7INDEPENDENT CORPORATE PERSONALITY OF A COMPANY: A

JURISPRUDENTIAL PERSPECTIVE

Yam Kumar Yonjan

Abstract
In the legal parlance, a company is an association of both natural and artificial person and is
incorporated under the existing law of the country. The company has no strictly technical or
legal meaning. The company is a business vehicle implies to a voluntary association of a group
of persons for common objectives. In the common law a company is a ''Legal Person‟ or ''Legal
Entity‟ which is separate from and capable of surviving beyond the lives of its members,
capable of rights and duties of its own and endowed with the potential of perpetual succession.
The term company has been described in many ways, since a corporate body is the creation of
law; it is not a human being. It is an artificial juridical person created by law and dissolved by
the law. Company is a legal person which can own a business, property, rights and obligations
separately from the people who manage or finance the company's activities as prescribed by law
and the powers conferred upon it by its MoA, AoA and Company Act. So, Independent corporate
personality is one of the characteristic of the company under which company is said to be a
legal or artificial person since it is invisible, intangible, and existing only in the contemplation
of law.

Key Words: Legal person, Corporate Personality, Lifting the Corporate Veil

1. Introduction
A person is juridically classified in two groups, natural persons and juridical persons. The first
group refers to a human being, who is an individual being capable of assuming obligations and
capable of holding rights. The second group refers to those entities endowed with juridical
personality who are usually known as a collective person, social person, or legal entity. 1
Beginning with an etymological understanding of "person", we must reconcile the juridical
fiction with what the law defines as a juridical person. The word "person" has multiple meanings.
From an etymological sense this word is derived from personare, a term that denotes larva
histrionalis, meaning “mask.” In this manner, the person acted as the mask covering the face of
an actor who recited verses during a scene in a play because the purpose of the mask was to
make the actor’s voice resonant and loud. Later, people used the term “person” in reference to
the masked actor himself. In view of the above, it is quite understandable to associate the person
as a natural being of the human species.2

In saying that "person" might legally mean whatever the law makes it mean, I am trying to say
that "person" might be used simply as a synonym for a right-and-duty-bearing unit. Any such
unit would be a person; such a statement would be altruistic, tautological. Hence it would convey
no implications, except that the unit has those rights and duties which the courts find it to

1
ElviaArcelia Quintana Adriano.(2015)."The Natural Person, Legal Entity or Juridical Person and Juridical
Personality." Penn State Journal of Law & International Affairs, Vol. 4, No. 1. pp. 363-389. Retrieved from
https://elibrary.law.psu.edu/cgi/viewcontent.cgi?article=1117&context=jlia
2
Royal Spanish Academy, Dictionary of Spanish Language, (Espasa, 1593).
have.3Julien Bonne case on the other hand, defines the juridical personality law as a set of rules
and institutions that apply to the person itself, in its individuation and its power of action. For
him, the personality law is classified in three parts.4

(i) The existence and individualization of persons, which means the set of elements that allow
on one hand social distinction of the person, and on the other hand, a determination of
juridical effect. The elements that allow for further distinction are its name, its legal status,
and its address.
(ii) The legal capacity of natural persons and their variations, on one hand the guidelines of the
organization in regard to capacity of natural persons and their variations (capacity to enjoy
and exercise capacity with their limits), and on the other hand the study of the legal bodies
which substitute for the incapacity of natural persons.
(iii) The existence, individualization and capacity of legal entities or juridical persons, which is
the subject matter of this paper.

