EVOLUTION OF SEPARATE LEGAL PERSONALITIES IN INDIA

Introduction

The Salomon v. A. Salomon & Co. Ltd’s decision founded the notion of “specific legal personality” published within the company law of 1862 and currently given under the United Kingdom company law of 2006. In this judgment, “Mr. Salomon has sold his shoe company with his wife and five children to a limited liability firm where its shareholders and directors are (to comply with the Companies Act of 1862 which required a minimum of 7 members). Mr. Salomon held 20,001 of the company’s 20,007 shares, the remaining 6 of which were evenly split between his wife and kids. The firm had financial problems and settled a £5,000 debt from one Mr. Edmund Broderip who provided the loan. The firm thereafter experienced additional financial troubles and could not pay its debt, which it was forced to liquidate. When Mr. Edmund failed to realize his unsecured loans, he brought an action for the personal responsibility of Mr. Salomon. Mr. Salomon was declared responsible by the High Court and the Court of Appeal. In its appeal to the House of Lords, the judgment was reversed, claiming that an enterprise was properly established and cannot be robbed of its separate legal personality.”[1]

When registered with the Company Registrar according to section 16(2) of “The Companies Act” (hereafter referred to as “CA 2006”). Article 15(1) stipulates that a certificate must be shown as proof of incorporation at the time of registration. It indicates that a firm becomes a business or corporation by incorporation. So what’s a company? A company may prosecute, enter into legal and contractual interactions, acquire property, etc. a man-made lawyer other than its members (shareholders and workers). A company is distinguished from its membership by its own legal identity. Through these members, personal liability is excluded. In some instances, however, the law might reject the corporate identity and hold a responsible or accountable individual (director, agent). According to the case of Kosmopoulos v. Constitution Insurance Co where Justice Bertha Wilson stated that “the best thing that could be said is that when a result was too blatantly contrary to the law, the concept of individual entities is not implemented…” Then you could question what the conditions are. Section 34 of the “Indian Companies Act of 1956[2]” reflects a separate legal existence that, once incorporated, acquires the company. It is now able to exercise its powers as a corporate body[3], regardless of its members.

Evolution of Separate Legal Personality

English rulings are praised largely for the subtle evolution of legislation in this field. The House of Lords’ epochmaking ruling in Salomon v Salomon & Co Ltd was the first case in English history to firmly uphold and have a far-reaching influence on the idea of independent legal identity. Maybe Solomon’s importance and reach cannot be overestimated by the most important and most referenced ruling of this day. Macnaghten’s ruling clears the way for all the misunderstandings established in 1897 in which a company is distinguished from its members. Unanimously, the House of Lords found that a corporation aims to limit its legal liability, and thus, Aron Salomon cannot be held accountable, by following the formation procedure.

Lord Cooke’s famous statement about Salomon recognizes that Otto Kahn-Freund even called Solomon “calamitous” not very favourable evaluations. Sir Frederick Pollock rightly pointed to the “impossibility” of such a judgment 30 or 20 years before Salomon. As Gower has pointed out, Salomon is widely acclaimed for making industrial and commercial progress feasible. Modern practices have led to corporate forms being utilized to bend the law and avoid legal accountability with the expansion of a commercial company.

The regulatory reaction was the establishment of legal exceptions which in some situations ignore the separate legal personalities. Although legal advancements have also been achieved, the law trade itself holds different opinions on exceptional independence, and the thin line is between the removal of cover and the disregard of the company’s existence. In the majority of the cases, the court might wish to penetrate the corporate coverings when the defendant has established a phoney business to avoid restrictions on his activity by fair means and such relief rights which are granted by third parties.

The second circumstance in which the court does not prevent itself to cross the veil and follow the person is if the corporation is established to avoid third-party responsibility. The famous case of State Of U.P. And Ors vs Renusagar Power Co. And others is among the foremost cases where the association theory of corporation is used. The Apex Court passed the judgment that “Hindalco and Renusagar were essentially the same legal entity, in fact, pierced the veil and viewed the corporation of Renusagar as an association of persons–one such person being Hindalco”. The court found that the training of individual firms and their operation by them for tax evasion is an illegal aim in CIT v Meenakshi Mills Ltd and hence was allowed to look at the economic reality of the façade. In doing so, Firestone Tyre And Rubber Co. Ltd vs. Lewellin (Inspector of Taxes) were relied upon by the court to incorporate English ideas into the network of Indian company law. Even completely owned subsidiaries in Western Coalfields have been granted a distinct existence concerning their registration according to the company law, and the same has also been done in the “Food Corp of India v Municipal Committee of Jalalabad” under a particular statute. “The legal status of a company under Indian law is similar to British law after Salomon” was used by Wadhwa J.’s citation along with the approval of Palmer on the corporate cloud.[4]

Conclusion

The bankruptcy processes in several situations mentioned in this article regarding exceptions to limited responsibility, as in Salomon. The ideas set out in Solomon were still true in insolvency procedures. CIT v Meenakshi has given primacy to the legal reality over economic substances in England concerning securitization and the use of a special purpose entity as a bond issuance instrument. There is, without a doubt, ambivalence about instances when the veil is raised based on judicially developed theories. This is further complicated by the fact that in many situations, by taking a different strategy, the same results could have been achieved while maintaining the independent legal personality of the firm.

Therefore, while the examples on this issue demonstrate that there is a great deal of difference on intricate elements when one can avoid a company’s separate personality, the justification for preventing unfairness remains valid in virtually every instance. Where the court is persuaded that a certain judgment would result in unfairness or would in particular harm the operation of the company, the court is ready to decide in favour. It is commendable that the courts are currently open to economic realities, which enables new fields such as company law to be nurtured. State intervention was recognized as a major element defending not just the firm and the society but also the economy, especially following the worldwide collapse. It is only fair that the state intervenes when necessary, because of the general influence of corporations. It is still debated how such an intervention should take place. Although freedom of justice is vital, it has been argued that more legislative measures must be established to reduce the area of regulatory uncertainty.

Author(s) Name: Ratnadeep Raha (The ICFAI University, Dehradun)

References:

[1] Salomon v Salomon (1897) A.C. 22 [1896] UKHL 1

[2] Indian Companies Act 1956 s 34

[3] Ibid

[4] New Horizons Ltd v Union of India [1997] SCC (1) 478

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