XYZ LAW COLLEGE .

Topic: Liability of Public Corporation.

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XYZ LAW COLLEGE

ACADEMIC YEAR 2019 – 20.

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 INDEX

Sr Content Page No.

No.

1. Corporations 3-9

3. Liabilities and Accountablity of Public Corporation 10-12

4. Controls over Public Corporation 13-18

5. Bibliography and Reference 19

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 Corporations

➢ What are Corporations?

A corporation has a corporate personality of its own and is considered in law as a seperate
and distinct entity. In other words, a corporation has a separate legal existence, which is
distinct and independant of its members who compose the corporation.

A corporation is an artificial legal person, because, law creates and it can be dissolved only
by law. A corporation is juristic entity and not an aggregation of its members, because a
corporation is a succession, common seal, and with limited liability. A corporation is
empowered to accquire, hold and transfer property in its own corporate name, and it can also
sue and can be sued by its own members. A corporation may be fined for any breach or
infringement of the provisions of law in force.1

2
In Dhanoa v/s. Municipal Corporation of Delhi The Supreme court defined the term
"corporations" in this case. According to the Supreme Court, a corporation mean an artificial
legal person created by law having sepearate legal entity, which is entirely seperate and
distinct from its members with perpetual succession, common seal and with the capacity to
acquire, hold transfer property by entering into contract and to sue or be sued in its own
name.
Examples of Public Corporation are: LIC, Food Corporation of India (FCI), ONGC, Air
India, Indian Airlines, State Bank of India, Reserve Bank of India, Employees State
Insurance Corporation, Central Warehousing Corporation, Damodhar Valley Corporation,
National Textile Corporation, Industrial Finance Corporation of India (IFCI), Unit Trust of
India (UTI), Tourism Corporation of India, Minerals and Metals Trading Corporation
(MMTC) etc are some of the examples of Public Corporations.

➢ Public corporations are classified into following four groups in India:

1. Commercial Corporation
2. Developement Corporation

1 Administrative Law, By I. A. Sayed (Himalayan Publication)

2 AIR 1981 S.C. 1395

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 3. Social Service Corporation
4. Financial Corporation

➢ Commercial Corporation:
The public corporations which deal with the commercial and industrial functions are called
"Commercial Corporations". Since, the functions of Commercial Corporation are
commercial in nature, they ought to be financially self-supporting and earning profit is the
essential intention of the commercial corporation. It is mandatory and compulsory that the
commercial corporations are required to conduct their affairs in the interest of public, and
that is why, commercial corporations are not confined to profit making motive alone.

Examples of Commercial Corporation are: Hindustan Machine Tools, State Trading

Corporations, Indian Air Lines and Air India Corporation.

➢ Development Corporations:
The basic feature of Development Corporation relates to encourage national progress by
promoting development activities. The Development Corporation may require financial
assistance from the Government at their initial stage, because such corporation may not be
financially sound, as such, corporations differ from commercial corporations.

Examples of Development Corporation are: Food Corporation of India, Oil and Natural
Gas Commission, Damodar Valley Corporation, Warehousing, National Small Industries
Corporation are some of the examples of Development Corporations.

➢ Social Service Corporation:

The basic aim of Social Corporation is to provide social service to the citizens on behalf of
the Governement. Such corporations are not in commercial nature and therefore they cannot
be financially considered to be self-supporting. Profit motive is irrelevant in the functioning
of such corporation. Social Corporation receives financial assisstance from the Government.

Examples of Social Corporation are: Housing Board, Rehabilitation Housing Corporation,

Employees State Insuarance Corporation, Hospital Boards are the examples of Social
Corporation.

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➢ Financial Corporations:
The main aim of the financial corporation is to provide financial assistance in the form of
loans to the institutions engaged in trade, business or manufacturing industry on such terms
and conditions. Such Financial Corporations extend loan to displaced persons with a view to
give them a helping hand to settle in trade, business or in any industry. Such Corporation
also provide, credit to the institution on such terms and conditions.

Examples of Financial Corporations are: State Bank of India, Reserve Bank of India,
Industrial Finance Corporation and Life insuarance Corporation of India are the examples of
Financial Corporations.

➢ Following are the Legal Advantages of a public corporation:

1. A corporation is an artificial legal person, because it has been recognised by law as it is
being capable of rights and duties.

2. A corporation has a seperate legal existence, that is, it has a seperate legal personality
which is distinct and independant from its members.

3. A coporation has a perpetual succession. The term "perpetual succession" mean that,
even if the membership of the coporation keep changing from time to time, such damage
does not affect the continous existence of the corporation.

4. A corporation has no soul, flesh and body, however, it acts through the natural person i.e.
officers of the government.

5. A corporation can accquire hold and transfer the property in its own corporate name.

6. A corporation is an autonomous body and its own master in its day-to-day management
and administration, though the ownership control and management of a corporation is
vested in the Union Government or in the State Government.

7. A corporation is required to follow and observe th direction relating to policy matters

given by appropriate government.

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 8. A corporation which is created under the Statute is considered as the "state" within the
meaning of Article 12 of the Constitution of India.

9. A corporation is subject to jurisdiction of the High Court and the Supreme Court under
Articl 226, and under Article 32, respectively.

10. A corporation is liable for the breach of contract and also liable for tort.

11. The provisions of Constituiton of India and Citizenship Act cannot be applied to
corporation, since it is not natural person.

➢ Features of Public Corporation:

(i) Special Statute:
A public corporation is created by a special Act of the Parliament or the State Legislature.
The Act defines its powers, objectives, functions and relations with the ministry and the
Parliament (or State Legislature).

(ii) Separate Legal Entity: A public corporation is a separate legal entity with perpetual
succession and common seal. It has an existence, independent of the Government. It can
own properly; can make contracts and file suits, in its own name.

(iii) Capital Provided by the Government:

The capital of a public corporation is provided by the Government or by agencies controlled
by the government. However, many public corporations have also begun to raise money
from the capital market.

(iv)Financial Autonomy:
A public corporation enjoys financial autonomy. It prepares its own budget; and has
authority to retain and utilize its earnings for its business.

(v) Management by Board of Directors:

Its management is vested in a Board of Directors, appointed or nominated by the
Government. But there is no Governmental interference in the day-to-day working of the
corporation.

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 (vi) Own Staff:
A public corporation has its own staff; whose appointment, remuneration and service
conditions are decided by the corporation itself.

(vii) Service Motive:

The main objective of a public corporation is service-motive; though it is expected to the
self-supporting and earn reasonable profits.

(viii) Public Accountability:

A public corporation has to submit its annual report on its working. Its accounts are audited
by the Comptroller and Auditor General of India. Annual report and audited accounts of a
public corporation are presented to the Parliament or State Legislatures, which is entitled to
discuss these.

Advantages of Public Corporation:

Following are the advantages of a public corporation:
(i) Bold Management due to Operational Autonomy:
A public corporation enjoys internal operational autonomy; as it is free from Governmental
control. It can, therefore, run in a business like manner. Management can take bold decisions
involving experimentation in its lines of activities, taking advantage of business situations.

(ii) Legislative Control:

Affairs of a public corporation are subject to scrutiny by Committees of Parliament or State
Legislature. The Press also keeps a watchful eye on the working of a public corporation.
This keeps a check on the unhealthy practices on the part of the management of the public
corporation.

(iii)Qualified and Contented Staff:

Public corporation offers attractive service conditions to its staff. As such it is able to attract
qualified staff. Because of qualified and contented staff, industrial relations problems are not
much severe. Staff has a motivation to work hard for the corporation.

(iv) Tailor-Made Statute:

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 The special Act, by which a public corporation is created, can be tailor-made to meet the
specific needs of the public corporation; so that the corporation can function in the best
manner to achieve its objectives.

(v) Not Affected by Political Changes:

Being a distinct legal entity, a public corporation is not much affected by political changes.
It can maintain continuity of policy and operations.