From the analysis of Savigny's proposed theories, it is understood that the legal entity is an
artificially-created being, capable of having a patrimony, but distinguished by its lack of will.
Savigny concludes that a "person" is any entity capable of having obligations and rights because
the juridical persons are legal fictions, therefore they do not have free will and is not subjects of
law.5

Hans Kelsen argues that, a "subject of law" refers to the object of a legal obligation or subjective
right. This is known as the juridical power to claim an action for the enforcement of an
obligation. For Kelsen, the natural person and the juridical person are merely a set of rights and
obligations which, when taken together, are metaphorically expressed as the concept of
"person."6

The word 'company' is derived from the Latin word "com"-with or together, "panis"- bread, and
it originally referred to an association of persons who took their meals together. Nowadays, the
business matters have become more complicated and cannot be discussed at festive gatherings.
Therefore, the company form of organization has assumed greater importance. 7Gogna defines a
company as "a voluntary association of persons formed to achieve some common objectives,
having a separate legal entity, independent and separate from its members, with a perpetual
succession and a common seal, and with capital divisible into transferable shares."8

3
John Dewby. (1926)."The Historic Background of Corporate Personality."Yale Law Journal, Vol. XXXV, No.
6. pp. 655-673.
Retrieved from https://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=3149&context=ylj
4
Julien Bonnecase. (1945).Elements of Civil Law. Jose M. Cajica trans. p. 281. Retrieved from
https://elibrary.law.psu.edu/cgi/viewcontent.cgi?article=1117&context=jlia
5
M.F.C. Savigny. (2009).Modern Roman Law System.(Jacinto Mesía& Manuel Poleytrans.). p. 304. Retrieved
from https://elibrary.law.psu.edu/cgi/viewcontent.cgi?article=1117&context=jlia
6
Hans Kelson. (2000). Pure Theory of Law. Robert J. Vernengo trans. p. 178. Retrieved from
https://elibrary.law.psu.edu/cgi/viewcontent.cgi?article=1117&context=jlia
7
ICSI. (2014).Company Law.New Delhi: Institute of Company Secretaries of India. Retrieved from
https://www.icsi.edu/media/webmodules/publications/1.%20Company%20Law-Executive.pdf
8
P.P.S. Gogna.(2004).A Textbook of Company Law.New Delhi: S. Chand & Company Ltd. p.9.
The word ''Company'' has no technical or legal meaning. Section 2(20) of the 2013 Act defines
the term "company" means "a company incorporated under the Companies Act, 2013 or under
any previous company law.9Nepalese Company Act, 2006 Section 2(a) defines company as any
company incorporated under the Companies Act. 10 In the common law a company is a "Legal
Person" or ''Legal Entity" which is separate from and capable of surviving beyond the lives of
members. Just like a juristic person a company is an entity different from its members, having its
rights and duties and having a perpetual succession.

So, Corporate Personality is one of the characteristic of the company under which company is
said to be a legal or artificial person. The concept of corporate personality further says that a
company is having a separate legal entity which is different from its members. The concept of
Corporate Personality was ruled out in the famous case of Solomon v. Solomon whereby it was
enunciated that a company is having a separate legal entity as distinct from its members. 11
According to National Civil Code Chapter 3 Section 42(1) reads, a corporate body which is
established by law shall have the legal personality and legal capacity. 12Legal personality and the
capacity to be the subject of rights and obligations and to determine one's own legal situation, is
ascribed by the law to human beings (natural person). A natural person has self-awareness,
intelligence, free will and feelings. In some natural person in light of children, intellectual
disability and have partially and completely limited capacity to require rights and resume
obligations, the responsibility for them is borne by legal guardians. The notion of legal
personality in the sense of the capacity to be to be the subject of rights and obligations has been
expanded to legal persons created by humans standing behind them. The detachment of legal
person from the natural person occurred over a long process, through the evolution of abstract
legal concepts.13

2. Theories of Corporate Personality

There are various theories of Corporate Personality which have attempted to describe the nature
and authority of the company. Following are the principle theories of corporate personality:

