritten in 1882 to keep pace with contemporary English reforms. The 1882 Act remained the central company law in India until the early 20th century.

A landmark statute was the Indian Companies Act, 1913, based on the English Companies Consolidation Act of 1908. The 1913 Act applied to all incorporated companies in India and contained detailed provisions on formation, management and winding up. It was frequently amended in the 1920s and 1930s (culminating in a major revision in 1936 aligning it with the British Act of 1929). After Independence, India set up the H.C. Bhabha Committee (1950–52) to review company law. Its report led to the Companies Act, 1956. The 1956 Act (based in part on the English Companies Act 1948) was a thorough, standalone statute governing company incorporation, capital, directors, meetings, audits, and winding-up. It remained in force for nearly six decades, amended many times but largely intact as the principal law for Indian companies.

Economic liberalization in the 1990s and corporate scandals prompted further updates. A series of amendments (1993, 1996, 2000–2002, etc.) introduced modern governance measures like buyback rules and the establishment of the National Company Law Tribunal. Finally, after extensive consultation, the Companies Act, 2013 was enacted (effective August 2013), replacing the 1956 Act. The 2013 Act modernized corporate law: it introduced new concepts such as One-Person Companies (OPCs), mandatory Corporate Social Responsibility (CSR) spending for certain companies, class-action suits by investors, enhanced roles for independent directors, and stricter anti-fraud provisions. In short, Indian company law has evolved from basic registration rules in the mid-19th century to a comprehensive, investor-friendly regime in 2013.

Constitutional Right to Form Associations

The Indian Constitution guarantees citizens the freedom to form associations. Article 19(1)(c) explicitly provides that **“all citizens shall have the right… to form associations or unions”**. Incorporating a company is essentially an exercise of this right – a group of individuals (citizens) freely band together into a corporate entity. (Of course, the company itself – as an artificial person – is not a “citizen” under Article 19 and cannot claim fundamental rights; only its natural-person members do.) Courts have recognized that citizens may validly exercise their Article 19(1)(c) freedom to incorporate and belong to companies or societies unless reasonable restrictions apply. For example, in Dharam Dutt v. Union of India (2003), the Supreme Court noted that people’s rights to form and manage associations (here, an intellectual body) remain protected under Article 19(1)(c) even when government acts on a statutory basis. In sum, while a company is a “legal person” distinct from its shareholders, its formation arises from the constitutional freedom of association enjoyed by those shareholders.

Previous Company Law [S.2(67)]

The Companies Act, 2013 defines “previous company law” in Section 2(67) to cover all historical Indian company statutes. This includes Acts enacted before 1866, the Indian Companies Act 1866, the Companies Act 1882, the Companies Act 1913, the 1942 Ordinance on transferred companies, the Companies Act 1956, and equivalent laws in erstwhile provincial jurisdictions. It even includes the Portuguese Commercial Code relating to “sociedades anonimas” and special laws like the Sikkim Companies Act (1961) where applicable. Thus the definition ensures continuity of law – any company incorporated under an earlier act is still treated as a company under the 2013 Act.

Nature and Advantages of Corporate Personality

By law, a corporation (once validly incorporated) has a separate legal personality from its shareholders or directors. This gives rise to several fundamental features and advantages:

• Independent corporate existence [S.9]. Upon registration (Section 9), a company becomes a body corporate in its own right. It “acquires a legal existence separate from its members”. In practical terms, the company can own property, enter contracts, sue and be sued in its own name. Its existence does not hinge on the lives or identities of its owners. This principle was famously affirmed in Salomon v. A. Salomon & Co. Ltd. (1897), where the House of Lords held that a properly formed company is a distinct legal person, even if one individual controls it. Indian courts follow this rule. The corporate entity alone bears legal rights and obligations; shareholders are not parties to the company’s contracts or debts. Thus, the corporation “stands apart as a person”: its assets belong to the company, its name signs the contracts, and it is liable for its actions.

• Limited liability. A primary benefit flowing from separate personality is that members’ liability is limited. Shareholders are liable only to the extent of unpaid share capital – they are not personally on the hook for company debts. If the company fails, creditors can claim only against the company’s assets. The personal assets of shareholders and directors are protected. As one commentator explains, “none of the shareholders … are liable beyond the amount they have invested in the corporation”. This encourages investment and entrepreneurship. (It also means the company’s debts are corporate debts alone.) Of course, limited liability is not absolute – courts may “pierce the corporate veil” and hold individuals liable if the company is a mere sham or is used to defraud creditors. But generally shareholders enjoy the shelter of limited liability.

