In the spread of corporations across multiple continents, the importance of private international laws has grown many folds. Conflict of laws, or private international law, or international private law, in common law system, is that branch of international law and interstate law that regulates all lawsuits involving a foreign law element, where a difference in result will occur depending on which laws are applied.
What is a pseudo-foreign Corporation?A pseudo-foreign Corporation[i] is an entity which is incorporated in one state & transacting all or most of their business in other state.
An Indian resident operates a business entity exclusively in India, dealing with Indian Customers, but the entity is formed in America. This entity is a pseudo-foreign entity.
The pseudo-foreign corporations are awarded a different treatment from a national company when it comes to deciding the applicable law. Various factors are considered in determining the law applicable in piercing an entity to so called pseudo-foreign corporation.
If a case involving a pseudo-foreign corporation comes before an American court, the court exercises its jurisdiction after determining the domicile of the pseudo-foreign company. There are two conflicting opinion on what would constitute the domicile of a pseudo-foreign corporation and they are as follows:
1. The domicile of a company would be the place where it was incorporated.
2. The domicile of a company would be the place of business or where it mostly transacts.
Lex Incorporationis (Law of State of Incorporation) [ii]:Under thisapproach the court decides the domicile of the pseudo-foreign company to be the place where it was principally incorporated. The doctrine recognizes that interests of certainty, protection of legitimate expectations and reducing the prospect of inconsistent obligations require that only one state have the authority to regulate a corporation's internal affairs. Matters that qualify as internal affairs as those which involve primarily a corporation's relationship to its shareholders, including the election or appointment of directors and officers, the adoption of by-laws, the holding of directors' and shareholders' meetings, mergers, consolidations and reorganizations and the reclassification of shares, and the purchase and redemption by the corporation of outstanding shares of its own stock. In addition, the doctrine generally requires that the law of the sate of incorporation govern allegations of director or officer breaches of fiduciary duty owed to the corporation and its shareholders.[iii] When the rights of third parties unaffiliated with the corporation are at issue, however, the doctrine does not apply and ordinary choice of law principles govern.
The Place of Business:This approach of determining the domicile is often called the traditional approach. Under this approach the court may exercise jurisdiction as to any cause of action, if defendant is domiciled in the forum state or its activities there are substantial, continuous & systematic even if unrelated to the defendant's activities within the state.[iv] This form of personal jurisdiction is known as general jurisdiction. However, even if a non-resident defendant's contracts with a forum state are sufficiently 'continuous & systematic' for general jurisdiction, it may still be subject to jurisdiction on claims related to its activities or contracts there.[v] This form of personal jurisdiction is known as limited jurisdiction.
[vi] As can be seen, there is no uniformity among the courts on the issue under review. This can lead to inequitable results. In the cases of Calder v. Jones and Keeton v. Hustler Magazine, Inc. these issues were discussed. The Supreme Court held that merely having jurisdiction over a business entity is not tantamount to having jurisdiction over the owners or employees of the entity. Rather, one must find the requisite minimum contacts as to each individual separately. Where one owns a pseudo-foreign corporation and is domiciled in the Forum State (as in our theoretical example), the courts there already possess general personal jurisdiction over the owner. In such a situation, the majority rule is that the law of the place of formation decides the issue.
Despite this difference of opinion, one thing is absolutely clear: The central question in choosing the appropriate law to govern a corporation asks whether the particular issue involved is an internal one or one that involves third parties.
The principles of Private International Law used to govern the conflict of law between countries. But the rapid growth of international trade, commerce, investment and industries setting the pace of globalization and opening-up of the economies of nations has added to the need of formulating, specific legal measures for protecting Indian creditors as well. The question of choice of law arises in all cross border transactions due to the following reasons:
(a) Development of international trade in which inter-country debtor-creditor relations across the border develops;
(b) Development of transnational and multi- national institutions through building up transborder structures through permanent establishment, branches or franchises;
(c) Development of business through chain organization structure of subsidiaries, and joint venture and finally
(d) Development of complexities in modern business relations. Naturally, in all transborder insolvency situations there are claims of national creditor against foreign debtor or national debtor to settle dues to foreign creditors.
The present Indian legal system does not contain any specific provision on any cross border relations, but is spread over various legislations. Some of specific issues in cross-border relation are discussed bellow:
Origin of a Company:
The domicile of origin in the case of a company is the country where it is registered, i.e., the place or country of its incorporation. Thus, a company formed under the English Companies Act has an English domicile if it is registered in England. Similarly, a company incorporated under the Indian Companies Act will have an Indian domicile. This has been recognized by the Indian Supreme Court in the case Technip SA v. SMS Holding (Pvt.) Ltd. & Ors, the court observed that:
Questions as to the status of a corporation are to be decided according to the laws of its domicile or incorporation subject to certain exceptions including the exception of domestic public policy. This is because a corporation is a purely artificial body created by law. It can act only in accordance with the law of its creation. Therefore, if it is a corporation, it can be so only by virtue of the law by which it was incorporated and it is to this law alone that all questions concerning the creation and dissolution of the corporate status are referred unless it is contrary to public policy.
