i.INTRODUCTION

A company is the creation of the law. It is not a human being but is an artificial person. On incorporation, the company acquires a separate legal entity distinct from and independent of its members. Unlike a partnership firm, which has no separate legal entity, a company has a separate corporate existence. Since a company has a separate legal entity, a shareholder can be the Director, creditor of the company, office bearer of the trade union, etc all at the same time. A shareholder cannot be held personally liable for the acts of omission and commission of the company, even though he holds almost the entire share capital of the company.
This principle of separate legal entity of the company was propounded by the “House Of Lords” in the case of Saloman v Saloman (1897). In this case all the members of the company belonged to one family. The court held that the fact that all the members were from one single family had no bearing on the validity of the company. The company is at law a different person altogether from the subscribers of the Memorandum of Association. Thus, the Saloman case enunciated that a company has its own existence, separate and distinct from its members.

II.DENIAL OF SEPARATE ENTITY STATUS

When a company is incorporated, all dealings are with the company and all persons behind the company are disregarded, however important they may be. Thus, a veil is drawn between the company and its members. Normally, the principle of corporate personality of a company is respected in most cases. The separate personality of the company is, however, a statutory privilege; it must be used for legal and legitimate business purposes only. Where a fraudulent, dishonest or improper use is made of the legal entity, the concerned individual will not be allowed to take shelter behind the corporate personality. The court will break through the corporate shell and apply the principle of “Lifting of the corporate veil”. The court will look behind the corporate entity and take action as though no entity separate from the members existed. In other words, the benefit of separate legal entity will not be available and the court will presume the absence of such separate existence. This will make the persons concerned vulnerable to the judicial scrutiny and they will be personally liable for their acts. The protection of separate legal existence of the company will not save them from various civil as well as criminal sanctions.
The Companies Act, 1956 contains certain provisions, which empower the courts to lift the veil to reach the persons who are in fact responsible for the culpable or wrongful act. The corporate veil can be lifted in the following cases:
(1) Where the doctrine conflicts with the Public policy,
(2) Where corporate veil has been used for fraud or improper conduct,
(3) Where the corporate facade is only an agency instrumentality,
(4) For determining the real character of the company,
(5) Where the veil has been used for evasion of taxes,
(6) In quasi-criminal cases,
(7) For investigating the ownership of the company,
(8) For investigating the affairs of the company,
(9) Where the company is used as a medium to avoid various welfare and labour legislations,
(10) In case of economic offences,
(11) Where the company is used for some illegal and improper purpose, etc.

The following provisions of the Companies Act, 1956 provide that the Member or the Directors/officer(s) of a company will be personally liable if:
(1) A company carries on business for more than six months after the number of its members has been reduced below seven in the case of a public company and two in the case of a private company. Every person who was a member of the company during the time when it carried on business after those six months and who was aware of this fact, shall be severally liable for all debts contracted after six months,
(2) The application money of those applicants to whom no shares has been allotted is not repaid within 130 days of the date of issue of the prospectus, then the Directors shall be jointly and severally liable to repay that money with the prescribed interest,
(3) An officer of the company or any other person acts on its behalf and enters into a contract or signs a negotiable instrument without fully writing the name of the company, then such officer or person shall be personally liable,
(4) The court refuses to treat the subsidiary company as a separate entity and instead treat it as only a branch of the holding company,
(5) In the course of winding up of the company, it appears that the business of the company has been carried on with intent to defraud the creditors of the company or any other person or for any fraudulent purpose, al those who were aware of such fraud shall be personally liable without any limitation of liability.

Thus, the protection of separate legal entity cannot be claimed in these cases and the limited liability of the shareholder becomes unlimited if he is engaged in these activities. The concept of “limited liability” restricts the liability of a shareholder to the nominal value of the shares held by him. If he has paid the entire amount which is payable towards his shares, he cannot be held liable for the debts of the company, even if he holds almost the entire share capital of the company. This rule, however, does not apply if the court lifts the corporate veil and finds the shareholder responsible for the wrongful act. III.RIGHTS AND LIABILITIES OF A COMPANY

The Rights and Liabilities of a company, as ascertained and deduced by the Judiciary, can be classified under the following two categories:
(1) Constitutional Rights and Liabilities, and
(2) Statutory Rights and Liabilities.

(1) Constitutional Rights and Liabilities:

This can further be classified under two heads:
(A) Fundamental and constitutional Rights, and
(B) Fundamental and Constitutional Liabilities/Restrictions.