• Perpetual succession. A company’s existence is perpetual: it continues unaffected by changes in membership or the death or insolvency of any member. Members may come and go, but the company’s legal identity remains constant until it is legally wound up. In practice, this means a company can last indefinitely, enabling long-term planning. Even if all original founders leave or pass away, the company survives through its governing authorities (the board of directors) and remaining shareholders. Its assets and rights remain vested in the company, not in the individuals. Thus, many companies endure for decades or even centuries, regardless of turnover in owners.

• Separate property. A corporation can own property in its own name. Any assets acquired by the company are owned by the company itself, not by shareholders. Shareholders have no claim to company property, beyond their share interest. This ensures corporate assets are clearly identified and managed for company purposes. As one legal analysis notes, this arrangement “allows a perpetual succession of the property” because the company alone holds it. (By contrast, in a partnership the property is owned jointly by the partners.) Notably, the House of Lords in Macaura v Northern Assurance (1925) held that even if one person is the sole shareholder, company property cannot be treated as his personal property. Thus the tea estate insured by Macaura belonged solely to the company. Similarly in India, courts recognize that property transferred to a company remains the company’s property.

• Transferable shares. A company’s capital is divided into shares, which (subject to any contractual restrictions in the Articles) are freely transferable. Shares are movable property of the shareholder, and can be sold or inherited. This transferability makes it easy to change ownership: an investor can exit by selling shares without disturbing the company’s existence. It also enables capital mobilization. By inviting the public to subscribe for shares (an IPO or stock listing), a company can raise funds quickly and on a large scale. Even if shareholders change over time, the company continues as before. (Transferable shares are a key advantage over e.g. partnerships, where “business interests” are not as easily sold.)

• Capacity to sue and be sued. Because it is a legal person, a company may initiate or defend legal actions in its own name. Unlike an unincorporated association, the company need not rely on individual members or trustees in litigation. Its obligations and rights in court belong to the company, though naturally it must act through human agents (directors or representatives). This means, for example, a company can sue for debts owed to it, or be held liable (and fined or penalized) without dragging shareholders into the case. Any judgement for or against the company affects the company’s assets directly.

• Professional management (separation of ownership and management). A modern corporation is run by a board of directors and professional managers who may be distinct from the shareholders. Owners (shareholders) exercise ultimate control only through voting, whereas the day-to-day management is entrusted to experienced directors and executives. This centralized professional management provides expertise and continuity. It also means that ownership (the shareholders) and control (the managers) are legally separate. As one analysis notes, shareholders are like the “organism’s limbs,” while directors are the “brain” controlling the company’s actions. This allows the company to pursue long-term strategies, fund expansion, and operate efficiently even as shareholders retire or sell their holdings.

• Financing power. By virtue of its corporate form, a company enjoys strong capacity to raise capital. It can issue shares or debentures to the public, borrow in its own name, and benefit from economies of scale. For example, listing shares on a stock exchange provides a powerful mechanism to generate funds. One commentator explains that by selling shares and debentures publicly, “a company generates its capital and finances,” and can thus amass large resources quickly. Also, since the company is perpetual, creditors and investors have greater confidence of repayment or dividends over time. All corporate revenues, investments, and liabilities reside with the company alone, simplifying accounting and making the business more transparent. In short, corporate finance is distinct from personal finance of members, enabling larger projects and investment.

Each of these features – independent existence, limited liability, perpetual life, separate property, transferability of interest, legal capacity, professional management, and standalone finances – flows directly from the doctrine of corporate personality. Together they make the corporate form a powerful vehicle for business, encouraging investment and growth while limiting individual risk. These characteristics have been consistently upheld in case law. For example, Salomon v. Salomon (1897) remains the touchstone affirming that an incorporated company must be treated as a separate legal person. Similarly, Indian jurisprudence (e.g. Kondoli Tea Co. Ltd. vs. Unknown, 1886) has ruled that property transferred to a company belongs to the company alone, reinforcing that members “did not hold the estate as tenants in common”. In practice, this legal framework of corporate personality underpins modern commerce: it balances the advantages of collective enterprise with the protections and responsibilities of corporate status.

References: Companies Act, 2013 §§ 1(4), 2(20), 2(67), 9; Salomon v. A. Salomon & Co. Ltd., (1897) AC 22 (HL); Law Drishti, Evolution of Company Law in India; Constitution Art. 19(1)(c); Lexibal Corporate Personality (notes); iPleaders Corporate Personality (blog).