In addition according to Indian Income Tax Act, a company registered outside India but having its management and control in India, is considered an Indian Company for the purpose of corporate taxation.
[vii] The domiciles of the shareholders have no influence in determining the domicile of the company.
[viii] Indian Law on Corporate Insolvency:
Under the Indian Companies Act, the Indian courts have jurisdiction to entertain winding up proceedings in respect of the following two categories of companies:
(a) When the company has been incorporated in India, and
(b) When it is an unregistered company [ix]
In respect of the former the Indian courts have jurisdiction irrespective of the fact that the entire business of the company is carried on abroad, or that all its members are foreigners. In such winding up proceedings, Indian as well as foreign creditors can prove their debts.[x] There is no discriminative treatment of 'foreign' creditors in the sense that only the creditors of the Indian branch are able to lodge proof of claim. The claims are treated equally as per the provisions of section 530 of the Companies Act. Part X of the Indian Companies Act deals with the winding up of the unregistered company. Section 584 of the Act relates to dissolved foreign companies. Foreign companies in India fall within the meaning of unregistered companies. A bank incorporated in a foreign country is an unregistered company and winding up proceedings can be filed in India. Winding up proceedings in respect of a foreign company not falling under section 584 of the Companies Act can be filed under section 582 as an unregistered company.
Indian courts have the jurisdiction to wind up a foreign company whatever be the number of its members, provided it has assets and an office in India.[xi] It would make no difference, even if an order for its winding up has been made by a court of competent jurisdiction of the place of the company's domicile. However, just because a winding up order has been made by the court of domicile of a foreign company, it does not mean that the Indian courts are bound to entertain its winding up proceedings. The court may decline to exercise jurisdiction on practical considerations.
Though the jurisdiction of the Indian court is 'territorial' as opposed to 'universal' in the sense that if the assets of the company are outside the jurisdiction of India, then the Indian courts and the liquidator will need to obtain the consent of the relevant courts in that jurisdiction for their actions to have effect
The nature of the corporation continues to evolve through existing corporations pushing new ideas and structures, courts responding, and governments regulating in response to new situations. A question of long standing is that of diffused responsibility: for example, if the corporation is found liable for a death, then how should the blame and punishment for this be allocated across the shareholders, directors, management and staff of the corporation, and the corporation itself?
The present law differs among jurisdictions, and is in a state of flux. Some argue that the owners of the business - the shareholders - should be ultimately responsible for such circumstances, forcing them to consider issues other than profit when investing, but the modern corporation may have many millions of small shareholders who know nothing about its business activities. In addition, traders especially hedge funds may rapidly turn over their partial ownership of a corporation many times a day.
[i] A corporation is an artificial legal entity (technically, a juristic person) which, while made up of a number of natural persons or other legal entities, has a separate legal identity from them. As a legal entity the corporation receives legal rights and duties. Five rights always exist for a corporation: the ability to sue and be sued (this gives the corporation access to the courts); the right to a common treasury (this gives the right to hold assets separate from the assets of its members); the right to hire agents (this gives the corporation the right to hire employees); the right to a common seal (this gives the corporation the right to sign contracts); and the right to make by-laws (this gives the corporation the right to govern its internal affairs).
[ii] Also known as the Internal Affairs Doctrine.
[iii] Walton v. Morgan Stanley & Co., 623 F.2d 796, 798 n.3 (2d Cir. 1980).
[iv] Colt Studio, Inc. vs. Badpuppy Enter, 75F.Supp.2d1104, 1107. (Quoting International shoe Co. vs. Washington, 326U.S.310, 316 (1945).
[v] Perkins vs.Benguet Consol Mining Co., 342 U.S.437 (1952)
[vi] Burger King Corp. v. Rudzewiez, 47 1 U.S. 462 (1985).
[vii] Section 2(26) of the Income-tax Act, 1961.
[viii] Private international law recognises that the fact that majority of shareholders of a company are Indians will not make it an Indian domicile company, even if it is incorporated elsewhere. See, Paras Diwan, Private International Law (New Delhi: Deep & Deep Publications, 1993) at 382. In Re Travancore National etc. Bank Ltd., (1939) Mad. 318, Rao, J., said that the domicile of a company is the place considered by the law to be the centre of its affairs which in the case of
(1) a trading company is its principal place of business, i.e., the place where the administrative business of the corporation is carried, and (2) in the case of other corporations, it is the place where its functions are discharged. In short, the test of domicile of a company is the same under the Indian law as it is under the English law. It should be kept in mind that the domicile of the company is entirely distinct and independent from the domicile of its members or shareholders.
[ix] Part X of the Indian Companies Act.
[x] Rajah of Vizianagaram v. Official Receiver and Liquidator, 1962 S.C. 500.
[xi] Re Travancore National Bank Ltd., 1939 Mad. 318; In re Frontier Bank Ltd., 1951 Punj, 145; In the matter of Indian Companies Act, 1913, 1949 Lah. 48.
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