JURISPRUDENTIAL ANALYSIS OF SECTION 8 COMPANIES
Author: Aba,
3rd Year BBA LLB,
Christ (Deemed To Be) University,
Bangalore.
Introduction
‘Company’ is a term used to denote an association of persons for some common object or objects. The purposes for which people may associate are multifarious and include economic as well as non-economic objectives.[1] In common parlance, the word ‘company’ may be described to mean a voluntary association of persons who have come together for carrying on some business and sharing the profits there from. The Companies Act, 2013 even allows for a company to be formed and registered for the promotion of commerce, art, science, sports, religion or charity, i.e., for non-economic purposes under Section 8.[2] The Act itself, does not however, define a company in terms of its features. It merely defines a company to mean a company incorporated under this Act or under any previous company law.[3] So, in order to understand the true meaning of the term, we need to refer to other authorities. Let us limit this study to understanding the meaning from two definitions given by Lord Justice Lindley and Professor Haney.
Lord Justice Lindley defines a company as: “A company is an association of many persons who contribute money or monies worth to a common stock and employed in some trade or business and who share the profit and loss arising there from. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute to it or to whom it pertains are members. The proportion of capital to which each member is entitled is his share. The shares are always transferable although the right to transfer is often more or less restricted.”
A not-for profit organisation may have some similarities with a company, especially the fact that it is a common organisation that has been formed explicitly for a common purpose in order to achieve a common good. One of the major differences between a for-profit company and a not-for-profit company is inherently in the etymology, i.e. the concept of profit.
A company that has been formed under Section 8 of the Companies Act, 2013 is one that works solely for the purposes of charity. In that instance that there are profits that are generated in the normal functioning of such company, it is reinvested in the company itself to further the charitable cause that it stands for. Unlike a profit-oriented company, the shareholders of such Section 8 Company hold to gain none of the profits that are manufactured by the Company.
The Concept of Separate Legal Entity:
Unlike a Partnership
or a Trust, a company is held to be different from the persons who constitute the said company. It is by this virtue that a company can enjoy rights and duties that are not the same as or enjoyed by the members of the said company. As Lord Macnaughten puts it, ―the company is at law a different person altogether from the subscribers……; and though it may be that after incorporation the business is precisely the same as it was before and the same persons are managers and the same hands receive the proceeds, the company is not in law, the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act. i.e., Solomon‘s case.[4]
or a Trust, a company is held to be different from the persons who constitute the said company. It is by this virtue that a company can enjoy rights and duties that are not the same as or enjoyed by the members of the said company. As Lord Macnaughten puts it, ―the company is at law a different person altogether from the subscribers……; and though it may be that after incorporation the business is precisely the same as it was before and the same persons are managers and the same hands receive the proceeds, the company is not in law, the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act. i.e., Solomon‘s case.[4]
The first case on the subject even before the famous Solomon‘s case was that of Kondoli Tea Co. Ltd., In this case certain persons transferred a tea estate to a company and claimed exemption from ad valorem duty on the ground that they themselves were the shareholders in the company and, therefore, it was nothing but a transfer from them in one to themselves under another name. Rejecting this, the Calcutta High Court observed ― “The Company was a separate person; a separate body altogether from the shareholders and the transfer was as much conveyance, a transfer of the property, as if the shareholders had been totally different persons.”[5] Even where a single shareholder virtually holds the entire share capital, a company is to be differentiated from such a shareholder.[6]
One of the major contentions that is herein raised is the fact that in companies that are not-for profit, there is difficulty in the distinction of the legal entity of the company itself and the management of the company itself. Not-for profit companies usually use many a radical means to obtain a standing in society, since it is important to gain widespread recognition in the field they work in, to further the cause that such said companies work towards. In doing so, these organisations sometimes perform actions that may not be acceptable in societies. One of the most recent situations this was noticed in, was in the case of the protest Sterlite Copper violating norms of the Tamil Nadu Pollution Control board. There were violent protests by NGOs, demanding that the plant be shut down for good.[7] It needs to be noted that the company in these said instances cannot be viewed as a separate legal entity. While such action on behalf of a not-for profit company may be viewed as an action on the behalf of the company in order to further the day-to-day business of the company, the damage caused by such action in society may not be attributable directly to the company itself.
Furthermore, in a company, the business is dealt with in a normal course, i.e. there can be enough pre-emption to decipher the way the company makes decisions in a normal situation, and the reaction of the company to business changes. However, when being postured as one that stands for social causes, the way a company reacts is extremely individualistic to the situation that has been presented to the company at that specific instance. Even though the common purpose of the company might be the same, i.e. promotion of arts, there is no specific means or set manner in which the company carries on its ‘business’.
This is more so because a Charitable Company has an object. And it is in this instance that there needs to be a clear distinction between an object and a business. An object is just a goal that the company seeks to achieve through the activities that it undertakes. Business is however a conscious for-profit transaction that the company undertakes to achieve its goal. Therefore, in a Section 8 Company there cannot be noted a separate means of achieving a said goal; it is reactionary, and how the Section 8 Company reacts to different situations is based on the perception of the said situation by the management of the Company, and not the Company itself.
