A Company is an Artificial Person Created by Law
1. Introduction
A company is a legal entity or “artificial person” created by law, distinct from its members (shareholders) or founders.
Unlike natural persons, a company has no physical existence.
It can own property, sue, or be sued in its own name.
The concept is enshrined in Salomon v. Salomon & Co. Ltd. (1897), which established the principle of separate legal personality.
2. Concept of Artificial Person
2.1 Definition
A company is an artificial legal person recognized by law, created through a statutory process of incorporation.
It can:
Own property in its own name.
Enter into contracts.
Sue and be sued.
Have perpetual succession, i.e., continue despite death or change of members.
2.2 Characteristics of Artificial Person
| Feature | Explanation |
|---|---|
| Separate Legal Entity | Exists independently of shareholders or members. |
| Perpetual Succession | Not affected by death, insolvency, or insanity of members. |
| Capacity to Sue and be Sued | Can initiate legal proceedings or defend itself. |
| Limited Liability | Members’ liability is limited to the extent of shares. |
| Creation by Law | Exists only after registration under Companies Act. |
| Can Own Property | Can hold movable and immovable property in its own name. |
3. Legal Basis
3.1 Companies Act, 2013
Section 2(20): Defines “company” as a company incorporated under this Act or any previous company law.
Incorporation: A company comes into existence only after registration, acquiring the status of an artificial person.
Separate Legal Entity: Explicitly recognized under the Act, enabling a company to enter contracts, own property, and sue/be sued.
4. Key Case Law
Case 1: Salomon v. Salomon & Co. Ltd. (1897) AC 22 (UK)
Facts: Mr. Salomon formed a company, transferring his business to it and holding most shares. Creditors sued, claiming he remained personally liable.
Decision: House of Lords held that the company was a separate legal entity, distinct from Salomon.
Significance: Established the doctrine of separate legal personality; the company is an artificial person created by law.
Case 2: Lee v. Lee’s Air Farming Ltd. (1961) AC 12 (NZ/UK)
Facts: Mr. Lee was the sole shareholder, director, and employee of a company. After a fatal accident, family claimed compensation.
Decision: Privy Council held that the company and Mr. Lee were distinct legal entities, and his family could claim compensation under workers’ compensation law.
Significance: Reinforced the principle of distinct legal personality of a company.
Case 3: CIT v. Peerless General Finance & Investment Co. Ltd. (1985)
Facts: Tax authorities sought to hold shareholders liable for company’s tax dues.
Decision: Court held that the company is a separate legal entity, and shareholders are not personally liable except under statutory exceptions.
Significance: Shows legal recognition of company as an artificial person with independent obligations.
5. Implications of Being an Artificial Person
Separate Ownership
Company owns property and assets in its own name, not in the name of shareholders.
Perpetual Succession
Company continues despite death or departure of members. Only legal dissolution ends its existence.
Capacity to Contract
Can enter into agreements, borrow, and invest independently.
Liability
Members’ liability is limited to shareholding, except in cases of fraud, negligence, or statutory provisions.
Suing and Being Sued
Can file lawsuits or be sued like a natural person.
6. Importance in Company Law
Establishing a company as an artificial legal person allows:
Separation of management and ownership.
Limited liability protection to shareholders.
Legal capacity to raise capital, borrow, and transact in its own name.
Corporate governance structures to function as an independent entity.
7. Exceptions / Lifting the Corporate Veil
Courts may look beyond separate personality in cases of:
Fraud or misrepresentation
Evasion of law
Agency relationship or sham transactions
Relevant Case:
Gilford Motor Co. Ltd. v. Horne (1933) Ch 935 – Company used as a device to avoid contractual obligations. Court pierced the corporate veil.
8. Conclusion
A company is a distinct artificial legal entity created by law:
Exists independently of its shareholders or directors.
Can own property, enter contracts, sue, and be sued.
Provides limited liability and perpetual succession, facilitating commercial activity.
Courts uphold this principle, but may pierce the corporate veil to prevent misuse.
✅ Key Takeaway:
The concept of a company as an artificial person created by law is foundational to modern corporate law, providing legal recognition, protection, and continuity, while balancing accountability through statutory exceptions and judicial oversight. Do write to us if you need any further assistance.
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