(vi) Lesser Likelihood of Exploitation:

The Board of Directors of a public corporation consists of representatives of various interest
groups like labour, consumers etc. nominated by the Government. As such, there is lesser
likelihood of exploitation of any class of society, by the public corporation.

(vii) Reasonable Pricing Policy:

A public corporation follows a reasonable pricing policy, based on cost-benefit analysis.
Hence, public are generally satisfied with the provision of goods and services, by the public
corporation.

Limitations Public Corporation:

A public corporation suffers from the following limitations:
(i) Autonomy and Flexibility, Only in Theory:
Autonomy and flexibility advantages of a public corporation exist only in theory. In practice,
there is a lot of interference in the working of a public corporation by ministers, government
officers and other politicians.

(ii) Misuse of Monopolistic Power:

Public corporations often enjoy monopoly in their field of operation. As such, on the one
hand they are indifferent to consumer needs and problems; and on the other hand, often do
not hesitate to exploit consumers.

(iii) Rigid Constitution:

The constitution of a public corporation is very rigid. It cannot be changed, without
amending the Statute of its formation. Hence, a public corporation could not be flexible in
its operations.

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(iv) Low Managerial Efficiency:
Quite often civil servants, who do not possess management knowledge and skills, are
appointed by the government on the Board of Directors, of a public corporation. As such,
managerial efficiency of public corporation is not as much as found in private business
enterprises.

(v) Problem of Passing a Special Act:

A public corporation cannot be formed without passing a special Act; which is a time
consuming and difficult process. Hence, the scope for setting up public corporations is very
restricted.

(vi) Clash of Divergent Interests:

In the Board of Directors of public corporation, conflicts may arise among representatives of
different groups. Such clashes tell upon the efficient functioning of the corporation and may
hamper its growth.

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 Liablities and Accountability of Public Corporations

➢ The liability of Public corporation can be divided into 3 categories i.e. in case of contract,
tort and crimes. In case of contract it can enter into contract and has the capacity to sue and
be sued and can only do those acts which are authorized expressly by the statue. Those acts
which are not expressly or impliedly authorized will be considered ultra vires and will be
void-ab-initio. Whereas in case of tort it will be held liable for acts committed by its servant
or say its employees during the course of employment provided that the act is within the
power of Corporation and actionable if committed by private individual and finally in case
of crime it may also incur liability for offences committed by its servant and employees but
the punishment in any case cannot be death sentence or life imprisonment and it cannot also
be held liable for an offence which can only be committed by natural person for say
bigamy. Servants of Public corporations are not civil servants and hence are outside Art. 311
of the Constitution. They are subject to the Rules and Regulations of the corporations. If
these rules are not followed and an employee is dismissed, the dismissal would be void as
they are entitled to reinstatement Sukhdev Singh V Bhagat Ram 3, here dismissed employees
of L.I.C, ONGC & IFC., were held entitled to reinstatement. Let us further examine these
liabilites.

1. Liability in Contract.

A corporation is a legal person which has a seperate legal entity. It is different from its
members, and therefore, a corporation can sue and can be sued in its own corporate
name. A corporation can enter into a contract, but its liability is within the ambit and
scope of the Statute under which it has come into existence. A corporation is liable for
breach of contract like any other person, but the contract entered into by the corporation
must be within its power and if the contract is made beyond its power, a corporation is
not held liable for such contract, because such contract is ultra vires or void.

When a public corporation enters into a contract with a private individual, such contract
need not satisfy the requirement provided in Article 299 of the Constitution. The

3 Delhi High Court, Civil 115 of 1974

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 requirement of two months notice as provided under Section 80 of the Civil Procedure
Code before filing the suit against government, does not apply to the public corporation.

2. Liability in Torts:

A public corporationcan be held liable for torts committed by its servants. However, it is
necessary that the act committed by the servant of a public corporation must be within
the powers and purpose of the public corporation. Therefore, if the act committed by the
servant of the public corporation is ultra vires, the public corporation cannot be held
liable for the ultra vires acts of its employess or servants.

