CONTENTS

Introduction ............................................................................................................................................................................... 2 Definition of a company ................................................................................................................................................... 2 Features of a corporation ................................................................................................................................................ 2 Distinction between a company and its shareholders ............................................................................................. 3 Different personality or Independent Corporate Existence: ............................................................................ 3 Directors and Shareholders: .......................................................................................................................................... 3 The Veil of Incorporation: ............................................................................................................................................... 4 The Lifting of the Veil: .................................................................................................................................................. 5 Related Case References ....................................................................................................................................................... 6 Salomon v s Salomon & Co Ltd [1897] AC 22.......................................................................................................... 6 Macaura v Northern Assurance Co [1925] AC 619 ............................................................................................... 6 Smith, Stone & Knight v Birmingham Corporation [1939]................................................................................ 6 Lee v Lee's Air Farming Ltd [1961] AC 12................................................................................................................ 7 Creasey v Breachwood Motors Ltd [1993] BCLC 480 ......................................................................................... 7 Conclusion .................................................................................................................................................................................. 8 Bibliography .............................................................................................................................................................................. 9

INTRODUCTION
DEFINITION OF A COMPANY
A company is a legal entity that is separate and distinct from its members and shareholders. When a company is formed, it is said to have become incorporated. A company is capable of owning property, making contracts, employing people and being sued or of suing. A company is a legal entity that is separate and distinct from its members and shareholders. When a company is formed, it is said to have become incorporated. A company is capable of owning property, making contracts, employing people and being sued or of suing. Under the eye of the law, anything that is capable of rights and duties is a person and thus has a personality. Persons can be of two types under the eye of law (i) natural persons and (ii) artificial persons. Natural persons are human beings and artificial persons are those created for the purpose of laws known as corporations or companies. As soon as a company is registered under the company act, it attains the status of a person which can buy, lend money, file and defend suit, sell goods and hold property. Under the eye of the law, anything that is capable of rights and duties is a person and thus has a personality. Persons can be of two types under the eye of law (i) natural persons and (ii) artificial persons. Natural persons are human beings and artificial persons are those created for the purpose of laws known as corporations or companies. As soon as a company is registered under the company act, it attains the status of a person which can buy, lend money, file and defend suit, sell goods and hold property.

FEATURES OF A CORPORATION

Legal Personality

Perpetual Existence

Statuotory Obligation

Registration

Capital

Common Seal

Limited Liability

Tranferability

Right to Sue

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DISTINCTION BETWEEN A COMPANY AND ITS SHAREHOLDERS

A company at law is distinct from its members. A director or a shareholders is neither the agents nor the trustee of the company The quotation stated above is a part of the statement delivered by Lord MacNaughton in the House of Lords to provide direction towards maintaining the principle of corporate traits, as set out in the Companies Act 1862. The remaining part of the statement is as follows: The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustees for them. The above quote typically describes the company law of Corporate Personality. Corporate personality refers to the fact that as far as the law is concerned a company really exists. As a result of this, a company can sue and be sued in its own name, hold its own property and crucially be liable for its own debts. This implies that owners generally are not held liable for the firms obligations in excess of the value of their investment. However, certain actions by the corporation or its owners can lead to instances in which a court will determine that the veil of limited liability ought to be pierced. It is this concept that enables limited liability for shareholders to occur as the debts belong to the legal entity of the company and not to the shareholders in that company.

DIFFERENT PERSONALITY OR INDEPENDENT CORPORATE EXISTENCE:

Section 24 (2) of The Companies Act 1994, when a Company is registered is becomes a corporate large entity distinct from its member. So, a Company is an independent corporate existence; as soon as it is registered it becomes an individual with all legal rights, duties & liabilities. It is the foremost feature of a company. Under the eye of the law, a company is seen as having a different personality. It can thus attain the characteristics mentioned in the previous section.

DIRECTORS AND SHAREHOLDERS:

A corporation works through living persona not by itself. The human agencies that mainly run the companys business are called directors. According to Companies Act1994, 3|Page

Director includes any person occupying the position of director by whatever name called and according to section 90(1), every public company must have at least three directors and every private company shall have at least two directors The companies Act tries to distinguish the area of proper management control and proper shareholders control. But even, there is always conflict between shareholders and directors as to their respective powers which is the agency problem as in Automatic Self Cleansing Filter Syndicate Co. Ltd vs. Cunningham1906 Shareholder is an owner of shares in a company. Due to the principle of separate legal personality, a shareholder does not own any assets of a company, but rather own shares. The relationship between the shareholders and the company and the rights of shareholders are regulated by the articles of association of the company. The majority of shareholders usually control the company, however exceptions exist for protection of minority shareholders where the majority act oppressively or cause detriment to the minority, or use powers granted in the articles for their personal benefit. Shareholders are the owners of the corporation as a result of their personal financial investment in the firm. The percentage of the shares they hold represents the percentage of ownership. A company's shareholders collectively own that company. They receive dividends. Stockholders have special rights to vote on matters such as elections to the board of directors, to propose shareholder resolutions, to share in distributions of the company's income, to purchase new shares issued by the company, to a company's assets during a liquidation of the company. But they dont receive any thing after liquidation of the company after bankruptcy. The way in which corporate personality and limited liability link together is best expressed by examining the key case of Salomon v Salomon & Co [1897] AC 22 and a few others.

THE VEIL OF INCORPORATION:

Separate legal personality of company operates as a shield - the courts will not normally look beyond the faade of the company to the shareholders who comprise it. The screen separating the company from its individual shareholders and directors is commonly referred to as "the veil of incorporation".

