Company law - Corporate personality part 2 Disadvantages of Corporate Personality

 Disadvantages of Corporate Personality

1. Lifting the Corporate Veil

Although a company is ordinarily a separate legal person, courts will pierce its veil in certain cases to hold the true actors liable. For example, if a company’s control reveals hostile or improper purposes, its character is determined (e.g. a company effectively controlled by enemy nationals was deemed an “enemy” company in Daimler Co. Ltd v. Continental Tyre). Similarly, if a company is used primarily to evade taxes or defraud the public, courts disregard its separate personality. In Sir Dinshaw Maneckjee Petit (tax-evasion case) the company was held a mere façade to dodge tax. Likewise, courts treat a company as a sham or cloak when its form conceals fraud: e.g. in Skipper Construction Co. multiple family-owned companies were treated as one entity because they were “pure cloaks” for illegality. Courts also pierce the veil if the company is acting as an agent or trustee of others. For instance, a company used as a mere nominee of a foreign parent was disregarded, and in Brojo Nath Ganguly v. CIWTC the Supreme Court held that a company acting as a state instrumentality must be treated as part of the government (lifting the veil under Article 12). In short, courts lift the veil “to look behind” when separate personality is misused – for revenue (tax) protection, fraud prevention, or public policy reasons.

2. Personal Liability of Directors and Members (Statutory)

Statute imposes personal liability on officers/shareholders in various cases, despite incorporation. Key provisions include:

• Non-compliance of incorporation (s.464 CA 2013): If a company is not properly formed (e.g. formation formalities breached), it loses the benefits of incorporation and members may be held liable.
• Misdescription of Name: Under s.12 of the CA, if a person signs company documents without the company’s official suffix (e.g. “Ltd.”), the signatory directors become personally liable.
• Fraudulent Trading (s.339 CA 2013): In winding-up, anyone knowingly running the company’s business to defraud creditors is personally liable for its debts.
• Holding and Subsidiary Companies (ss.2(46), 2(87) & disclosure rules): A holding company must attach its subsidiary’s accounts to its own balance sheet. This statutory disclosure lifts part of the veil by making the subsidiary’s affairs transparent. (However, absent fraud or abuse, parent and subsidiary remain distinct legal entities.)

3. Subsidiaries and Multinationals

A holding company and its subsidiaries are separate legal persons, so normally the parent is not liable for subsidiary debts. For example, Vodafone v. UOI reaffirmed that a subsidiary’s assets and liabilities belong to itself. However, if a parent exerts total control and the subsidiary has no independent existence, courts may treat them as one “single economic entity.” In State of U.P. v. Renusagar Power, Hindalco completely controlled its 100%-owned subsidiary Renusagar, so the Supreme Court lifted the veil and held Hindalco liable for Renusagar’s power plant (electricity duty). In short, mere ownership is not enough – only when the subsidiary is a mere façade or agent of the parent will liability follow the veil-lifting doctrine.

Note: A foreign company’s branch/office is not a separate legal entity (it’s part of the parent abroad under s.2(14) CA 2013), so liabilities of the branch attach directly to the parent.

4. Formalities and Expense

Incorporation brings heavy compliance burdens. A company must follow strict procedures (registration, boards and shareholder meetings, annual filings, statutory audits, etc.), which increase time and cost. For example, companies must comply with myriad legal requirements under company, tax, and labour laws; non‑compliance can incur penalties. Maintaining a company also incurs ongoing expenses – professional fees (lawyers, accountants), filing fees, audits and record‑keeping. This administrative overhead can be **“expensive and time‑consuming”**. In short, compared to an unincorporated firm, a corporation’s regulatory formalities and associated costs are a notable disadvantage.

5. Company is Not a Citizen (Nationality, Domicile, Residence)

A company is an artificial person, not a “citizen” under law. It cannot claim citizenship rights as a natural person. For constitutional purposes, only individuals are citizens; a company is excluded. However, a company does have a nationality and residence. Indian law treats nationality as determined by the place of incorporation: an Indian-incorporated company is “Indian” even if management is abroad. Its residence (domicile) is where its real business is carried out – usually where central management and control is located. In practice, the company “resides” where its board actually meets and manages affairs. (These rules matter for tax and legal jurisdiction but do not confer citizenship status on the corporation.)