Fiction Theory
Fiction Theory was propounded by Karl Von Savigny, Salmond, Coke, Holland, etc. This theory
says that only human beings are properly being called as persons, according to this theory, the
corporation is having a different personality as that of its members. This theory propounds that
juristic person has only a fictitious will. According to this theory, the legal personality of entities
other than human beings is the result of a fiction. 14Gray supported this theory by saying that only
human beings are capable of thinking, whereas a corporation is a non-human entity to which we
attribute will through humans who are capable of thinking and assign them legal personality.
Originally, the outward form that corporate bodies are fictitious personality was directed at
ecclesiastic bodies whereby the doctrine was used to explain that the ecclesiastic bodies could
not be guilty of a delict as they have neither a body nor a will. As a result, the fiction theory
9
Indian companies Act, 2013.Section 2(20).
10
Companies Act, 2006 (2063).Section 2(a).
11
Avtar Singh. (2015).Company Law (16thed.).Lucknow: Eastern Book Company. P. 2
12
National Civil Code, 2017 (2074). Section 42(1).
13
Newtech.law.law/en/legal-personality-and-artificial –intelligence, accessed on March 18, 2020.
14
Dr.Monomita Kundu Das. (2012).An Introduction to Jurisprudence (Legal Theory), Darbhanga Castle,
Allahabad(U.P.), India, Central Law Publications, 1stedn., p. 96
became an established theory of the English Law. Under fiction theory, rights and duties attached
to corporation as artificial person totally depend on how much the lawImputes to it.15

Concession Theory
Concession theory is concerned with the sovereignty of the state. It is of the view that as the
corporation is a legal person recognized by state or law, so it is of great importance. According
to this theory, a juristic person is the creation of the state. The theory simply says that the
corporate bodies are having legal personality only to the extent granted by the state. This theory
is different from fiction theory on the point that it identifies law with the state while fiction
theory does not.16The concession theory is basically linked with the philosophy of the sovereign
national state. Hence, a juristic person is merely a concession or creation of the state.
Nonetheless, it is obvious that while the fiction theory is ultimately a philosophical theory that a
corporation is merely a name and a thing of the intellect, the concession theory is indifferent as
regards to the question of the reality of a corporation in that it focuses on the sources of which
the legal power is derived. The distinguished English jurist, Frederick Pollock, denied that
English law applied the fiction theory but rather adopted the concession theory in explaining the
nature of corporate personality.

Realist Theory
Realist theory is also known as "Organic Theory." This theory was propounded by Gierke and
Maitland was the supporter of this theory. This theory says that a corporation is having all the
characteristics just like a natural person. So, he opines that legal or juristic person is really just
like the human beings. It further says that juristic persons are not fictitious and also do not
require the recognition of the State.The realist theory also emphasized that the law has no power
to create an entity but merely having the right to recognize or refuse to recognize an entity. The
realist theory contended that, action of the corporation is deem to be carried out on its own,
similar to the way of the normal person and not by its agents or representatives like those of the
incapable, such as the infant and insane.

Symbolist Theory
This theory is also known as Bracket Theory. The theory was propounded by Rudolph Ritter von
Inhering. The theory says that the only persons who are having rights and duties are the members
of the corporation. The granting of legal personality means putting a bracket on the members so
that they can be treated as a single unit when a corporation is formed. 17This theory is also known
as the 'bracket' theory. Under this theory, rights are not inherent attributes of the human will and
that an individual is not a subject of right by reason that he possesses a will. The symbolist
theory is often acknowledged for its availability to justify corporate personality from non-legal
facts but it has been repeatedly rejected by the courts in common law jurisdictions because it
denies the law by deducing that the only legal relation which is fixed and certain can be

15
Halyani Hassan,(2012)."The Myth of Corporate Personality’: A comparative Legal Analysis of the
Doctrine of Corporate Personality of Malaysian and Islamic Laws." International Islamic University
Malaysia, Malaysia Australian Journal of Basic and Applied Sciences, p.191-198, retrieved from
https://www.researchgate.net.
16
N.K. Jayakumar, (2014) Lectures in Jurisprudence, p. 250 (LexisNexis, 2 ndedn.) retrieved from
https://www.onlinebookstore.in.
17
B.N. Mani Tripathi. (2015). Jurisprudence:The Legal Theory (19thed.)–, Allahabad Law Agency, p. 308-309
discovered by removing the 'brackets' of the corporation and analyzing the relations of the
human beings involved.

