Reference no: EM131681490

ASSIGNMENT QUESTION: "Companies are said to be an artificial legal person."

A company becomes a legal person on incorporation, i.e., it has a legal entity of its own, it is empowered to hold properties in its name and it can sue others. Also, the company is referred to as an artificial person which means the company is intangible and invisible and exists only in consideration of law (Anon, 2017).However a company is not a natural person, i.e. it does not have mind, it does not have body of its own, it does not have eyes to see, it does not have ears to hear, it does not have hands to sign and it does not have brain to think and come at the decisions and hence, a corporation cannot function by its own and as a result of this, it has to be dependent on some human agency to act in its name. The 2 human agencies, with the help of which a company acts, are the board of directors and members of the company. In other manner, the decisions taking power of a company is vested in its two organs, viz. the BODs and the members. The board is the managerial body and hence it is entrusted with the whole management of the corporation. It is constituted by the members. Directors are accountable to the members in as much as members are empowered to appoint them and remove them. It is obligation on the part of directors to the members to apply care, skill and diligence to discharge their functions. The directors must act as a body without inappropriate elimination of any of the directors (Courtney et al., 2014).

According to the definition given by Chief Justice Marshall, "A corporation is an artificial person which is intangible, invisible and exists only in contemplation of the law. The creditors of the corporation can recuperate their dues only from the corporation and the belongings of the corporation. They cannot file a suit against individual members. In the same way, the corporation is not accountable for the personal debts of its members in any manner. The assets of the corporation should be utilized for the advantage of the corporation but not for individual advantage of the shareholders. Based on the same argument, any ownership rights in the company's property or on its winding up cannot be alleged by a member. The members of the corporation can come into contracts with the corporation in the same way as any other individual can at the same time. The Income Tax Act also recognizes Separate legal entity of the corporation. The shareholders have to pay income-tax on their income in the form of dividend as and when it is necessitated by a corporation for paying Income-tax on its earnings and when the earnings as aforesaid are dispersed to shareholders in the form of dividends. This lays down that a corporation and its shareholders are two separate entities. The well-known case of Salomon v Salomon & Co Ltd emphasized the separate legal entity concept. The details of the said case are as below:

Mr. Salomon who is the owner of an awfully flourishing shoe business, sold his business for the consideration of $ 39,000 to Salomon and Co Ltd. This company had the following members - Salomon himself, his wife, his four sons and his daughter. The purchase consideration was discharged by the company by allotting 20,000 shares and $ 10,000 debentures and the remaining consideration in cash to Mr. Salomon. The debentures carried a floating charge on the property of the company. The remaining 6 family members subscribed one share of $ 1 each. Salomon and his 2 sons became the directors of this company and became managing Director.

The company went into liquidation after a short period. The statement of affairs' was as follows: Assets:$ 6000, liabilities; Salomon as debenture (6) holder $ 10,000 and unsecured creditors $ 7,000. Accordingly its assets were short of its liabilities by $11,000.

The unsecured creditors made a claim of precedence over the debenture holder on the argument that company and Salomon was the same person. Nevertheless the House of Lords came at the conclusion that the subsistence of a company is somewhat independent and distinct from its members and that the assets of the company should be used in disbursement of the debentures foremost in precedence to unsecured creditors. Salomon's case recognized ahead of doubt that in law even if the individual hold all the shares of the company, an incorporated company is an entity which is distinct from its members. There is no distinction in principle between a company comprising of only two shareholders and a company comprising of two hundred members. In every case the corporation is a separate legal entity. The principle recognized in Salomon's case as well been applied in the following: Lee Vs Lee's Air farming Ltd A.C. 12 Of the 3000 shares in Lees Air Forming Ltd., Lee held 2999 shares. He designated himself as the managing Director and too became Chief Pilot of the company on remuneration. He died in an air crash whilst functioning for the company. His wife was given compensation for the death of her husband in the course of service. Court concluded that Lee was a separate person from the corporation which he formulated, and compensation was payable to the widow. As a result, the principal of corporate personality has enabled Lee to be the master and servant at the same time.

It was concluded by Calcutta High Court in the case of Re Kandoi Tea Co Ltd that a corporation was a separate person which was separate body on the whole from its Shareholders. In the case of Re. Sheffield etc., it has been decided that a company is a legal person, like an individual but with no material existence. The feature of distinct corporate personality of a corporation was as well emphasized by Chief Justice Marshall of USA when he gave a definition of a company "as a person, invisible, artificial, intangible and exists only in the eyes of the law. Being the only formation of law, it possesses simply those properties which the charter of its formation vests upon it either explicitly or as catastrophe to its very existence" (Legal Essays and Reflections,2017).

The fundamental hypothesis behind all business organizations is that a business (generally called a firm in economics) can function with added proficiency, and thus attain a superior profit by combining certain functions within a sole entity. Governments seek to assist investment in lucrative operations by formulating rules that protect investors to be individually accountable for the debts incurred by that business, either because of unauthorized acts or through mismanagement devoted by the business.

To give effect to the pluralist view, the case to reformulate director's duties is as below:

The existing corporate law may reinforce an atmosphere in which relationships of trust are not easy to maintain to make shareholder's interests eventually overriding. In view of the fact that the duty of directors is eventually to advance the shareholder's interests, parties who might formulate firm-specific investments in a company will be unenthusiastic to do so, because of the intensity of risk they are exposed. Such investments are risky as these cannot be shifted to other uses without considerable loss of value as well as these are intricate to protect contractually because of their long-term nature and the troubles involved in projecting and providing for potential contingencies. The pluralist outlook emphasized that existing law fails to provide for these considerations, because such firm-specific investments are most excellent treated as assets of the company as a wealth creating entity which is distinct from its members. Its directors should be responsible for the stewardship of the assets of the company and the maximization of their worth for the advantage of all contributors and not simply its shareholders. Merely against the background of a administration which allows or requires directors to treat non-member participants in that way can they be anticipated to take on the essential commitments.

There are numerous possible counter-arguments to such pluralist opinions. First, it may be argued that in practice a broad progressed shareholder value methodology would give a sufficient environment for the improvement of such relationships. It is unclear that the trade-offs of shareholder's benefit against those of other participants which the pluralist approach envisages would be indispensable in practice. Second, it is not obvious that the usual procedure of bargaining between suppliers and consumers of factors of production is incompetent of generating suitable safeguards of incentives for all sides. Third, it may be argued that if there are deficiencies in this area they are best made good by changes in other areas of public policy and law, or one best practice, rather by making changes in corporate law, that might not have predictable and destructive effects (Blumberg,1993). Examples include - in the service field, the potential include improved levels of consultation and information with supply of information relating to training policies to acknowledged unions and discussion in the workplace, conceivably based on partnership agreements. Such development functions within the present company law systems of control, responsibility and accountability. So they do not require company law reform.

Attachment:- Assignment File.rar