In this article, Aarthi S, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on the determination of the enemy character of a Company
One of the fundamental advantages of incorporation is the creation of an artificial person functioning distinctly from that of its constituents. Yet, there is an ever-evolving jurisprudence on situations in which this artificial personality can be forsaken. This article seeks to emphasize on the concepts of separate legal entity and lifting of the corporate veil with special emphasis on the enemy character of a company.
Separate Legal Entity
The separate legal entity of a company is a term used to denote the fact that the identity of a company is distinct from that of the members who constitute it. This is by virtue of the fact that once a company is incorporated, the law imputes a legal fiction upon a company and it attains an artificial personality distinct from that of the ones who constitute it. Therefore, the rights and responsibilities that flow from this are also distinct.
The implications of this was first fully grasped by the courts in United Kingdom in the case of Salomon v. Salomon. Lord Macnaghten rendered that the company is at law a different person from that of its shareholders and is not an agent or trustee of the company. Therefore, the shareholders cannot be held personally liable for the company’s debts.
This principle was first applied in India in the case of In Re Kondoli Tea Co. Ltd. where an exemption from ad valorem duty was claimed for transfer of a tea estate by certain persons to a company in which the same persons were shareholders. This exemption was claimed on the ground that they effectively transferred the same to themselves. The court dismissed the claim on the ground of a company having a separate legal entity. A plethora of other judgements have since reiterated and upheld this position of a separate legal entity.
However, this does not give blanket immunity to the persons acting illegally, fraudulently and the like under the cloak of a company. Courts and legislatures across the world have evolved situations to pierce this corporate veil and impute liability upon persons who run the company but hide behind its façade as discussed in detail in the section below.
Lifting of Corporate Veil
The most fundamental advantage of incorporation is that it creates a separate legal entity. A company being an artificial creation of the law is in reality run by and under the control of some individuals. Although a corporation is a legal fiction forming a distinct entity, in reality, it is an association of persons who are the real beneficiaries. Therefore, the veil of a corporation can be used by their underlying beneficiaries to commit frauds or such other illegal acts keeping their self-interest in mind as opposed to the collective and common interest of the company. In certain circumstances of this nature, where it would be illogical to impute liability upon the company, an artificial entity, the corporate veil is lifted to identify the persons committing such acts who use the corporate entity as a cloak. These identified persons as individuals are imputed with liability. Although courts refrain from interfering with the separate legal entity of a company, it may often be in the interest of the company or in the interest of the public to identify the persons who misuse this corporate entity.
The Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. noted that although a company is a separate legal entity distinct from that of its members, the corporate veil may be lifted and the corporate personality may be ignored. The individual persons are to be recognized for who they are in exceptional circumstances. It may be lifted where the statute itself contemplates it or in other circumstances such as evasion of tax, fraud, improper conduct and the like. The Apex Court also opined that it is not desirable to enumerate class or classes of companies where lifting of the veil is permissible as it must depend on several factors such as the statute, the object sought to be achieved, conduct, an involvement of public interest, the effect on parties etc.
The Supreme Court in State of U.P. v. Renusgar Power Co. noted that the concept of lifting of the veil is a changing concept and is becoming more and more transparent in modern jurisprudence. In the expanding horizon of modern jurisprudence, lifting of corporate veil is permissible, its frontiers are unlimited and it primarily depends on the facts and circumstances of each situation.
On this pretext, lifting of the corporate veil can be brought under 2 heads, namely: under statutory provisions or under judicial interpretations. The lifting of the corporate veil of a company to determine its enemy character falls within the latter i.e., it is a result of judicial interpretation.
Enemy Character of a Corporation
It is logical to infer that a company being a result of a legal fiction and having an artificial entity cannot be an enemy or a friend. Therefore, at the time of war, it becomes essential to lift the corporate veil and identify whether the persons behind the veil – who run the company – are enemies or friends of that nation.
An important landmark judgement in this context is that of Daimler Company Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd. In this case, the Respondent company was incorporated in London, United Kingdom for the sale of tyres which were manufactured in Germany by a German company. All shares except one of the Respondent company were held by German residents and all the shareholders were German as well. A suit was filed to recover a trade debt when Germany and England were at war (First World War) in 1914.
The Court of Appeal upheld the separate legal entity of a company and held that it is a legal body clothed with the form prescribed by the Legislature and not a mere mask or cloak to conceal the identity of persons forming it. The character of the company would not change due to the outbreak of war.
The House of Lords reversed the above decision and held that the analogy is to be found in the “control” of the company and it is not a necessary implication of a separate legal entity status to say that owing to the corporate veil, the character of the persons constituting the corporation would be irrelevant. It was further held that, since the acts of the company are through its directors, managers, secretary and the like, their character becomes important to determine that of the company’s.
Nationality of company vis-à-vis its enemy character
At this juncture, it becomes necessary to examine the nationality of a corporation and the role that it plays in determining the rights, duties and character of a company.
As stated above, upon incorporation, a company is a legal entity on its own, distinct from that of the ones who constitute it. According to the Halsbury’s Laws of England, nationality and domicile of a company is the place of its registration. A company though incorporated in one nation may still be regarded as having enemy character if the de facto control of its affairs are in an enemy country or are under the control of enemies.
In the case of State Trading Corporation of India Ltd. and Ors. v. The Commercial Tax Officer, Vishakapatnam and Ors., the Supreme Court held that the persons operating a company are regarded as its brain and where the brain functions the corporation is said to function. The rights of a corporation during the time of peace include all such as is permitted by the municipal law such as owning of property, conducting business and the like and this extends to foreign corporations as well based on comity of nations. At the time of war, law of nationality becomes pertinent to determine the enemy character of the company and is not a law that recognizes nationality in a political or municipal sense.
The Daimler case also clearly iterated that setting aside the question of residence of a company, it is not right to say that the legal entity of a company can be completely identified with that of its shareholders and their nationality does not become its nationality.
It is also important to note that a company incorporated in a nation does not lose its nationality merely because it is under enemy control. In so far as nationality is supplied to a juristic person, it is determined in an inalienable manner by laws of the country from which its personality is derived.
Therefore, at the time of war, nationality does not serve as a criteria to determine the enemy character of a company. This veil of nationality is pierced to determine that of the ones in de facto control of its affairs.
Determination of enemy character of a company is judicially evolved jurisprudence on piercing the corporate veil of a company. This is seldom used as it bears relevance only in the context of war. The same analogy used for determining the enemy character of the company is used for determining malice of a corporation in pursuing malicious prosecution where the malice of a company is determined by the actions and malice of the persons controlling the company.