Persons (Legal Personality) notes — Unit 3

The word 'person' is derived from the Latin word 'persona', which originally meant the mask worn by actors in ancient Greek and Roman plays to indicate the character they were playing. Over time, it came to mean the part a man plays in the legal drama of life.

⇒1.1 Jurisprudential Definition

In jurisprudence, a 'Person' is not necessarily a human being. Salmond defines a person as 'any being whom the law regards as capable of rights and duties.'

Therefore, personality in law is a pure creation of the law itself. If the law says a river has rights, the river becomes a legal person.

⇒1.2 Natural vs. Legal Persons

• Natural Persons: Living human beings recognized by the state. (Note: Historically, slaves were living human beings but were considered 'property', not persons, because they had no rights. Today, all humans are natural persons).
• Legal (Artificial/Juristic) Persons: Non-human entities, creations of law, which are treated as if they were human beings for legal purposes. They can own property, sue, and be sued. Examples: Registered Companies, Universities, Trade Unions, the State, and Hindu Idols.

How does the law treat entities that are biologically human (or were) but do not fit the standard definition of a fully active natural person?

⇒2.1 The Unborn Child (En Ventre Sa Mere)

A child in the mother's womb does not have full legal personality because it is not yet fully born. However, the law grants it contingent rights (rights that become vested upon live birth).

• Property: Under the Transfer of Property Act (Sec 13) and Hindu Succession Act, property can be transferred for the benefit of an unborn child. If born alive, the child inherits.
• Criminal Law: Causing the death of an unborn child is a specific crime under the IPC (Sections 312-316).
• Tort: A child born with deformities due to negligent injuries inflicted upon the mother while pregnant can sue the wrongdoer for damages.

⇒2.2 Dead Men

Death terminates legal personality. Dead men cannot hold property or sue. 'Dead men tell no tales, and they have no rights.' However, the law protects three specific interests of the deceased:

• 1. The Body: The right to a decent burial and protection from indignity.
• 2. Reputation: Defaming a dead person is a crime under IPC (Section 499) if it hurts the feelings of the living family members.
• 3. The Estate: The law ensures the deceased's Will is honored and property is distributed as they wished.

⇒2.3 Lower Animals

Animals are not legal persons. They are classified as 'chattels' (property). An animal cannot hold rights or owe duties.

• Can you leave property to a dog? No. A trust created for the maintenance of a specific dog is valid, but the dog does not 'own' the money. The trustee owns it, with a duty to feed the dog.
• Cruelty Laws: Laws like the Prevention of Cruelty to Animals Act do not confer 'rights' on the animal. They impose a 'duty' on human beings toward the State/Society to act humanely.

⇒2.4 Hindu Idols (Religious Institutions)

In Indian Jurisprudence, a Hindu Idol (Murti) is recognized as a Juristic Person.

• An Idol can hold property, pay taxes, and sue or be sued.
• Because the Idol is made of stone and cannot speak, it is treated like a 'minor'. It must act through a human manager called a Shebait or Mahant.
• (Famous Example: In the Ayodhya Ram Janmabhoomi case, 'Bhagwan Shri Ram Virajman' was one of the actual legal parties to the suit).

The most important legal person in the modern world is the Corporation (Company). When individuals form a registered company, the law breathes life into it, treating it as an entirely new, separate person.

⇒Attributes of Corporate Personality

• Separate Legal Entity: The company is completely distinct from its shareholders or directors.
• Perpetual Succession: Members may come and go, or even die, but the company lives on until legally wound up.
• Limited Liability: If the company goes bankrupt, the shareholders' personal assets (house, car) cannot be seized to pay the company's debts.
• Right to Sue: The company sues in its own name, not in the names of its directors.

To understand Corporate Personality, one must understand the most famous case in corporate legal history.

⇒Salomon v. Salomon & Co. Ltd. (1897)

• The Facts: Aron Salomon was a prosperous leather merchant. To expand, he formed a Limited Company. The law required 7 shareholders. Salomon held 20,001 shares. His wife and 5 children held 1 share each.
• The Transaction: Salomon sold his leather business to his new company. In return, the company gave him shares and £10,000 worth of Secured Debentures (making him a secured creditor of his own company).
• The Crisis: The company eventually failed and was liquidated. The assets were enough to pay Salomon (the secured debenture holder) but left nothing for the outside unsecured creditors.
• The Argument: The unsecured creditors sued. They argued that Salomon and the company were basically the same person. The company was just an 'alias' or a 'sham'. Therefore, Salomon shouldn't be allowed to pay himself before the outside creditors.
• The Judgment (House of Lords): The court totally rejected the creditors' argument. The court ruled: 'The company is at law a different person altogether from the subscribers.' It does not matter that Salomon owned 99% of the shares. The company was validly incorporated. Therefore, the company's debt to Salomon was a valid secured debt, and he had the right to be paid first.

