Once a Company is incorporated under the Law, it is said to have an independent Corporate Existence. What is the meaning of this phrase Independent Corporate Existence of a Company.
The phrase Independent Corporate Existence of the Company means that the Company will have a distinct legal identity from that of its shareholders. It will not be having the same identity as that of its shareholders and a new body in law in the eyes of law is created. A company, once incorporated, is not like a partnership firm wherein the partnership firm is not separate from its members. A company on the other hand is having a distinct legal persona that is existing independent of its members. With other kinds of enterprises like Partnership firm and Proprietorship firm, the entity isn’t a different person in the eyes of law and the partners / members of such entity are the entity and they are not seperate and different from the entity. Whereas, the same is not the case with a Company.
As soon as company has been incorporated under the act, a company is vested with a corporate personality, which is different from that of its members who are a part of it. Such incorporated companies are independent of its members and have a perpetual succession and a common seal. All the members who have so become a part of the Company and have signed its Memorandum of Association are a part of the Body Corporate that has been defined under the Act. Once a Company has been incorporated it can start doing business in its own name and does not need to be dependent on the member / shareholder of the company. It can take its own decisions and each and every asset or liability will be that of a company. Whatever is purchased by the Company, will remain of the Company and so is with the liabilities of the Company. Having that said, a Company will not cease to exist like a partnership firm or a proprietorship concern with the death of one of its member / sole proprietor. It will continue until and unless it is liquidated under the law. This is one of the most basic reason for forming a company. A shareholder of a company is not personally liable for any of the liabilities of the Company, even though he may be the majority shareholder of such Company. The liabilities are of the Company itself and have to be paid off by the Company itself. Incorporation of a Company can be correlated to the birth of a human being as a New Legal Person is born.
The House of Lords in the case of Salomon v. Salomon & Co. Ltd., 1897 AC 22: (1895-99) All ER Rep 33 (HL), had decided a law point regarding the Independent Corporate Existence of a Company and the separate entity principle before them. Mr. Salomon was a boot and shoe manufacturer. He had incorporated a Company having his family members as the only shareholders. As payment for transfer of the business, he took the maximum number of shares for himself and gave one each to his family members and also took debentures from the Company. The Company soon went into liquidation after which the Company’s unsecured creditors approached the Court claiming that although the Company was incorporated under the Act, it was nothing but Mr. Salomon itself running the business in a different name. They contended that the majority shareholder of the Company was Mr. Salomon and the rest of the shareholders were his family members. Therefore, the Company does not have any independent legal existence in the eyes of law. Negativiting their contention, the House of Lords observed that the Company was incorporated under the law and therefore had a different legal existence and was a different legal person. The court observed,
“When the memorandum is duly signed and registered, though there be only seven shares taken, the subscribers are a body corporate capable forthwith of exercising all the functions of an incorporated company. It is difficult to understand how a body corporate thus created by statute can lose its individuality by issuing the bulk of its capital to one person. The company is at law a different person altogether from its subscribers of the memorandum; and though it may be that after incorporation the business is precisely the same as before the same persons are managers,and the same hands receive the profits, the company is not in law their agent or trustee. The statute enacts nothing as to the extent or degree of interest which may be held by each of the seven, or as to the proportion of interest or influence possessed by one or majority of the shareholders over others. There is nothing in the Act requiring that the subscribers to the memorandum should be independent or unconnected, or that they or any of them should take a substantial interest in the undertaking, or that they should have a mind or will of their own, or that there should be anything like a balance of power in the constitution of the Company.”
A similar case (Kondoli Tea Co. Ltd., re, ILR (1886) 13 Cal 43, was before the Calcutta High Court wherein a few persons had transferred their tea estates to a company that they had incorporated and claimed exemption from the taxes for such transfer as they claimed to be the shareholders of the company. The High Court observed that the Company was a separate person and a distinct legal entity different from the persons who had transferred the land and accordingly the Hon’ble High Court held that they were bound to pay the taxes on such transfer as it would be considered that the lands have been transferred from one person to a different person.
Therefore, once a Company is incorporated under the law, as per Section 9 of the Companies Act, 2013, the Company becomes a seperate legal entity and has an Independent Corporate Existence that is not dependent on its members and is different from that of its members.
The Hon’ble Supreme Court of India (in the case of Vodafone International Holdings NB v. Union of India, (2012) 6 SCC 613) has traced the foundation of the concept of separate entity principle from the legal fiction propounded by Pope Innocent IV wherein he had said that corporate bodies could not be excommunicated because they existed only in abstract.