(A)(i) Fundamental rights: Although a company is a legal person, it is not a citizen either under the Constitution of India or the Citizenship Act, 1955. Thus a company has a nationality but no citizenship. This difference of status is important because certain Fundamental rights are available to citizens only.

In State Trading Corporation of India v C.T.O the Supreme Court of India held that a corporation cannot claim the status of a citizen under the Constitution of India Thus, under the Constitution, a corporation has no Fundamental Rights which are expressly available to citizens only. It can, however, claim the protection of those Fundamental Rights which are available to all “persons”, whether citizen or not.

In R.C.Cooper v U.O.I it was held that a shareholder, a depositor or a director is not entitled to move a petition for infringement of the rights of a company, unless by the action impugned by him, his rights are also infringed. The test in determining whether the shareholder’s right is impaired is not formal but it is qualitative. If the State action impairs the right of the shareholders as well as of the company, the court will grant the relief. Where the legislative measures directly affect the company, of which the petitioner is a shareholder, he can petition on behalf of the company if by the impugned action his rights are also infringed.

In Bennet Coleman Co v U.O.I the Supreme Court held that the fundamental Rights of the shareholders as citizens are not lost when they associate to form a company. When their Fundamental Rights as shareholders are impaired by the State action, their rights as shareholders are protected. The reason is that the shareholder’s rights are equally and necessarily affected if the rights of the company are affected.

The natural corollary of the above decisions is that the company acquires a standing by adding a shareholder with itself in an action.

(A)(ii) Constitutional Rights: Besides certain Fundamental Rights which are available to all “Persons”, including a corporate entity, a company also enjoys the protection of various Constitutional Rights as provided under the Constitution. For instance, a company has a Constitutional Right to hold and enjoy its property. Article 300-A of the Constitution confers a right on all persons to hold and enjoy their properties. Thus a company cannot be deprived of its property save by authority of law. Any violation of this right of the company can be challenged in a court of law. In view of the interpretation given to the word “law” by the Supreme Court in Maneka Gandhi v. U.O.I, a law depriving a company of its property must be fair, reasonable and just. An arbitrary and unreasonable law is vulnerable to attack U/A 14 of the Constitution and is liable to be struck down.

In Bhavnagar University v Palitana Sugar Mills Pvt Ltd the Supreme Court held that an owner of a property, subject to reasonable restrictions, which may be imposed by the Legislature, is entitled to enjoy the property in any manner he likes. A right to use a property in a particular manner or in other words a restriction imposed on user thereof except in the mode or manner laid down under the statute would not be presumed.

In Dharam dutt v U.O.I the Supreme Court held that the protection of Article 300-A is available to any person, including a legal or juristic person and is not confined only to a citizen. However, the same cannot be sought to be enforced by a petition U/A 32 of the Constitution, since it is not a fundamental right but merely a Constitutional Right.

Similarly, Article 301 of the constitution confers on a company a right to have a free trade, commerce and intercourse throughout the territory of India. This right, however, is subject to the provisions of Articles 302 to 305 of the Constitution. Thus so long a company is carrying on its business in accordance with the law, its business activities cannot be interfered with.

(B) Fundamental and Constitutional Liabilities/Restrictions: A right without restrictions or/and limitations cannot be visualized. Thus, by its very nature a right is non-absolute in nature and is subject to various well-defined parameters. In a civilized society one cannot imagine a situation where rights are conferred without limitations. This is so because law has to perform various social functions also which are directed towards the welfare of human beings at large. Thus, conferment of rights without limitations may create chaos within the legal system and may disrupt the normal functioning of the society.

A company possessing various Fundamental Rights enjoys the same subject to their restrictions and limitations. Similarly, the Constitutional Rights of a company are also subject to the express or/and implied restrictions contained therein. Thus, a company enjoys various rights subject to their restrictions and limitations.

It must be noted that the corporations deemed to be “State” within the meaning of Article 12 of the Constitution and acting as agency of the government, would be subject to the same limitations in the field of Constitutional or administrative law as the government itself, though in the eyes of law they would be distinct and independent legal entities.