Impact: This case cemented the principle of the 'Corporate Veil'—an impenetrable shield separating the company from its human owners.

How exactly does a group of humans magically become a 'new person'? Jurists have proposed 5 major theories to explain this phenomenon.

⇒5. The Purpose Theory

Proponent: Brinz.
Idea: This theory states that 'persons' don't hold property, 'purposes' hold property. When people pool money for a purpose (like education or charity), the law attaches rights to that purpose. This theory is heavily used to explain Trusts and Charitable Foundations, which don't have shareholders.

While the Salomon case created the 'Corporate Veil' (the shield protecting shareholders), people soon realized they could use this veil to commit massive frauds, evade taxes, and hide behind the company's limited liability.

To stop this abuse, the courts developed the doctrine of 'Lifting or Piercing the Corporate Veil'. This means the court will ignore the company's separate personality and look behind the veil to punish the actual humans controlling it.

⇒When will the courts lift the veil?

• Courts do not lift the veil lightly. They will only do so in exceptional circumstances where the corporate form is being abused. This can happen under Statutory provisions (written laws) or Judicial interpretations (case laws).

⇒1. Protection of Revenue (Tax Evasion)

If a company is created solely as a sham to evade taxes, the courts will pierce the veil.

• Case: Sir Dinshaw Maneckjee Petit (1927): Sir Dinshaw was a wealthy man earning huge dividends. To avoid paying high income tax, he formed 4 dummy companies and transferred his shares to them. The companies did no business; they just collected dividends and handed them back to him as 'loans'. The court lifted the veil, declaring the companies a sham, and taxed Sir Dinshaw directly.

⇒2. Prevention of Fraud or Improper Conduct

If a company is formed to defeat a legal obligation or commit a fraud.

• Case: Gilford Motor Co. v. Horne (1933): Horne signed an agreement with his employer (Gilford) that he wouldn't solicit their customers if he left. He left, but to bypass the agreement, he opened a new company in his wife's name and used it to steal Gilford's customers. The court lifted the veil, saying the new company was a 'mere cloak or sham', and issued an injunction against Horne.

⇒3. Determining Enemy Character

During wartime, a company registered in your country might actually be controlled by enemies.

• Case: Daimler Co. Ltd v. Continental Tyre & Rubber Co. (1916): Continental Tyre was registered in England (making it a British legal person). However, World War I broke out. It was discovered that all its directors and 99% of its shareholders were Germans living in Germany. The UK court lifted the veil, declared the company to have an 'enemy character', and stopped all payments to it.

⇒4. Where Company is a Mere Agent

If a subsidiary company is acting purely as an agent or puppet for a parent holding company, the court will lift the veil and treat them as one economic unit.

• Case: Smith, Stone & Knight Ltd. v. Birmingham Corp: The court held that if a subsidiary is just carrying on the parent's business, the parent company can claim compensation for the subsidiary's losses.

⇒Summary of Master Concepts

• Legal Person: Any entity capable of rights and duties (includes Idols and Companies).
• Theories of Corporate Personality: Fiction (creation of law), Concession (gift of State), Bracket (group of humans), Realist (living organism), Purpose (attached to a goal).
• Salomon Rule: A company is a distinct legal entity separate from its shareholders.
• Lifting the Veil: Courts ignore the corporate personality to punish fraud, tax evasion, or enemy action (Gilford, Dinshaw, Daimler).

⇒University Exam Tips for this Unit (Premium Advice)

• The 5 Theories: If asked 'What is Corporate Personality?', do not just define it. List out the 5 theories (Fiction, Concession, Bracket, Realist, Purpose) with their main jurists. This is what separates an average answer from a top-tier answer.
• Lifting the Veil Format: This is a guaranteed exam question. Structure your answer clearly: (1) Define Corporate Veil using Salomon. (2) Explain why it is lifted (to prevent abuse). (3) Use separate headings for Tax, Fraud, and Enemy Character, and YOU MUST cite the three exact cases (Dinshaw, Gilford, Daimler).
• Idols: If asked a short note on Hindu Idols, explicitly mention the word 'Juristic Person' and 'Shebait' (the human manager).