Purpose Theory
The purpose theory is propounded by the Brinz. Similar to the fiction and concession theories,
the Purpose theory declares that only human beings can be a person and have rights. Entities
other human is regarded as an artificial person and merely function as a legal device for
protecting or giving effect to some real purpose. As corporations are not human, they can merely
be regarded as juristic or artificial person. Under this theory, juristic person is no person at all but
merely as a 'subject less' property destined for a particular purpose and that there is ownership
but no owner. The Purpose theory claims that the juristic person is not constructed round a
person but based on object and purpose. This theory rationalized the existence of many
charitable corporations or organizations, such as trade unions, which have been recognized as
legal persons for certain purposes and have continuing fund.18

Group Personality Theory or Institutional Theory

This theory is also known as Institutional Theory. The exponent of this theory was Hauriou. The
theory has its basis in collective outlook. It says that individual integrates into association and
becomes part of it. Thus, it believed that every collective group has real mind, the will and power
of action. So, a corporation has the real existence and is independent of the fact that whether it is
recognized by the state or not.19

3. Characteristics of Corporate Personality

Independent corporate existence
A company has a distinct legal entity and is independent of its members. It is a different person
from the shareholders who compose it. Therefore, it is capable of owning property, incurring
debts, borrowing money, having a bank account, employing people, entering into contracts and
suing or being used in the same manner as individuals. Its shareholders are its owners. However
they can be its creditors simultaneously. Hence, the company is a separate entity in law. 20The
creditors of the company can recover their money only from the company and the property of the
company. They cannot sue individual members. So, the company is not liable for the individual
debts of its members in any way. The property of the company is to be used for the benefit of the
company and not for the personal benefit of the shareholders. This means that company is a
having independent existence and is vested with a corporate personality which is distinct from
the members who compose it. A company is an artificial person. So, a company cannot act on its
own self and, it exists in the eyes of the law. It has to act through a board of directors elected by
shareholders.21

18
Halyani Hassan,(2012)."The Myth of Corporate Personality’: A comparative Legal Analysis of the
Doctrine of Corporate Personality of Malaysian and Islamic Laws." International Islamic University
Malaysia, Malaysia Australian Journal of Basic and Applied Sciences, p.191-198, retrieved from
https://www.researchgate.net.
19
Paton Sr. George. (2004). A Text Book of Jurisprudence. Oxford, UK: Oxford University Press. pp. 416-417.
20
Nicholas Bourne. (2008).Bourne on Company Law, (4thed.). New York: Routledge. p. 38.
21
Naveen Singh Thakuri, Divya Singh, Theory of Corporate Personality, International Journal of Science and
Research (IJSR) ISSN (Online): 2319-7064 Index Copernicus Value (2016): 79.57 | Impact Factor (2017):
7.296 Volume 7 Issue 4, April 2018
Incorporation of a company by registration was introduced in 1844 and the doctrine of limited
liability of a company followed in 1855. Subsequently in 1897 in Salomon v. Salomon &
Company, the House of Lords effected these enactments and cemented into English law the twin
concepts of the corporate entity and limited liability. In that case, the Apex Court laid down the
principle that a company is a distinct legal person entirely different from the members of that
company. The decision of the House of Lords in the case of Salomon v. Salomon & Co.Ltd 1897
which revised the decisions of the Higher Court and the Court of Appeal marks the beginning of
the judicial acceptance of the company as a separate legal entity.22The proprietor of a small but
successful business, Mr. Salomon, formed a business as a limited company in accordance with
the registration provisions contained within the Companies Act, 1862. The Section 6 of the Act
provided that" seven or more persons together could form a business provided that it was
associated for a lawful purpose."23The seven subscribers to the Salomon & Co. Ltd were Mr.
Salomon, his wife and their five children. The company, A Salomon & Co. Ltd, purchased Mr.
Salomon's business in a solvent state for a consideration to a value of approximately £39,000.
Mr. Salomon received £20,000 a fully paid-up £1shares, an issue of debentures to the value of
£10,0006. The remaining six members of Salomon's family were each allotted a £1 share in the
company.24Unfortunately, a Salomon & Co. Ltd did not prosper. Mr. Salomon's debentures were
transferred to Mr. Broderip in return for £5000; this amount was then pumped back to the
company by Mr. Salomon. Despite further effortson the part of Mr. Salomon to keep the
company afloat, less than a year after its formation, the company fell into an insolvent state. The
company could not meet Broderip's debenture interest payments and, fearful that his investment
would be lost, Broderip sought to realize his security (the floating charge) by appointing a
receiver. The company, which had other creditors, was subsequently put into liquidation.25

Aaron Salomon was a successful leather merchant who specialized in manufacturing leather
boots. When the company went into liquidation, the liquidator argued that the debentures used by
Mr. Salomon as security for the debt were invalid, on the grounds of fraud. The judge, Vaughan
Williams J. accepted this argument, ruling that since Mr. Salomon had createdthe company
solely to transfer his business to it, then the company and Salomon were one unit;the company
was in reality his agent and he as principal was liable for debts to unsecuredcreditors.The Court
of Appeal also ruled against Mr. Salomon, on the grounds that Mr. Salomon had abusedthe
privileges of incorporation and limited liability, which the Legislature had intended only toconfer
on "independent bona fide shareholders, who had a mind and will of their own and werenot mere
puppets."

The House further noted" The company is at law a different person altogether from the
shareholders 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 received the profits, the
company is not in law the agent of the shareholders or trustee for them. Nor are the shareholders,
as members, liable in any shape or form, except to the extent and in the manner provided for by
the Act.26The House of Lords in considering the agency and trust arguments of the lower courts
22
Griffin Stephen, (2004), Company law: fundamental principles, p. 6. 4th ed, retrieved from
https://www.amazon.com.
23
Salomon v. Salomon & Co Ltd, AC 22 House of Lords, (1897).
24
Griffin Stephen, supra note 6, p. 6.
25
Ibid.
26
Ibid.
concluded that both were contradictory to the view that the company was a separate legal entity.
The finding of the agency or trust relationship would have meant that Mr. Salomon would have
been personally liable for the company's debt. Lord Halsbury, remarked "once the company is
legally formed it must be treated like any other independent person with rights and liabilities
appropriate to it, and that the motives of those who took part in the promotion of the company
are absolutely irrelevant in discussing what those rights and liabilities are." 27 It is the decision of
the House of Lords that marked the beginning of the judicial acceptance of the company as a
separate legal entity distinct from its members.

In the case of Lee v. Lee's Air Farming Ltd, a company was formed for the purpose of aerial top-
dressing. Lee, a qualified pilot, held all but one of the shares in the company. He was killed in an
air crash while working for the company. His widow claimed compensation for the death of her
husband in the course if his employment, the insurance company opposed the claim. The Privy
Council held that Lee and his company were distinct legal persons which had entered into
contractual relationships under which he became chief pilot, a servant of the company. In effect
the magic of corporate personality enabled him (Lee) to be the master and servant at the same
time and enjoy the advantages of both. In Lee by asserting the separate identity of the company,
the widow was able to benefit from the New Zealand Workman's Compensation Act and obtain
compensation.28 In the context of Nepal, for the first time, Supreme Court in the case of Piyus
Raj Pandey v. Tax office Kathmandu, it is held that company is a separate legal entity which is
different from its members.29 In the case of Nepal Government v. Rabindralal Shrestha, Supreme
Court said that company is legal entity and so company and its board members are different in
the eye of law.30