In the landmark jugdement of Kapila Hingorani v State of Bihar the Apex Court analysed the rights and liabilities of a company vis-à-vis the Fundamental rights and Human Rights of the individuals. The Court observed:
“A company incorporated under the Companies Act is a juristic person and has a distinct and separate entity vis-à-vis its shareholders. The corporate veil, however, can in certain situations be pierced or lifted. Whenever a corporate entity is abused for an unjust and inequitable purpose, the court would not hesitate to lift the veil and look into the realities so as to identify the persons who are guilty and liable thereof. The veil can indisputably be lifted when the corporate personality is found to be opposed to justice, convenience and interest of the revenue or workman or against public interest”.
The Court further observed:
“The company being “State” would be constitutionally liable to respect life and liberty of all persons in terms of Article 21 of the Constitution of India. It must do so in cases of its own employees. The government of the State of Bihar is the sole shareholder of the company. Although in law, its liability towards the debtors of the company may be confined to the shares held by it, but in the matter of enforcement of human rights and/or rights of the citizens of life and liberty, the State has also an additional duty to see that the rights of the employees of such corporations are not infringed. The government of the State of Bihar, thus, had a constitutional obligation to protect the life and liberty of the employees of the government owned companies. It had an additional liability having regard to its rights of extensive supervision over the affairs of the company. The State cannot be permitted to say that it did not know the actual state of affairs of the company or it was kept in dark that the salaries of their employees had not been paid for years leading to starvation death and/or commission of suicide by a large number of employees. The concept of accountability arises out of the power conferred on an authority. The State may not be liable in relation to day to day functioning of the company, but its liability would arise on its failure to perform the constitutional obligations. The State acts in a fiduciary capacity”.

(2) Statutory Rights and Liabilities:

A company on its incorporation acquires certain rights and privileges. It is also saddled with certain obligations, which are required to be fulfilled by it. This gives rise to a jural relationship between the company and the individuals with whom it deals. Thus, if the company has a right, the individual with whom it is dealing is under an obligation to respect the same. Similarly, if the individual possesses a right, the same can be enforced against the company. The Indian Companies Act, 1956, as well as other statutes, confer on a company certain rights and impose certain restrictions/liabilities upon it. These rights and liabilities can be categorized under the following headings:
(A) Statutory Rights, and
(B) Statutory Liabilities.

(A) Statutory Rights: A company enjoys certain statutory rights conferred upon it by various statutes. These rights can be categorized as:
(i) Rights conferred under the Companies Act, and
(ii) Rights conferred under other statutes.

The rights conferred under the Companies Act are available against the outsiders as well as the company members. For instance, if an officer or employee of the company wrongfully withholds the property of the company after he ceases to be an officer/employee, the company can file a complaint before the appropriate court and seek restoration of the same.

In Lalita Jalan v Bombay Gas Co Ltd the Supreme court held that if a former employee is prosecuted u/s 630 of the act, in normal circumstances it may not be very proper to prosecute his wife and dependant children also as they are bound to stay with him in the same premises. The position would be different where the former employee is himself not in occupation of the premises either on account of the fact that he is dead or he is living elsewhere. In such cases all those who have come in possession of the premises with the express or implied consent of the employee and have not vacated the premises would be withholding the delivery of the property to the company and they are liable to be prosecuted u/s 630 of the Act. This would include anyone else who has been inducted in possession of the property by such persons who continued to withhold the possession of the premises as such person is equally responsible for withholding and non-delivery of the property of the company”.

A company incorporated under the Companies Act, 1956 also enjoys certain privileges under other statutes, which a partnership firm, an association of persons or a registered society does not possess. These privileges flow form the “distinct entity status” of a company, which other associations lack. In Illachi Devi v Jain Society the Supreme Court held that the mere fact of registration of a society under the Societies Registration Act would not make the said society distinct from the associations of persons. Sections 223 and 236 of the Indian Succession Act, 1925 in very categorical term provide that an association of persons; be it a society, a partnership firm or other forms of associations, would not be entitled to be granted the Letter of Administration. The Letter of Administration can be granted only to a “company” fulfilling the conditions laid down under the rules. In terms of Sections 223 and 236, a “company” must be a company registered under the Companies Act. A society registered under the Societies Registration Act is not a body corporate as is the case in respect of a company registered under the Companies Act. It is not a juristic person.

(B) Statutory Liabilities: A company enjoying various rights is also subjected to certain liabilities and obligations under the Companies Act and other statutes. The Companies Act, 1956 imposes on a company various “compliance requirements” which it is required to fulfill. This includes filing of various returns, reports and documents with the prescribed authorities. In case of default, the concerned officer of the company who was responsible for the conduct of the affairs of the company at the relevant time would be liable. The liability of the defaulting officer could be civil as well as criminal. Similar are the provisions contained in various statutes, which fix the liability of a company in case of breach of the respective provisions of the concerned statute. It must be noted that in the present era, virtually all the statutes contain a provision fixing the criminal liability of the company. The liability of the company is generally found under the heading “Offences by companies/corporations” which is a normal clause found in all the statutes. The rationale behind the same is that the activities of a company, as incorporated in the “Object Clause” of the Memorandum of Association, are so wide that a conflict with many statutes is inevitable. A company can escape the criminal liability only if it works within the legally defined parameters of the statute.
The liability/obligations of a company may be towards the:
(1) State, or/and
(2) Individuals.