The immunity conferred on the Government under Article 300 of the constitution,
cannot be claimed by the public corporation. A corporation cannot be sued for torts or
tortuous acts of personal nature, such as, personal defamation, assault, but the public
corporation can be sued for libel, deceit or malicious prosecution. A public corporation
has a power to sue for tortuous act of any person. A public corporation can avail of the
same defence in an action against public corporation for tortuous acts of its servants
which are available to a private individual in similar situation.
Immunity:
If the Statue under which a public corporation comes into existence provides some
immunity on the public corporation or on its servants for their tortuous acts done in good
faith while discharging their duties, in such situation, the public corporation enjoys the
immunity. Section 28 of the Oil and Natural Gas Commission Act grants such immunity
to Oil and Natural Gas Commission.

3. Liability for Crime:

A public corporation may be held for the criminal offence committed by its servants. In
other words, a public corporation is held liable vicariously for offences committed by its
servants in the course of employment. The public corporation is vicariously liable for the
offences such as libel, nuisance, fraud, contempt of court, etc., committed by the
servants of the public corporation in course of their employment. A public corporation is
an artificial legal person and it is not a natural person thus it cannot commit offences
such as bigamy, murder, hurt and therefore a public corporation cannot be sentenced to

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 death or imprisonment. In R v/s. ICR Houlage,4 it was held that public corporations
cannot be held liable for any offence which can only be committed by a natural person.

➢ Accountability.
Committee on Public Undertaking, Estimate Committee, etc.
The functions of the Committee are:-
1) to examine the reports and accounts of public undertakings;

2) to examine the reports, if any, of the Comptroller General, or public undertakings;

3) to examine in the context of the autonomy and efficieny of public undertakings, whether
the affairs of the public undertakings are being managed in accordance with sound business
principles and prudent commercial practices;

4) to exercise other functions vested in the Public Accounts Comittee and the Estimated
committee which relates to the public undertakings.

4 (1944) All ER 691

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 Controls over Public Corporation

CONTROLS OVER PUBLIC CORPORATIONS

(i) General.
(ii) Judicial Control
(iii) Statutory Control.
(iv) Executive or Government or Ministerial Control
(v) Parliamentary Control.

(i) General: The sphere of activities of Sovereign States (or simply the State) is enlarged
and widened so much in the modern world that it (State) partake the commercial activities
where, ordinarily, others fear to tread. These activities although taken up by the State in the
larger public interest and in larger public good. However, the State does not start these
commercial activities directly but starts them indirectly by establishing the corporate bodies
(popularly referred to as the Public Corporations), necessary for the purpose. These
corporate bodies (Public Corporations) thus have the multiple controls. (1) Judicial Control -
because these corporate bodies (Public Corporations) are the 'State' within the meaning of
Article 12 of the Constitution and hence amenable to the Writ Jurisdiction of High Courts
(under Article 226) and Supreme Court (under Article 32). (2) Statutory Control. These
corporate bodies (Public Corporations) are established under the Statute. Necessarily,
therefore, these Public Corporations cannot travel beyond the scope and ambit of the Statute
which created them. (3) The Executive or the Government or Ministerial Control. As is too
very well known, in modern era, the Sovereign States are run by three wings of the State,
Parliament, Executives (which is also identified as the Government) and Judiciary. These
Public Corporations are thus controlled by the Executives or the Government in as much as
the Government gives several directions to control under which these Public Corporations
have to carryon their activities. There is also the (4) Parliamentary Control Since these
corporate bodies are the brainchild of the Parliament Legislative Bodies, the Parliament or
the Legislative Bodies hold-on the control over these Public Corporations in as much as the
Parliament Legislative Bodies can amend the Statute itself and control the activities of these
Public Corporations, whenever considered necessary on floor of Parliament. Finally, (5) the
general public for whose larger interest these Public Corporations are established also give

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 shape to these Public Corporation. Thus, and thereby the Public too control these Public
Corporations.

