Principle of Separate Legal Entity of Companies in Bangladesh
by Miss Anika Mardiah Chowdhury
The principle of a separate legal entity of a company was recognised in the case of Salomon v. Salomon and Co. Ltd (1897) A.C 22, which stated that a company has a separate existence from its members. Thus, this concept protects the shareholders from being personally liable for any wrong or obligations of the company.
Also, the Supreme Court in the case of Tata Engineering Locomotive Co. Ltd. v. State of Bihar and others, held that a corporation is a natural person and has its own existence. However, it is not always that the court is bound to take the company as a separate legal entity.
Meaning of a corporate veil: a company is a legal person distinct from its members or shareholders; this concept is the veil of incorporation. The court is usually not willing to lift this veil to see who is under control. But on some occasions, the court will disregard the concept of corporate entity and below are some of the exceptions:
- Under Express Statutory Provisions
- Under Judicial Interpretation
Under the Statutory Provisions, the court will lift the corporate veil in the following circumstances:
First, when the number of members becomes less than the required minimum fixed by the companies Act 1994; if the company runs its business for more than six months than the company shall be liable for all debts contracted within those six months. Thus, under section 222 of the companies Act it ensures the right of creditors seeing the number of members by lifting the corporate veil.
Second, as per section 259 of the companies Act if in the event of winding up of company it appears that the business was carried out for fraudulent purposes then the court will lift the veil for a public purpose and bring out the real culprit who controlled the business fraudulently.
Third, section 225 of the companies Act 1994 provides the rule for authentication of documents, and in any types of transactions, the name of the company shall be specifically mentioned. Thus, if any director violates this rule and enters into and contract without mentioning the name then on the application by the aggrieved person, the court will make such person or director liable.
Fourth, the directors of a company are jointly and severely liable to repay the application money with interest if the company fails such to refund of those applications which have not allotted shares within 130days of issue of prospectus than the court shall enter into this fact.
And finally, under section 187 the court may treat the subsidiary company as the only branch of holding company if found any fraud from them. As a general rule, the subsidiary company and the holding company are treated as a separate legal entity.
The following instances under the judicial interpretation and case laws regarding the lifting of the corporate veil:
First, every company must pay taxes as it is the public revenue and if it is found by the court that the company if formed for evading taxes or ignoring tax obligations then the court shall lift the corporate veil without taking into consideration its separate legal entity and hold the persons liable behind this as seen in the case of Sir Dinshaw Maneckjee petit, Ref. A.I.R (1927) Bom. 371.
Second, law does not permit what is against the public interest. This philosophy is also applied in relation to the formation of the company. Where it is found that the machinery of incorporation of a company used to defraud creditors or defeat law than the court will take legal action against such company by ignoring its separate legal entity. This principle has been well-founded in Jones vs. Lipman (1962) All E.R . 342, L, where the court looked into the reality of the situation and ignored the transfer for public policy.
Third, where it is found that the company has incorporated and until then avoided its legal obligations, the court can disregard the legal personality of the company and will proceed as if no company existed by that name.
Fourth, if a person controlling the affairs of a company is an enemy of the country, the court may in its discretion examine the character of the person and may declare the company to be an enemy company. In Daimler Co. Ltd. Vs. Continental Tyre and Rubber Co. Ltd. (1916) 2 A.C.307 the court declared a company an enemy company because the payment of the debt amount to trading with the enemy and therefore the company was not allowed to proceed with the action.
Fifth, the court will lift the corporate veil where it finds that the company is a mere cloak or sham. This precedent can be seen in the case of Gilford Motor Co. Ltd. Vs. Horne (1933) Ch. 935 C. A. Where the former employee agreed with a company not to solicit its customers but went on to opening a company and breaching the agreement as a result. Under the circumstances, the court issued an injunction and restrained them from carrying on the business.
In conclusion, it can be said that the company enjoys its separate legal entity by owning or selling properties. It can also be sued and sue if any criminal offence is committed or made up the by people acting as agents of the company by using the ‘seal of the company’ then the members or shareholders committing fraud or such acts shall be liable under the Companies Act 1994. As such, when a person commits offences in the name of a company, the court, where necessary will uncover the legal personality behind the veil and will make them liable.