Important Case Laws.

Important case laws on Company law

1.Separate Legal Entity.

1.Saloman Vs. Saloman & Co. Ltd. (1895 - 99)

Facts - Saloman sold his business to a company named Saloman & Company Ltd., which he formed. Saloman took 20,000 shares. The price paid by the company to Saloman was £ 30,000, but instead of paying him, cash, the company gave him 20,000 fully paid shares of £ 1 each & £ 10,000 in debentures. The company wound up & the assets of the company amounted to £ 6,000 only. Debts amounted to £ 10,000 due to Saloman & Secured by debentures and a further £ 7,000 due to unsecured creditors. The unsecured creditors claimed that as Saloman & Co. Ltd., was really the same person as Saloman, he could not owe money to himself and that they should be paid their £ 7,000 first.

Judgment-

A Company is a "legal person" or "legal entity" separate from and capable of surviving beyond the lives of, its members 

The company is not in law the agent of the subscribers or Trustee for them.

Saloman was entitled to £ 6,000 as the company was an entirely separate person from Saloman.

The unsecured creditors got nothing.

2.Doctrine of Indoor management / Turquand rule

Royal British Bank Vs. Turquand (1856)

Facts - The Directors of a company borrowed a sum of money from the plaintiff. The company's articles provided that the directors might borrow on bonds such sums as may from time to time be authorised by a resolution passed at a general meeting of the company. The shareholders claimed that there had been no such resolution authorising the loan and, therefore, it was taken without their authority. The company was however held bound by the loan. Once it was found that the directors could borrow subject to a resolution, the plaintiff had a right to infer that the necessary resolution must have been passed.

Judgment-

1. Persons dealing with the company are bound to read the registered documents and to see that the proposed dealing is not inconsistent therewith.

2. Outsiders are bound to know the external position of the company, but are not bound to know its indoor management.

3. Company may ratify the ultra vires borrowing by the directors if it is taken bonafide for the benefit of the company.

3.Exception to Turquand rule

Ruben Vs. Great Fingall Consolidated (1906)

Facts - The plaintiff was the transferee of a share certificate issued under the seal of a defendant company. The certificate was issued by the company's secretary, who had affixed the seal of the company & forged the signatures of two directors.

Judgment-

1. It is quite true that persons dealing with limited liability companies are not bound to enquire into their indoor management and will not be affected by irregularities of which they have no notice. But the doctrine of indoor management, which is well established, applies to irregularities which otherwise might affect a genuine transaction. It can't apply to a forgery.

2. Plaintiffs suit for damages did not succeeded because turquand's rule did not apply where the document was forged.

Anand Biharilal Vs Dinshaw and Co.,

Facts – The plaintiff accepted a transfer of the company’s property from its accountant.

Judgment – The court held that since it is beyond the scope of an accountant’s authority, it was held void.

The offer in prospectus should be made to public (atleast to 50 persons)

Nash Vs Lynde

Facts – Some copies of documents marked “strictly confidential” and containing particulars of a proposed issue of shares, were sent by the managing director to his relatives and friends. Thus the document was passed on privately through a small circle of friends of directors.

Judgment – The court held that there was no issue to public, and it doesnot amount to prospectus as it was not offered to public

4.DOCTRINE OF CORPORATE VEIL. 

For The Protection of Revenue
In Sir Dinshaw Maneckjee Petit (1927)
D was a rich man having dividend and interest income. He wanted to avoid income-tax. For this purpose, he formed four private companies, in all of which he was the majority share holder. The companies made investments and whenever interest and dividend income were received by the companies, D applied to the companies for loans, which were immediately granted and he never repaid. In a legal proceeding the corporate veil of all the companies were lifted and the income of the companies treated as if they were of ‘D’.

JONES VS LIPMAN.

FACTS: Mr Lipman contracted to sell a house at 3 Fairlawn Avenue, Chiswick, Middlesex (now Ealing W4) to Mr Jones for £5,250. He changed his mind and refused to complete. To try and avoid a specific performance order, he conveyed it to a company formed for that purpose alone, which he alone owned and controlled.

JUDGEMENT: Russell J ordered specific performance against Mr Lipman and the company. The defendant company is the creature of the first defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity.