A Company is an Artificial Person Created by Law

The concept of a company as an artificial person created by law is fundamental to modern corporate law. It signifies that a company, once incorporated, attains a legal status separate from its shareholders, directors, and members. This legal distinction allows the company to enjoy rights and bear obligations in its name, facilitating commerce, investments, and enterprise at an unprecedented scale. 

What is an Artificial Person?

To comprehend the notion of a company as an artificial person, it is essential first to understand what an artificial person means in legal terms. An artificial person refers to an entity that the law recognises as having legal rights and duties, despite not being a human being. This term contrasts with “natural person,” which denotes a living, breathing individual who can exercise rights and be held accountable for obligations.

An artificial person, like a company, has no physical existence but is deemed by law to perform many of the same functions as a natural person. It can own property, sue and be sued, enter contracts, and take other legal actions necessary for its business. Therefore, a company is considered an artificial person because, although it is a collection of individuals, it exists independently in the eyes of the law.

Legal Origins: A Company is Created by Law

The principle that a company is created by law is rooted in corporate legislation. In most jurisdictions, the formation of a company is a legal process initiated by filing the necessary documents with a governmental body, typically the registrar of companies. Once the company is incorporated, it is recognised as a separate legal entity, distinct from its founders and shareholders.

In Indian law, this principle is outlined in Section 2(20) of the Companies Act, 2013, which defines a company as “a company incorporated under this Act or under any previous company law.” This means that the company comes into existence only after meeting the legal formalities prescribed by the Companies Act, thus transforming it into an artificial person.

The Salomon v. Salomon & Co. Ltd (1897) case is one of the most important legal decisions in corporate law that reinforced the notion that a company is an artificial person separate from its shareholders. This case set a precedent that the debts and liabilities of the company are its own and not those of its shareholders, affirming the separate legal entity doctrine.

Characteristics of a Company as an Artificial Person

Once a company is established, it is endowed with certain characteristics that distinguish company as an artificial person created by law:

Separate Legal Entity

The primary feature of a company being an artificial person is its separate legal existence. A company is considered a legal entity distinct from its shareholders and directors. This separation allows the company to enter into contracts, own property, and carry out business activities independently.

This principle was established in Salomon v. Salomon, where the court ruled that once a company is incorporated, it becomes a separate entity from the individuals who founded it. The company’s legal actions, liabilities, and obligations do not automatically bind its shareholders or directors, offering protection to those individuals.

Perpetual Succession

Another important feature of a company as an artificial person is perpetual succession. The existence of a company is not affected by changes in its membership. The death, bankruptcy, or incapacity of shareholders or directors does not disrupt the company’s existence. The company remains in existence until it is legally wound up or dissolved, ensuring its continuity in business operations.

Limited Liability

A joint stock company is an artificial person created by law that enjoys limited liability protection for its shareholders. This means that the shareholders’ liability is limited to the amount they invested in the company’s shares. If the company incurs debts or liabilities, the personal assets of the shareholders are protected, and they are not responsible for settling the company’s debts beyond the unpaid value of their shares.

Ability to Own Property

Since the company is treated as a separate legal entity, it can own, acquire, and dispose of property in its name. The shareholders or directors do not have any direct rights over the company’s assets. The company’s property is its own and does not belong to its members. This separation of ownership is another important characteristic that supports the company’s legal independence as an artificial person.

Capacity to Sue and Be Sued

As a legal person, a company has the right to initiate legal action and can also be sued in its name. The capacity to sue and be sued allows the company to enforce contracts and protect its legal interests, just like a natural person. This further cements its status as an artificial person, with rights and obligations that it must uphold.

Common Seal

While not as prevalent in modern times due to technological advancements, the common seal was historically used as the official signature of a company. As an artificial person, the company cannot physically sign documents. Therefore, the common seal served as the legal representative of the company’s authorisation on contracts and formal agreements.

Why a Company is Called an Artificial Person

The reason a company is called an artificial person is that, although it is a creation of law, it can carry out many of the same functions as a natural person. The company, through its directors and officers, can perform activities like entering into contracts, buying and selling property, and seeking legal recourse. However, being artificial, the company does not have the physical or biological attributes of a human, such as emotions, intent, or morality. It functions within the boundaries of law and is bound by the rules and regulations that govern corporate entities.