(ii) Judiciary Control: As discussed above, the Public Corporations the 'Companies', as
understood under the Company Law and as such, have the 'Perpetual Succession', 'Common
Seal', can 'Sue' and 'Can be Sued'. They can 'Have and Hold' the property and can dispose of
the property. They can lay down rules, regulation and procedure for their day-to-day
activities and these rules and regulations have the binding force unless ultra-vires the (1)
parent Act, (2) Constitution of India or (3) otherwise bad in Law. As Corporate Body, they
take all their decisions through Board of Directors and by rule of 'vote of majority'. With this
legal status, these Public Corporations cannot claim crown privileges and they are bound by
the constituent statute. These Public Corporations are liable for:
• breach of contract,
• tortuous acts of its servants like any other person,
• paying income tax, sales tax and all other revenues UNLESS exemption under Article 289
of the Constitution of India is granted.
• acts ultra vires the (1) constituent statute, (2) Constitution of India and/or (3) otherwise bad
in Law.
In Lakshmanaswami vs. LIC,5 a resolution was passed (for giving donation of rupees two
lakhs from the amount to be paid to the Share-Holders) contrary to the Articles of
Association of the Company The apex Court held that such a resolution was ultra vires,
absolutely void and cannot be ratified even if all the shareholders agree to give such
donation. The payment made pursuant to the resolution was unauthorized and those
responsible in passing the resolution will be liable to make good the amount unlawfully
disbursed pursuant to the resolution. All said and done, the judicial control through the
doctrine of ultra vires cannot be said to adequate and effective for the simple reason as to
who will bell the cat - who will seek this remedy. It is no denying that the Public
Corporations are the State within the meaning of Article 12 of the Constitution of India and
therefore amenable to Writ Jurisdiction of High Courts (Article 226) and Supreme Court
(Article 31) and for that reason, there is complete check and control of judiciary on Public
Corporations. As discussed above, fundamental rights cannot be enforced by the Public
Corporation (except those which are given to 'any person' by the Constitution of India),
nevertheless, those (fundamental rights) can be enforced against it (Public Corporation)

5 AIR 1963 SC 1185

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 because it (Public Corporation) is the 'State' within the meaning of Article 12 of the
Constitution of India The Employees of the Public Corporations are not 'civil servants' and
therefore, cannot claim the protection guaranteed to Government Servants under Article 311
of the Constitution but some of the employees are the Public Servants and claim those
protection envisaged under the criminal laws. In Fertilizer Corporation Kamgar Union
us. Union of India,6 the apex court observed that certainly it is not part of the judicial
process to examine entreprenurial activities to ferret out flaws. The internal management,
business activity or institutional operations of public bodies cannot be subjected to
inspection of the courts. To do so is incompetent and improper and therefore out of bounds
of the courts, nevertheless, the broad parameters of fairness in administration, bona fides in
action and fundamental rules of reasonable management of public business if breached will
become justifiable.

(iii) Statutory Control: The Public Corporations are created under the constituent statute.
The statute lays down the limits within which these Public Corporations expand and work.
Necessarily, therefore, the constituent Statue control the activities of the Public
Corporations, However, it must be borne in mind that infringement, breaches and violations
of these constituent statutes by the individual corporations can be corrected by the judiciary.
➢
(iv) Executive or Government or Ministerial Control: As is too very well known, in
modern era, the Sovereign States have three wings, Parliament, Executives (Government)
and Judiciary. These three wings of Sovereign State have the control over the Public
Corporations and so the Executives or the Government has the control. The Executives or
Government give directions to these Public Corporations and effectuate its control over
them. Needless to record the government control is over and above the judicial control. The
question of judicial control comes only and only when the action of the Public Corporation
is challenged in the Court of Law and not otherwise. In other words, there is no total and
complete judicial control inasmuch as when the illegal action is not challenged, it goes
undetected and uncorrected whereas, and there is no question of some one challenging the
illegal action because the Government constantly and always monitors the activities of these
Corporations. This will be evident from the fact that the Government controls:-

6 AIR 1981 SC 344

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(a) Appointments and removal of members - The Government is generally vested with
powers of appointment and removal of Chairman, Managing Directors and other Directors
of Public Corporations. Thus, Government can remove the member for remaining absent in
the meetings specified in the statute. So also the Government can remove the members if
adjudged bankrupt or otherwise unsuitable to continue as a member and so on.