The liability of a company towards the State may be civil, administrative, quasi-judicial or/and criminal. If a company, generally, as prescribed under a particular statute, has committed an offence, the persons who are liable to be proceeded against are:
(i) The company, which includes a firm,
(ii) Every person, who at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business, and
(iii) Any director (who in relation to a firm means a partner), manager, secretary, or other officer of the company with whose consent or connivance or because of neglect attributable to whom the offence has been committed. Such person may escape the liability if he proves that the offending act was committed without his consent or he did not know about the commission of the offence, or he took all reasonable precautions to prevent the commission of the offence.

In Assistant Commissioner, Bangalore v M/S Velliappa Textiles Ltd the Supreme Court held that a company cannot be prosecuted for offences under sections 276C, 277, and 278 of the Income Tax Act, 1961 since each one of these sections requires the imposition of a mandatory term of imprisonment coupled with a fine and leaves no choice to the court but to impose only a fine. Since a company cannot be imprisoned, these sections are not attracted in the case of a company. Thus, under the present Indian law, it is difficult to impose fine in lieu of imprisonment though the definition of “person” in the Indian Penal Code includes a company.

The liability of a company towards individuals may be civil or criminal in nature. It must be noted that the Companies Act, 1956 does not bar the jurisdiction of a civil court, even though it is a self- contained code/Act. In Dwarka Prasad v Ramesh the Supreme Court held that the civil court’s jurisdiction is not completely ousted under the Companies Act, 1956. The court observed that a bare perusal of sections 9 and 10 of the Act leaves no manner of doubt that thereby the jurisdiction of the civil court has not been ousted.

The discussion under this heading is confined only to liability arising under various labour legislations. This is generally civil in nature. It must be noted that India being a welfare State, many labour legislations find place in the statute book. These legislations provide positive obligations of the employers/companies towards the workmen. For example, the terms, conditions and obligations prescribed by the Payment of Wages Act, 1936, Industrial employment (Standing Orders) Act, 1946, Minimum Wages Act, 1948, Payment of Bonus Act, 1965, etc are framed keeping in mind the legitimate interests of the workmen. . The provisions of these legislations provide means of livelihood to the workforce. Thus, the Supreme Court has interpreted these provisions very liberally and in favour of the workmen.

In D.K.Yadav v J.M.A. Industries Ltd the Supreme Court observed that procedure prescribed for depriving a person of livelihood must meet the challenge of Article 14 and such law would be liable to be tested on the anvil of Article 14 and the procedure prescribed by a statute or statutory rule or rules or order affecting the civil rights or results in civil consequences would have to answer the requirement of Article 14. So it must be right, just and fair and not arbitrary, fanciful or oppressive. Therefore, fair play in action requires that the procedure adopted must be just, fair and reasonable.

Similarly, in Uptron India Ltd v. Shammi Bhan the Apex court held that any clause in the certified standing orders providing for automatic termination of services of a permanent employee, not directly related to “production” in a company, would be bad if it does not purport to provide an opportunity of hearing to the employee whose services are treated to come to an end.

IV.CONCLUSION

The concept of separate legal entity has always fascinated the legal scholars including the judges. Ever since the House of Lords have declared that a corporation has an entity separate from its members, the law concerning companies seems to be revolving around it. With the passage of time it became essential to invent exceptions to this rule and the doctrine of lifting of the veil was formulated to do the complete justice. It must however be noted that the courts are reluctant to lift this veil except in exceptional cases. The sanctity of separate existence is generally recognized, maintained, and upheld by the courts all over the world.

The law have conferred and assigned a special status to the companies, which is not available to other forms of associations. It expects the companies to contribute for the growth and development of the nation. The companies are expected to perform their “Social responsibilities” so that people can enjoy a qualitative life. The role of the companies is so important that we can see provisions touching and regulating their functioning in almost all the spheres of life. This is particularly so in a country like India which is a “Welfare State” by nature. The State formulates various laws and regulations keeping in mind its welfare state role. Thus, a balance has been maintained between social responsibilities of the company on the one hand and conferment of absolute autonomy and freedom from interference upon the company on the other.