A Joint Stock Company is an Artificial Person

A joint stock company is a specific type of company where the capital is divided into shares that can be freely bought, sold, or transferred. The concept of a joint stock company as an artificial person emphasises that, like any other company, it enjoys the status of a legal person separate from its shareholders. The shareholders own shares in the company, but the company itself owns the assets and liabilities.

In a joint stock company, shareholders can transfer their shares without affecting the company’s legal existence. This structure ensures that the company continues its operations uninterrupted, regardless of changes in its ownership. This aspect of perpetual succession is a vital feature that distinguishes joint stock companies from other forms of business organisations.

Artificial Person and Legal Citizenship

A common question that arises is whether a company is a citizen or is the company a citizen. Legally, the answer is no. While a company is treated as a legal person in many aspects, it is not considered a citizen. Citizenship, as defined in law, applies to natural persons and not artificial entities.

In India, Section 2(1)(f) of the Citizenship Act, 1955 explicitly states that the term “person” does not include companies or associations. Therefore, companies cannot claim the rights that are specifically reserved for citizens, such as voting rights or certain fundamental rights under the Constitution. This was affirmed in State Trading Corporation v. CTO (1963), where the Supreme Court of India held that a company, being an artificial person, cannot be considered a citizen and therefore cannot invoke fundamental rights under Article 19 of the Indian Constitution.

However, companies do have a domicile—the place of incorporation, which serves as their legal residence. The company’s nationality is tied to its place of registration, but it does not enjoy citizenship in the conventional sense.

The Doctrine of Lifting the Corporate Veil

Although a company is generally treated as a separate legal entity, there are instances where courts may “lift” or “pierce” the corporate veil to hold the individuals behind the company accountable for its actions. This happens in cases where the company is used for fraudulent or wrongful purposes.

The doctrine of lifting the corporate veil disregards the separate legal personality of the company to expose the individuals responsible for its illegal activities. Courts may invoke this doctrine to prevent misuse of the company’s legal status as an artificial person. Some of the circumstances where the corporate veil is lifted include:

• Fraudulent practices: When the company is involved in fraud or illegal activities.
• Tax evasion: When the company is used to evade taxes.
• Misrepresentation: When the company misrepresents its true nature or activities.

This doctrine ensures that the artificial person status of the company is not misused to harm others or to evade legal responsibilities.

Laws Governing Companies as Artificial Persons

In India, the Companies Act, 2013 provides the legal framework governing companies as artificial persons. This comprehensive legislation lays down the rules for incorporation, management, and dissolution of companies, ensuring that they operate within a legal structure. Some of the key provisions include:

• Incorporation: The process of legally registering a company, thereby giving it a separate legal personality.
• Management: The appointment of directors and officers to manage the company’s day-to-day operations.
• Liabilities: Regulations concerning the liabilities of the company and its members.
• Winding Up: The legal process by which a company ceases to exist.

In addition to national laws, various countries have their statutes and regulations that outline the rights and obligations of companies. The legal framework helps maintain the balance between the company’s independent legal status and the need for accountability among its shareholders and directors.

Benefits and Challenges of Being an Artificial Person

The status of a company as an artificial person provides significant benefits, including limited liability, perpetual succession, and ease of raising capital. These advantages make the corporate structure highly desirable for businesses that seek to grow and expand. However, this status also comes with challenges, such as the risk of misuse of the corporate entity, necessitating mechanisms like the lifting of the corporate veil to prevent fraud and malpractice.

Furthermore, the rise of multinational corporations has added complexities to corporate law. The global operations of such entities mean that the legal status of artificial persons is now a matter of international law, with companies often being subject to the laws of multiple jurisdictions.

Conclusion

A company is an artificial person created by law and recognised as a separate legal entity from its members. This distinction is central to corporate law, allowing companies to function independently, enter into contracts, own property, and engage in legal proceedings in their name. The company’s separate legal status, perpetual succession, and limited liability offer significant advantages, making the corporate structure one of the most effective and popular business models worldwide. However, this artificial status also requires careful regulation and legal frameworks to prevent misuse and ensure accountability. The concept of a company as an artificial person continues to shape the landscape of modern business and legal systems.