CORPORATE VEIL OR SEPARATE LEGAL ENTITY

What is Company?

Company is an artificial person with entity separate from its members having perpetual succession and common seal with transferability of shares and capable of being sued and sue. It is a form of business where people came together to earn profit and money. Main objective is to earn profit.
Company is incorporated under Companies Act, 2013 and it is defined under section 2(20) of the said act. There are different types of companies exist in India.

Characteristics of a Company

1. Artificial Person : company is unlike natural person as it is created by law.
2. Liability of Members : the liability is limited of its members to the extent of shares subscribed by them.
3. Transferability of Shares: the shares of company can be transfer to anyone who wants to buy it.
4. Perpetual Succession : the company never dies, it continues to exist. It’s members dies but not the company.
5. Common Seal : company has their own common seal or official signature for identification of itself.
6. Capacity to sue or be sued : company can be sued or sue by the third party due to breach of contract between them.
7. Separate Legal Entity : company is different from its members.

SEPARATE LEGAL ENTITY

A separate legal entity is a “legal person” i.e., person recognised by law. Separate from persons who govern and/or own the company, the entity has its legal rights and duties. If a business is a separate legal entity, it means it has some of the same rights in law as a person. It is, for example, able to enter contracts, sue and be sued, and own property. A sole trader or partnership does not have a separate legal entity.

Basically, an SLE means that if someone takes legal action against your business, your personal finances are separate and safe from the legal suit. And, any investors, stakeholders, shareholders, and partners are also personally protected.

Benefits of being a separate legal entity

1. Enter into legal contract as a business
2. The business can own the property
3. Can take legal action against another individual or business

Importance of Separate legal entity

1. Rights: Although SLE is not necessary for all business types, an individual holding such status can keep property rights and fight legal prosecutions. 
2. Legal Framework: In the legal framework, companies act as separate entities. Moreover, business owners are liable to pay taxes only on their salaries, bonuses, and dividends. However, corporations pay corporate taxes differently from individual taxation. This helps remove instances of double taxation.
3. Exemption: A separate legal entity is exempt from dealing with annual filings, shareholder meetings and regular maintenance. Also, SLEs are not responsible for the company’s defaulted payments. The company is thereby not free to freeze personal assets to cover its liabilities.   
4. Operation: An SLE status helps maintain consistency and creates an identifiable persona for the organisation. Thus, business enterprises can continue operating despite the death or removal of the owner. Only a legal procedure can negate that status. 

What isn’t a separate legal entity?

1. a trade mark: trade marks are personal property owned by a legal entity, whether it’s an individual, a company or other form of legal entity
2. a domain name: a domain name is registered in the name of a legal entity. The legal entity is entitled to use it does not own it. The legal entity rents it from the relevant domain name registrar. 
3. a brand or trading name: these are in essence aliases for a legal entity. Like trade marks, the only true reference to a company for instance includes the use of the suffix with the company name. 
4. a group of companies: each company within the group is a legal entity. Just because there is a collection of companies with subsidiaries and parent companies does not mean that they have one single legal existence. They are all separate legal persons.
5. a business: “a business” could be:
   – a number of legal entities trading as a single business,
   – a single legal entity trading by itself without cooperation of other legal entities.
   It depends upon what is meant by use of the term “business”.

RELEVANT CASE LAWS

Salomon v. Salomon & Co., Ltd.(1897) AC 22 (HL)

Facts: There was a man Aron Salomon who run his boots. There are 7 subscribers to the business, i.e, being the appellant, his wife , daughter and 4 sons. Appellant himself hold 20001 out of 20007 shares and the left persons hold one share each. The business had problems almost immediately, and a year later, the holder of the debentures (Salomon having sold his shares to Salomon and Co. Ltd.) hired a receiver, and the business entered liquidation. At the time of liquidation, the value of the assets was divided as follows: liabilities received £6,000, debentures received £10,000, and unsecured obligations received £7,000. Nothing would be left over for the unsecured creditors once the debenture holders had been paid. As a result, the liquidator filed a lawsuit against Salomon, holding him responsible for covering the company’s trade debts.
Issue: Whether Salomon & Co. Ltd. indeed existed as a company?
Whether Salomon was accountable for the business’s debts?
Judgement: The Act stated that any seven or more people who are connected for a legitimate purpose may create a company with or without limited liability by signing their names to a memorandum of association and otherwise complying with the Act’s registration requirements. Additionally, the Act stated that “no subscriber shall take less than one share.” There was no question that seven genuine living people owned the company’s shares. The court determined that the firm had been legitimately created and was an actual corporation (company) since it complied with the Act’s criteria. Rejecting the contention of the Liquidator that all the shares were bought by Salomon and his family members and that the company was nothing but one man show, House of Lords held that the provisions of the Act did not require that the persons subscribing shall not be related to each other or that holding of a single share shall not afford a sufficient qualification for membership. The company does not lose its identity if the bulk of its capital is held by one person. The company at law is altogether different person from its subscribers. The House of Lords further stated that the Act said nothing about the subscribers being independent or that they should take a substantial interest in the undertaking, or that they should have a mind and will of their own.
Court held that when a company is incorporated, it becomes a separate legal entity and the owner is the first one to receive the debt because he is a secured creditor and then unsecured creditor will be paid.

Lee v. Lee’s Air Farming Ltd.[1960] 3 All ER 420

Facts: Mr. Lee was director and shareholder of Lee’s Farming ltd., a New Zealand-based company. He held 2999 shares of the company and the remaining one share was held by his wife, Mrs. Lee, the Appellant. This company engaged in Aerial Topdressing. Mr. Lee died while piloting the aircraft. The Company had been insured under the New Zealand Workers’ Compensation Act, 1923 for compensation in case of any personal injury.
Mrs. Lee claims compensation under the act. This case was disputed in the Court of appeal of New Zealand, which refused to provide compensation to the appellant due to the fact that Lee was the owner of all except one share of the company and hence could not be treated as a worker.
Issue: Whether Lee and the company would be treated as separate entities?
Whether his widow is entitled to get compensation under the Act of 1923?
Judgement: After the ruling of Court of appeal, this case was then appealed in Privy council of New Zealand, it was said that company is a separate legal entity and it can enter into a contract with its own members.
Court also Referred Salomon v. Salomon & Co., Ltd.(1897) AC 22 (HL) case and held that Mr. Lee is different from the company. Mr. Lee was the employee of the company at the time of his death and on the demise of him, his wife is entitled to claim compensation. The relation between him and the company was of master and servant.
Lee was able to serve as both the master and the servant simultaneously and still got the rewards of both because of the corporate personality concept.
The Court additionally ruled that a shareholder of a corporation may enter into a contract with that firm. A member and a business can engage in legal service contracts since they both function as independent legal entities.