Limited liability
A company being a separate person is the owner of the assets and bound by its liabilities. A
company may be a company limited by shares or a company limited by guarantee. In company
limited by shares, the liability of members is limited to the unpaid value of the shares. Limited
liability of shareholders/members is another basic attribute of a company which makes it the
chosen mode of business. Since a company is a separate person with property interests, it will
alone be liable for the debts it incurs. This means that, if the company becomes unable to pay its
debts, the members of that company will not have to contribute towards paying the company’s
debts out of their private funds. The shareholders are liable only to the extent of the amount they
have paid, or have promised to pay, for their shares. 31 Hence, a company is responsible for its
own actions and will be predominantly liable for its own debts and the company's creditors
cannot seek the satisfaction of their claims from the members even if the company's funds
(assets) are insufficient to pay its liabilities in full. Moreover, the personal creditors of
shareholders have no right to the company's assets except to the extent of the debtor member's
share.32 The Companies Act, 2006 (2063) of Nepal has incorporated that the liability of a
27
Ibid. p. 9
28
Nicholas Bourne on Company Law, p.18 (4TH ed., Routeledge, New York,NY 10016, 2008).
29
NKPNKP 2040, NO. 12, P. 901
30
NKP 2074, N0, 1. P. 162
31
Dine Janet &KoutsiasMarios.(2007).Company Law, (6thed.). London: Palgrave Macmilan. p.2.
32
E.J. Chon & C. Simitis.(1963). "Lifting the veil in the company laws of the European continent."International
and Comparative Law Quarterly, Vol. 12, No. 1, Cambridge University press. p.189. Retrieved from
https://lawdigitalcommons.bc.edu.
shareholder of a company incorporated under this Company Act in respect of its transactions
shall be limited only to the maximum value of shares which he has subscribed or undertaken to
subscribe.33

Perpetual succession
A company is a stable form of business organization. Its life does not depend upon the death,
insolvency or retirement of any or all shareholders or directors. The law creates it and law alone
can dissolve it. Members may come and go but the company can go on forever. A company's life
is determined by a terms of its MOA. Perpetual succession refers to the membership of a
company may keep changing from time to time, but that shall not affect its continuity. The
incorporated company never dies unless it is winding up as per the requirements of law. The
perpetual succession is considered as the ability of a company to maintain its existence by the
succession of new individuals who step into the shoes of those who cease to be members of the
company.34

Separate property
Company as a legal person can enjoy a right to property and entirely distinct from its members,
is capable of owning, enjoying and disposing of property in its own name. The company is the
real person in which all its property is vested and by which it is controlled, managed and
disposed. The property of the company is the joint property of the shareholders. A company's
property is the property of the company as a separate person, not the shareholders. 35 Companies
Act, 2006 (2063)Section 7(2) provides that subject to the Companies Act, like an individual,
acquire, hold, sell, dispose of or otherwise deal with, any moveable or immoveable property.36

Capacity to sued and be sued

The company being a legal person or body corporate can sue and be sued in its own name. All
the legal proceedings against the company are to be brought in its own name. The company may
bring an action against any one which is concerned with the legal rights of a company as separate
legal entity. Section 3 of the Companies Act, incorporates that any company may sue and be also
sued by its own name.37 Section 139 and 140 of Companies Act, 2006 (2063) provide that the
shareholders or other any person may sue or be sued on behalf all interested parties of the
concerned company.38

Common seal
A company being an artificial person is similar to natural person and as such it cannot sign
documents for itself. It acts through natural person who are called its directors. But having a
legal personality, it can be bound by only those documents which bear its signature. Therefore,
the law has provided for the use of the common seal, with the name of the company engraved on
it, as a substitute for its signature. Any document bearing the common seal of the company will