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THE LIFTING OF THE VEIL:

The veil is lifted in the following situations Where membership of a company falls below two for more than six months. Member who knows he is the sole member but continues to trade will be jointly and severally liable with the company for company debts contracted after the six month period has elapsed -Companies Act 1985 s.24 (s.24 no longer applies to private limited companies)

Where public company trades without obtaining a trading certificate. If the company fails to comply with any obligations under a transaction within 21 days of being called on to do so, the directors of the company are jointly and severally liable to indemnify the third party against any loss- Companies Act 1985, s.117(8)

If person acting on behalf of a company signs or authorizes the signing of a bill of exchange, order for goods or similar document in which the companys name is not correctly stated, the person signing will be personally liable if the company fails to pay- Companies Act 1985, s.349

The director of a company which has gone into insolvent liquidation cannot become a director of another company with the same name within a five year period. If he does he can be made personally liable for all the debts of the new company- Insolvency Act 1986, s.216 & 217

Company Directors Disqualification Act 1986, s.15

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RELATED CASE REFERENCES

SALOMON V S SALOMON & CO LTD [1897] AC 22
Salomon had run a boot manufacturing business as a sole trader. He formed a limited company and sold the business to it for nearly 40,000 (an overvaluation of around 8,000). The subscribers to the memorandum were S and 6 members of his family, who subscribed for 1 share each. S also took 20,000 1.00 shares in the company as part of the purchase price of his business, the remainder of the price being paid partly in cash and partly by way of a secured debenture for 10,000. The company did not prosper and was wound up a year later, at which time its liabilities, including the debenture, exceeded the assets by 7,700. The liquidator, on behalf of the unsecured creditors, resisted S's claim and argued that S should in fact be liable for all the debts of the company. The House of Lords held that S was entitled to be paid under the debenture, and that he could not be made liable for the company's other debts. This case firmly established the principle of the separate legal personality of a company i.e. that a company, once incorporated, is a legal person in its own right and is to be regarded as a separate entity from its members. The court did, however, recognize that there could be instances where the courts would have to deviate from the principle of separate legal personality (commonly called " lifting the veil of incorporation") by stating that the principle was to be of general application provided that there was "no fraud and no agency and if the company was a real one and not a fiction or a myth

MACAURA V NORTHERN ASSURANCE CO [1925] AC 619

Macaura owned an estate in Ireland and insured some timber on the estate. He transferred the estate and the timber to a company (which he controlled), but failed to have the insurance re-issued in the company's name. There was a fire and the timber was mostly destroyed. Held: Macaura could not claim on the policy. The timber was no longer his to insure.

SMITH, STONE & KNIGHT V BIRMINGHAM CORPORATION [1939]

Premises owned by the plaintiffs were compulsorily acquired by the corporation. Questions arose as to whether the business for which the premises were used was being carried on by Smith, Stone & Knight or by its subsidiary - the distinction was important because an owner-occupier could get 6|Page

compensation, but a tenant-occupier could not. It was held that the plaintiffs were entitled to compensation. The business carried on at the premises by the subsidiary was being carried on by them purely as agents for the plaintiffs.

LEE V LEE'S AIR FARMING LTD [1961] AC 12

The husband of the plaintiff was the controlling shareholder and director of a company formed by him. He was also employed by the company as a pilot. The company had employer's liability insurance. He was killed in an accident when flying a company plane on company business and his wife claimed compensation from the company (effectively claiming from the insurers). Her claim was successful. It was held that Lee and the company had separate legal personalities and the deceased could, as director, enter into a contract on behalf of the company between the company and himself as an employee.

CREASEY V BREACHWOOD MOTORS LTD [1993] BCLC 480

C was dismissed from his employment with a company called Welwyn Motors Ltd. W Ltd carried on business from premises owned by Breachwood Motors Ltd. The two people who were the sole directors and shareholders of B Ltd were also the only directors and shareholders of W Ltd. C sued his employers for wrongful dismissal and were awarded over 60,000. Unknown to C, the directors of W Ltd had already transferred all its assets to B Ltd, and W Ltd had been struck off the register of companies. B Ltd paid all of W Ltd's trade creditors, so as to maintain creditworthiness, but it did not pay C's claim. B Ltd then carried on W Ltd's former business from the same premises as before. B Ltd claimed it was not liable to pay the compensation to C because W Ltd and B Ltd were separate legal entities. The court lifted the corporate veil and determined that W Ltd was part of B Ltd, thus B Ltd was prima facie responsible for payment of the compensation. The court felt that lifting the veil was necessary in the interests of justice.

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CONCLUSION
The question of whether the negative aspects of the decision in Salomon's case outweigh the good ones is best left unanswered for it is far too broad. One is inclined towards the view that the principle of separate legal entity established in Salomon's case has been instrumental in the development of modern capitalism and the immense social and economic wealth which it has generated. According to Lord Chancellor Haldane, "...a company is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who is really the directing mind and will of the company, the very ego and center of the personality of the company. The legal personality has two economic implications. First it grants creditors priority over the company assets upon liquidation. Second, company assets cannot be withdrawn by its shareholders, nor can the assets of the firm be taken by personal creditors of its shareholders. The second feature requires special legislation and a special legal framework, as it cannot be reproduced via standard contract law. In conclusion we can say that a company does have its separate legal entity and its directors and shareholders are distinct from it. Directors and shareholders are neither the agent nor the trustees of the company but their duties towards the company among which the fiduciary duty is mentionable. As far as the relationship with the shareholders is concerned, the legal position which has evolved over a period of time is that the directors are neither agents nor trustees of the shareholders but special circumstances depending on facts of a particular circumstance may give rise to that relationship.

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BIBLIOGRAPHY
The company Act-1994 Company and Security law. Company law and partnership. Company law Dr. M. Zahir. Nirmalandhor Dhor Avtar Singh

Commercial Law and Industrial Law. Sen & Mitra www.wikipedia.org

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