Limited Liability:
One of the principal advantages of trading through the medium of a limited company is that the members of the company are only liable to contribute towards payment of its debt to a limited extent. If the company is limited by shares, the shareholder‘s liability to contribute is measured by the nominal value of the shares he holds, so that once he or someone who held the shares previously has paid the nominal value plus any premium agreed on when the shares were issued, he is no longer liable to contribute anything further.[8]
One of the major considerations in this section is the fact that a not-for profit company seeks to achieve a goal through the sight of the management of the company. Therefore, the Company in this instance would function as a tool for the management to achieve what the management and the shareholders of the company think is necessary at that point to achieve. The decision of the company can never be different from what the top management of the company feels. In the specific instance that there is a disagreement between both the aforementioned antics, then the decision of the management would triumph.
The basis for limited liability in a company is the fact that it is an independent decision maker. However, when this very primary facet is taken away from the company, it cannot be held to be in limited liability, and the personal liability of the owner-management is what should be held to be valid. This is another major contention as to why there can never be a corporate veil in a Section 8 not-for profit company.
Piercing The Corporate Veil:
The theory of the corporate veil dictates that the company exists as a separate legal entity from the members of the company. This in itself provides to be one of the chief advantages of incorporation. In reality however, the business of the artificial person is always carried on by, and for the benefit of, some individuals. It goes on to mean that some human beings are most often the real beneficiaries of the corporate advantages- for while, by fiction of law, a corporation is a distinct entity yet in reality, it is an association of persons who are in fact the beneficiaries of the corporate property[9]. This was held in the case of Gallaghar v. Germania Brewing Company.[10]It may, therefore, happen that all the corporate personality of the company is used to commit frauds or improper or illegal acts. Since an artificial person is not capable of doing anything illegal or fraudulent, the facade of corporate personality might have to be removed to identify the persons who are really guilty. This is known as lifting the corporate veil. Although, in general, the courts do not interfere and essentially go by the principle of separate entity as laid down in the Solomon‘s case and endorsed in many others, it may be in the interest of the members in general or in public interest to identify and punish the persons who misuse the medium of corporate personality.
While it is firmly established ever since in Solomon V. Solomon &Co. Ltd.,[11] that a company is an independent and legal personality distinct from the individuals who are its members, it has since been held that the corporate veil may be lifted, the corporate personality may be ignored and the individual members recognised for who they are in certain exceptional circumstances. The veil of corporate personality, even though not lifted sometimes, is becoming more and more transparent in modern jurisprudence. It is high time to reiterate that, in the expanding horizon of modern jurisprudence, lifting of the corporate veil is permissible, its frontiers are unlimited, but it must depend primarily on the realities of the situation.[12]
In the case of Section 8 Companies, there is no distinction that can be drawn between the management and the members, and as such the question begets whether the corporate veil theory hold true. The extent to which the separateness of the “corporation” and its members can be drawn is very little, and it is to be considered in this instance that in section 8 companies, the corporation is used as a tool to further the goals of the individuals behind it and the principle that no corporate action can be viewed as that of the members becomes obsolete. Therefore, it stands to read that even without piercing the corporate veil for a Section 8 company, it may be realised that the actions of the corporate and that of the members are indistinguishable.
Particularly, non-for-profit organizations included under Section 8 of the Act have goals that are synonymous with those of its members, or directors. What the corporation aspires to do or achieve through its singular personality is merely the furtherance of the goals that the members behind the veil of the company aspire to achieve.
Further, the theory of lifting the corporate veil need be applied only in certain extenuating situations, such as to determine the fraudulent nature of the company or to protect the revenue of the company. For the not-for-profit company, very rarely is there a need to lift or pierce through the corporate veil to determine such circumstances.
As was postulated in the case of K.T. Doctor v. Commissioner of Income Tax[13], the corporate veil between personality of the non-governmental “corporation” under the ambit of companies incorporated under Section 8 and the personality of the members who are part of it can be drawn only to the extend wherein the actions of the members reflect the ideas enshrined by the corporation, and vice versa. A distinction, or separateness, further than this synonymous existence cannot be drawn lest there be conflicts in the functionality of the non-for-profit organization.
Conclusion
Thus, in inferring that the principle of the corporate veil, and the piercing of the corporate veil of companies is not applicable and is redundant to Section 8 ‘non-for-profit organisations’, there is a conclusion drawn that such non-for-profit organisations cease to fall under the common ambit of ‘companies’ under the section. The concept of lifting the corporate veil is one which is used to deny the members of a company such advantages of incorporating. Usually, this is due to reasons that leave the shareholders or other stakeholders, such as society, worse of due to actions that may be illegal or fraudulent in nature. The Section 8 not-for-profit company, however, reflects the actions and goals of the members and therefore, the complex framework that purports the principle of the corporate veil ceases to have any applicability in their instances.
[1] Stanley, Re [1906] 1 Ch. 131.
[2] § 8, The Companies Ac
t, 2013.
t, 2013.
[3] § 2(20), The Companies Act, 2013.
[4] Solomon v. Solomon Co. Ltd. (1897) A.C. 22.
[5] Kondoli Tea Co. Ltd., Re ILR [1886].
[6] Supra note at 10.
[7] https://www.thehindubusinessline.com/news/ngos-have-an-agenda-to-shut-down-the-plant/article23993777.ece
[8] Id. at 11.
[9]Gallaghar v. Germania Brewing Company, [1893] 53 MINN. 214.
[10] Id.
[11] Supra note at 4
[12] State of U.P. v. Renusagar Power Co. [1991] 70 Comp. Cas. 127.
[13] K.T. Doctor v. Commissioner of Income Tax, (1980) 124 ITR 501 (Gujj)
