Question

The concept of separate corporate entity is the cardinal principle of company law. Elucidate the statement citing relevant case laws​

Answer 1

Explanation:

Background

The word company has no technical meaning attached to it. It simply means a group of individuals who have come together for a common goal. The individuals may associate themselves either for an economic or for a non-economic cause. Chief Justice Marshall defines company to mean that a corporation is an artificial being, which is invisible, intangible, existing only in contemplation of law.[1] The words ‘intangible and invisible’ hold significance as they imply that a company is not a natural person, it has no existence of its own, the management is conferred with the power under the law to work, make a company, responsible for decision making and functioning of the company.

Principle of Separate Legal Entity

Unlike a partnership, a company has a separate legal entity apart from its members. It creates its own space in the eyes of law for determination of its own rights (contractual rights), and is also subjected to duties. A company has the right to sue for any loss it suffers.[2]

The principle of separate legal entity has been traditionally misused by the management of companies to extract money, acquire property and discharge their liability by doing illegal acts. Such managements are aware that, as per the separate legal entity principle, any liability that arises from an act committed under the name of the company would be shifted to the company and that they shall not be liable for any illegal act committed. To fill this loophole, the concept of ‘Piercing of Corporate Veil’ has been introduced. In the case of Solomon v. Solomon Co. ltd.[3], the Hon’ble Court held that firstly – the company has a separate legal entity than its members; secondly – the principle of piercing of corporate veil may be utilized for looking at who the actual decision makers of the company are.

Answer 2

A basic concept of corporate law applied globally is the separate entity principle.

• Under this concept, a corporation is regarded as a separate body from its members. The independent rule of entity pervades corporate law and has had far reaching consequences for corporate theoretical and functional law.
• The concept of a separate body was demonstrated in the R v Arnaud case, where the registry authority declined to register a ship as foreigners were the owners of the ship. The ship was owned by a chartered British company whose representatives included foreigners.
• On the basis that the company was the ship's owner, rather than the company's members, the court ordered the registering authority to register the ship.
• Also, in Salomon v Salomon & Co Ltd, shoe business the unanimous decision of the House of Lords is regarded as a milestone in corporation law, stating a company is a separate body with a distinct legal identity.