33
Companies Act, 2006 (2063). Section 8.
34
Dr. AwatarNeupane.(2019).Company Law. Kathmandu:Pairavi Book House Pvt. Ltd. p. 41.
35
Derek French. (2018).Mayson,French and Ryan on Company Law, (35thed.). Oxford, UK: Oxford University
Press. p. 105.
36
Companies Act, 2006 (2063). Section 7(1).
37
Companies Act, 2006 (2063).Section 7(3).
38
Companies Act, 2006 (2063). Sections 139 & 140.
be legally binding on the company. These were a few characteristics of a corporation. 39 A
company being an artificial person is similar to natural person and as such it cannot sign
documents for itself. It acts through natural person who are called its directors. But having a
legal personality, it can be bound by only those documents which bear its signature. Therefore,
the law has provided for the use of the common seal, with the name of the company engraved on
it, as a substitute for its signature. Any document bearing the common seal of the company will
be legally binding on the company. These were a few characteristics of a corporation. 40 Section
20(2)(s) of the Companies Act, mentions that the provision of the seal and it is not mandatory to
use a seal for the company. Section 26 of the Companies Act, 2006 (2063) provides that the
company which intends to use a seal in its transactions shall make the in its name in clear legible
letters.41

Transferability of shares
The share is considered as a moveable property of the company and freely transferable. When
the joint stock companies were established in the England, the object was that their shares should
be capable of being easily transferred. Section 42 of the Companies Act, 2006 (2063)
incorporates that the shares held by the shareholders are moveable property and can be
transferred from one person to another in the manner provided by the articles. 42 Although,
Section 10(c) of the Companies Act, 2006 (2063) states that, a private company shall not sell its
shares and debentures publicly.43

Professional management
Company is a voluntary association for the profit and it is administered by its managerial
personnel. Shareholders, Board of Directors and Employees of the company conduct corporate
functions through managerial personnel employed by them.

Termination of existence
Company is a legal person which is created by law and dissolved by law. The existence of the
company is terminated by means of winding up. Sometimes, by reorganizing, reconstruction and
amalgamation process is applied to avoid the winding up. A company is a separate entity in a law
and certain advantages flow from this access to limited liability, separation of ownership from
control, perpetual succession, transferability of shares and raising finance. 44 A Company has its
independent legal personality and artificial person is terminated by applying the certain
procedures of law.

4. Lifting of Corporate Veil

The lifting of Corporate Veil is an exceptional principle of independent legal personality of the
company. A Companies separate personality is ignored if its property, rights or obligations are
treated as the property, rights or obligations of its shareholders. This is called piercing the
corporate veil.45After the incorporation, a company becomes legal person separate and distinct
from its members. It has a corporate personality of its own with rights, duties, and liabilities
39
Dr N.V. Paranjape, (2014) The New Company Law p. 48 (Central Law Agency, Allahabad,6th edn.,
40
Ibid.
41
Companies Act, 2006 (2063). Section 26(1).
42
Companies Act, 2006 (2063). Section 42.
43
Companies Act, 2006 (2063). Section 10(c)
44
Nicholas Bourne, Bourne on Company Law, p. 13 (4th ed., Routledge, New YORk, NY 10016, (2008).
separate from those of its individual members. Thus, a veil of incorporation exists between the
company and its members and due to this a company is not identified with its members. In order
to protect themselves from liabilities of the company, its members often take shelter of the
corporate veil. Sometimes this corporate veil is used as a vehicle of fraud or evasion of tax and
statutory provisions. To prevent unjust and fraudulent acts, it becomes necessary to lift the veil
or disregard the corporate personality to look into the realities behind the legal facade and to hold
the individual members of the company liable for its acts or liabilities. 46

4.1 The lifting of Corporate Veil under Judicial Interpretation47

Determination of Character
The Corporate Veil has been lifted by the courts to determine the enemy character of a company
in a time of war. The court will lift the veil for the purpose of finding out the person who in
reality controls the company's affairs and if the affairs of the company are found to have been
controlled by enemy aliens, it will assume the enemy character.

Determination of residence for tax purposes

The determination of the residence of a company is important for tax purpose also because the
assessment is usually made on the basis of its residential status. A company is usually considered
to be residing at the place where its central management and control is situated. The court may
lift the veil to find out the place where its central management and control is situated and
generally the place will be that where the meetings of the Board of directors are held. For this
purpose, the expression "control and management" means de facto control and management and
the place of the control and management of the affairs of a company is the place where the
meetings of the directors are held.

