‘S’ was a boot manufacturer. He incorporated a company in the name of Salomon Company Limited. He transferred his personal business to the company. There were seven members all from his own family. The Company had an investment of 40000£. ‘S’ took 20000£ shares of each and debentures for 10,000£. The company had debts of 17000£. The Company was wound up within one year and assets of the company were 6000£ for himself. The creditors contended that the company had no independent existence and it was infact his own business. Can they succeed?

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  • ‘S’ was a boot manufacturer. He incorporated a company in the name of Salomon Company Limited. He transferred his personal business to the company. There were seven members all from his own family. The Company had an investment of 40000£. ‘S’ took 20000£ shares of each and debentures for 10,000£. The company had debts of 17000£. The Company was wound up within one year and assets of the company were 6000£ for himself. The creditors contended that the company had no independent existence and it was infact his own business. Can they succeed?
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Answer:

A company is a legal person. Once the company is registered under Companies Act, it becomes independent and distinct from its members.  It gains a corporate personality.

 

A member cannot be held liable for the acts of the company even if he holds virtually the entire share capital. Since ‘S’ had fulfilled all the requirements for a valid company, he was entitled to get the whole assets of the company.

 

The facts of the case resemble Salomon Vs. Salomon company Ltd, wherein the House of Lords held that Salomon was entitled to get the whole assets of the company since he had fulfilled all the requirements of a valid company.

 

Since the strict view of independent corporate personality has been used to defraud the creditors of the company, etc., exception like lifting the corporate veil of the company for public interest, prevention of fraud, tax evasion, etc., has come into existence.

Last Updated On January 31, 2018
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