It is interesting to note that the separate entity of a company can provide an absolute immunity to a company from a criminal prosecution, which necessarily requires the imposition of a term of imprisonment. This is so because a company, being a juristic person, cannot be imprisoned. This does not mean that the persons through whom the company was operating at the time of commission of the offence are also exempted from being imprisoned. It is submitted, with due respect to the judgement of the apex court, that this exemption from criminal liability may create a disastrous effect on the smooth functioning of the present legal system. If the reasoning and logic given by the court is accepted, then a company can neither be imprisoned nor be fined in case the concerned statute provides a punishment of both imprisonment and fine. The courts have the power to exercise their discretion in the most suitable way to do complete justice. This exercise of discretion must, of course, be based on sound and judicious principles as formulated by the apex court from time to time. In the interest of justice and to prevent the abuse of the process of law, the courts can exercise their discretion in such a manner as to advance the substantial justice. Thus, when faced with a situation where a statute provides mandatory imposition of both fine and imprisonment, the courts should ignore the imprisonment part, as far as a company is concerned, and impose fine upon it. The officers, who were responsible for the conduct of the business of the company, at the time of commission of the offence, must be held liable for the offence and the punishment of imprisonment with fine can be imposed upon them. It must be noted that the liability of the company is both joint and severe. This makes the task of separation of the mode of punishment (fine and imprisonment) easier and converts this mode into two separate modes of imprisonment (fine or imprisonment). The fine or compensation may be imposed upon the company and the guilty officer may be saddled with the criminal liability. This theory of “alternative punishment” will prove very handy to deal with companies who are guilty of the commission of various offences. The theory of “alternative punishment” is also important from the point of view of environment protection. The environmental law recognizes certain internationally accepted principles, chief among them are “polluter pays principle” and “strict liability principle”. The Indian judiciary has not only recognized these principles but it has extended the scope of the strict liability by making it absolute in nature with no exceptions attached to it. It must be noted that the quantum of compensation is directly related to the paying capacity of the company. If the company is “acquitted” on a technical ground only, then it will go scot- free without even being prosecuted. It is difficult to understand how a law like this can meet the requirements of Article 14 of the Constitution. It cannot be said that there is a reasonable classification while making such a law, much less intelligent differentia. There cannot be a nexus between the law made and the object sought to be achieved. In fact, a law like this will defeat the very purpose of the law for which it has been formulated. It cannot be considered as just, fair and reasonable. It is very difficult to appreciate how an act of the company, which affects the right to life and liberty of the citizens, as conferred U/A 21 of the Constitution, can go unnoticed and unpunished.
The court may alternatively lift the veil of the corporate entity and find the person who was in fact responsible for the commission of the offence. This process becomes important because if the concerned officers prove their innocence, then neither the company nor the officers would be liable for the offence committed. It must be remembered that the first duty of the court is to do justice. There would be a failure of justice not only by an unjust conviction but also by acquittal of the guilty for technical reasons only. It must also be remembered that Criminal Procedure Code, from which strength to this theory can be obtained, is an ongoing statute. The interpreter has to presume that the Legislature intended the Act to be applied at any future time in such a way as to give effect to the changed circumstances. The law cannot stand still but it must change with the changing social concepts and values. If the law fails to respond to the needs of changing society, then either it will stifle the growth of the society and choke its progress or if the society is vigorous enough, it will cast away the law, which stands in the way of its growth.

This does not mean that a company should be discriminated against other persons or institutions and it should be saddled with additional and more stringent punishment provisions. What is suggested here is that a company, like any other “person”, must also be held liable for the offence committed by it applying the “alternative punishment” theory. This is essential because it has to perform various “social functions” also, which makes it accountable to the people. This liability is offset by availability of numerous rights to a company. If a company performs its functions according to the requirements of the law, no question of civil or criminal liability of the company arises.
Thus, formation of a company has its own merits. In the present scenario companies play a very important role in the growth and development of the nation. Thus, they should be encouraged and motivated to contribute more. This can be achieved by providing them additional benefits, concessions and privileges. Their functioning and operations should not be made complicated by forcing them to comply with unnecessary and technical formalities. In fact, the various technical and procedural formalities governing them should be made more liberal and simplified so that the “corporate governance” can become a real and effective governing force.

ALL RIGHTS RESERVED WITH THE AUTHOR.

* An abridged version of the article has been published in the August 2004 issue of Corporate Law Advisor (CLA).