Fraud and evasion of contractual obligation

The corporate existence cannot be used as vehicles of fraud. Wherever the corporate existence is
used for fraudulent purpose as to defraud creditors or to avoid legal obligation, the courts will lift
the corporate veil to see the realities behind it and strike down the transaction.

Evasion of statutory provision –inference of agency to prevent it

Where a company is acting as agent for its shareholder, the shareholders will be liable for the
acts of the company. It is a question of fact in each case whether the company is acting as an
agent for its shareholders. There may be an Express agreement to this effect or an agreement
may be implied from the circumstances of each particular case. In the case of F.G. Films Ltd.,
Re, An American company financed the production of a film in India in the name of a British
company. The president of the American company held 90 percent of the capital of the British
company. The Board of trade of Great Britain refused to register the film as a British film. Held,
the decision was valid in view of the fact that British company acted merely as he nominee of the
American Company.48

45
Derek French. (2018).Mayson,French and Ryan on Company Law, (35thed.). Oxford, UK: Oxford University
Press. p. 105.
46
R. Judith Priya, S. Susmitha, Subhicksha, B.Thenmozhi, A Descriptive study of the Doctrine of lifting of
corporate veil., 2018, volume, 3 , p. 6-9, retrieved from www.ijarnd.com.
47
Ibid.
48
Ibid.
Trustees
As a general rule, a company does not hold its property on trust for its members or for another
company but in some exceptional cases the court avoided the general rule and held a company
acting as a trustee for its members or another company. Thus, the concept of trust has also been
used by the courts as a device to lift the corporate veil.

4.2 Lifting of Corporate Veil under Statutory Provisions49

Reduction of the number of members
If at any point of time the number of members of company is reduced below the minimum
number as prescribed by company law and the company carries out the business for certain
duration of time provided law then all the members of the company at that point of time will be
held liable for the payment of company’s debts contacted during that time.

Misrepresentation
According to company law if there is a misrepresentation in a prospectus then promoter,
directors and every other person who is authorized to issue such prospectus will incurs the
liability toward those people who have subscribed for share on the faith of the untrue statement.

Mis-description of the name

When any officer of the company signs on the behalf of the company any contract, promissory
note or cheque, then such person is liable to the holder if the name of the company is not
mentioned properly or it is not mentioned at all.

Holding and subsidiary company

A holding company is required to disclose to its members the accounts of its subsidiaries.
Company law provides that every holding company is required to attach to its balance sheet,
copies of the balance sheet, profit, and loss account etc., in respect of each subsidiary company.

5. Conclusion
A company is an artificial juridical person created by law and dissolved by the law. The
company has no strictly technical or legal meaning. The company is a business vehicle implies to
a voluntary association of a group of persons for common objectives. In the legal parlance, a
company is an association of both natural and artificial persons and is incorporated under the
existing law of the country. A company has its own independent existence, it is a distinct legal
person existing independent of its members/shareholders. The term company has been described
in many ways, since a corporate body is the creation of law; it is not a human being or citizen but
it acts through human beings. Hence, The Companies have certain features such as independent
legal personality, limited liability, perpetual succession, separate property, transferable shares,
capacity to sue and be sued, common seal, contractual rights and professional management. So,
corporate personality is one of the characteristic of the company under which company is said to
be a legal or artificial person since it is invisible, intangible, and existing only in the
contemplation of law. It is capable of enjoying rights and being to duties as well.The separate
personality of a company is a statutory privilege and it must be used only for the legitimate
purpose of any businesses.

49
Ibid.
Professionally, Mr. Yam Kumar Yonjan is a practicing Lawyer. He is also a member of
teaching faculty of Nepal Law Campus, Tribhuvan University. He has completed LL.M.
degree from the Nepal Law Campus, Tribhuvan University, specialization in International
Law and Commercial law. Presently, he is doing legal practice in the field of corporate law.
He has also experience of a visiting resource person of different law colleges, governmental
and non-governmental academic and training institutions as well.