📌 Separate Legal Entity

1️⃣ Meaning & Concept

A company, once incorporated, becomes a separate legal entity from its owners and members. This principle establishes that:
✅ The company has its own legal identity and is distinct from its shareholders.
✅ It can own property, enter contracts, sue, and be sued in its own name.
✅ Shareholders have limited liability, meaning they are not personally responsible for the company’s debts beyond their shareholding.
✅ The company enjoys perpetual succession, meaning it continues to exist even if all its members change or die.

Example: If “ABC Pvt Ltd” owns a building, the shareholders of the company cannot claim personal ownership over it. The property belongs to the company, not its members.

2️⃣ Legal Recognition (Companies Act, 2013)

The concept of a company as a separate legal entity is embedded in the Companies Act, 2013:

🔹 Section 2(20): Defines a company as an entity incorporated under this Act or any previous company law.

🔹 Section 9: A company upon incorporation becomes a body corporate with the following features:

• Separate legal existence.

• Perpetual succession.

• Right to own property.

• Right to sue and be sued.

3️⃣ Landmark Case Laws

📌 Foreign Case Law:

📍 Salomon v. Salomon & Co. Ltd. (1897) AC 22 (HL)

• Facts: Mr. Salomon formed a company where he was the major shareholder and also a creditor. When the company went into liquidation, creditors claimed that Mr. Salomon should be personally liable.

• Held: The House of Lords ruled that the company was a separate entity, and Mr. Salomon was not personally liable. This case firmly established the principle of corporate personality.

📍 Lee v. Lee’s Air Farming Ltd. (1961) AC 12

• Held: A shareholder can also be an employee of his own company because the company has a separate identity.

📌 Indian Case Laws:

📍 State of Andhra Pradesh v. Andhra Pradesh State Road Transport Corporation, AIR 1964 SC 1284

• Held: Even if a company is fully owned by the government, it remains a separate legal entity distinct from the government.

📍 Tata Engineering and Locomotive Co. Ltd. v. State of Bihar, AIR 1965 SC 40

• Held: A company is independent of its shareholders and directors, even if control is exercised by a few individuals.

📍 Macaura v. Northern Assurance Co Ltd (1925) AC 619

• Facts: Mr. Macaura owned timber, transferred it to his company, and later, the timber was destroyed by fire. He had insurance in his own name and claimed compensation.

• Held: Since the timber belonged to the company (not Mr. Macaura personally), he was not entitled to claim insurance.

📍 Bacha F. Guzdar v. CIT, AIR 1955 SC 74

• Held: A shareholder is not the owner of the company's assets. The company is a distinct entity that holds ownership over its property.

4️⃣ Effects of Separate Legal Entity

The doctrine of separate legal entity gives rise to the following important legal effects:

✅ Limited Liability: Shareholders are liable only for the unpaid value of their shares. Their personal assets remain protected.
✅ Perpetual Succession: The company continues to exist even if all shareholders die.
✅ Owning Property: The company can own property in its own name, and shareholders cannot claim ownership over it.
✅ Right to Sue & Be Sued: The company can initiate legal proceedings independently.
✅ Capacity to Contract: The company can enter into contracts in its own name.

5️⃣ Illustration for Easy Understanding

Imagine XYZ Pvt Ltd, a company owned by Mr. A. The company:

• Takes a bank loan of ₹10 crores.

• Faces losses and goes into liquidation.

• Mr. A’s personal assets cannot be used to pay the company's debts.

• The company is responsible for its own liabilities.

This demonstrates separate legal personality—the company exists independent of its owner.

✅ Conclusion

The doctrine of separate legal entity is a fundamental principle of corporate law. It allows businesses to function as distinct legal persons, giving them rights and responsibilities separate from their members. However, in cases of fraud or misuse, courts may disregard this principle using the doctrine of lifting the corporate veil (which we will discuss separately).