(b) Finance - The Government in the large public interest pumps in the public funds to run
the public corporation. Therefore, the Government will require (a) prior approval for the
expenditure of funds (b) Annual Budget and Programs to be placed before it (c) consent for
the borrowing, (d) insurance of Bonds and Debentures. The Auditor General exercises
control in the matter of accounts and audit of the Public Corporations. Thus, and thereby the
Government effects its control over the Public Corporations.

(c) Directives - The statutes generally vest powers in the Government to decide the policy
matters and give necessary directions in this regard. Therefore, the Government without
interfering with the day-to-day working of the Corporation can issue such directions as the
Government deem necessary and proper for the proper functioning and working of the
Corporation.

(d) Rules and Regulations - It is usual to provide for the prior approval of the Government
for the rules and regulations framed by the Public Corporations for its day-to-day working
and functioning. Thus, and thereby the Government indirectly even controls the day-to-day
activities of the Public Corporations.

(e) Enquires - It is also usual to provide for the inquiries by Government in case any
illegality is brought to the notice of the Government. When a complaint is made to the
Government about any malfunctioning or improper working of the public Corporation, the
Government is vested with the discretionary powers to cause inquiry into the same and take
the corrective measures, if necessary in the matter. The Public Corporations are placed under
ministries. The respective minister holds the complete control over the affairs of the
corporations falling under his ministry. In other words, the constituent ministry also controls
the affairs of the public corporations functioning under it.

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(v) Parliamentary Control: As aforesaid, the Sovereign States, as the Welfare States in
contradistinction of the Police State establish Public Corporations to satisfy the needs of the
public and for the welfare of the public. The Sovereign States thus passes constituent statues
to establish any particular public corporation. Necessarily, therefore, the Sovereign States or
the Parliament or the State Legislatures retain its control over the public corporations
established by it. It is interesting to note as to how the Parliament or the State Legislatures
effects its control over them. Following are some of the methods in which the Parliamentary
Control can be effected.

(a) Questions on the floor of Parliament - In the democratic State, party in power has to
answer questions put by the parties not in power. As such, whenever there is any grievance,
even if the party in power keeps quite or overlooks to such grievance, the opposition pounce
upon them and raise questions on the floor of Parliament/Legislative Assembly. Indeed,
there are procedures and rules for raising the questions on the floor of Parliament but if
those are met with, certainly, the issues can be raised and the party in power is required to
take necessary corrective measures if necessary.

(b) Debates - When the annual accounts and reports are placed before the Parliament or the
Legislative Assembly, as the case may be, those are debated on the floors of Parliament.
This is most effect control over the public corporations. Even in cases where the Statute
does not provide for placing the Budget, accounts and Reports before the
Parliament/Legislative Assembly, the Public Corporations are required to submit the same to
the Estimates Committee and the said material is made available at the time of
Parliamentary debate so that, in case of need, the said material is made available to
parliamentarians. It operates as good control over the Public Corporations. (c) Parliamentary
Committees - There is no gainsaying that the Parliament is a busy body and it is not possible
for it to look into each and every minute details of the working of the public corporations.
The Parliament has devised to constitute Committees. The functions of these Committees
are
(i) to examine the reports, accounts and budget
(ii) to examine in the context of autonomy and efficiency
(iii) to ascertain whether the public corporations are managed on the sound prudent
principles of business and commercial practices etc.

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No doubt, the recommendations of these committees are not binding on the government,
nevertheless, by conventions, those are always accepted. However, if government considers
it appropriate to not accept those recommendations, then the government has to record its
reasons in writing, which operates as pressure on the government to accept those
recommendations.

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 Bibliography and Reference

A) Books

1) Administrative Law, By I. A. Sayed (Himalayan Publication)

2) Administrative Law by Prof. Prakash Mokal

3) M P Jain and S N Jain's Principles of Administrative law.

B) Websites

1) https://www.iilsindia.com/blogs/2017/12/20/public-corporation/

2) http://www.manupatrafast.in/ipAccess.aspx

3) https://www.scconline.com/

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