Cases on Company Law

1. Separate Legal Entity
Salmon vs. Salmon & Co. Ltd., (1877)
Salmon was a leather merchant. He sold his business for a sum of £30,000 to a company formed by him along with his wife, a daughter and four sons. The purchase consideration was satisfied by allotment of 20,000 shares of £1 each and issue of debentures worth £10,000, secured by a floating charge on the company’s assets in favour of Mr. Salmon. All the share holders subscribed for one share of £1 each. Mr. Salmon was appointed the managing director of the company. The company almost immediately ran into difficulties and eventually become insolvent and winding up commenced. At the time of winding up, the total assets of the company amounted to £6,050; its liabilities were £10,000 secured by the debentures issued to Mr. Salmon and £8,000 owing to unsecured trade creditors. The unsecured sundry creditors claimed the whole of the company’s assets, viz. £6,050 on the ground that company was a mere alias or agent for Salmon.
Held: The contention of the trade creditors could not be maintained because the company, being by law a person quite distinct from its members, could not be regarded as an ‘alias’ or agent or trustee for Salmon. Also the company’s assets must be applied in payment of the debentures as a secured creditor is entitled to payment out of the assets on which his debt is secured, on priority to unsecured creditors.
It can be inferred from Salmon’s case that there need not be any equilibrium or equitable distribution of voting amongst the members of the company. Mr. Salmon had £20,000 shares, whereas all other members had one share of £1 each.




Lee vs. Lee Farming Limited (1960)
A company was formed for the purpose of manufacturing aerial top-dressing. Lee, a qualified pilot, held all but one of the shares in the company and by the articles was appointed governing director of the company and chief pilot. Lee was killed while piloting the company’s aircraft and his widow claimed compensation for his death under the Workmen Compensation Act. The company opposed the claim on the ground that Lee was not a ‘worker’ as the same person could not be employer and the employee.
Held: There was a valid contract of service between Lee and the company and Lee, was therefore, a worker. Mrs. Lee’s contention was upheld.
2. Separate Property
Bacha F. Guzdar vs. The Commissioner of Income-Tax, Bombay (1955)
The plaintiff (Mrs Guzdar) received certain amounts as dividend in respect of shares held by her in a tea company. Under the Indian Income-tax Act, agricultural income is exempted from payment of income-tax. As income of a tea company is partly agricultural, only 40 per cent of the company’s income is treated as income from manufacture and sale, and therefore, liable to tax. The plaintiff claimed that the dividend income in her hands should be treated as agricultural income up to 60 per cent, as in the case tea company, on the ground that dividends received by shareholders represented the income of the company.
Held: Though the income in the hands of the company was partly agricultural yet the same income when received by Mrs. Guzdar as dividend could not be regarded as agricultural income.
It can be referred from Mrs. Guzdar’s case that a shareholder of a company is not a part-owner or co-owner of the company or its property. He is only given certain rights by law, for example, to attend and vote at the meetings of the shareholders, to receive dividend. Thus the property of the company belongs to the company and not to its shareholders.

Macaure vs. Northern Insurance co. Ltd., (1925)
‘Macaure’ held all except one share of a timber company. He had also advanced substantial amount to the company. He got insured the company’s timber in his personal name. On timber being destroyed by fire his claim was rejected for want of insurable interest. The court, applying principle of separate legal entity, held that the insurance company was not liable.

3. For The Protection of Revenue
In re 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’.

4. Where a Company has been Formed by Certain Persons to Avoid their Own Valid Contractual Obligations
Gilford Motor Co. Vs. Horne (1933)
A sold his business to B and agreed not to compete with him for a given number of years within reasonable local limits. A, desirous of re-entering business, in violation of the contractual obligation, formed a private company with majority shareholdings. B filed a suit against A and the private company and the court granted an injunction restraining A and his company with going ahead in the competing business.

5. Where a Company has been Formed for Some Fraudulent Purpose or Is A ‘Sham’

Construction Company (P) Ltd., (1996)
The Skipper Construction Company failed to pay the full purchase price of a plot to DDA. Instead, construction was started and space sold to various persons. The two sons of the directors who had business in their own names claimed that they had separated from the father and the companies they were running had nothing to do with the properties of their parents. But no satisfactory proof in support of their claim could be produced.
Held: that the transfer of shareholding between the father and the sons must also be treated as a sham. The fact that the director and members of his family had created several corporate bodies, did not prevent to the court from treating all of them as one entity belonging to and controlled by the director and his family.

6. Where a Company Formed is Against Public Interest or Public Policy
Daimler Co. Ltd., vs. Continental Tyre and Rubber Co. (1916)
C company was floated in London for marketing tyres manufactured in Germany. The majority of the C’s shares were held by German nationals residing in Germany. During World War I, C company filed a suit against D company for the recovery of trade debt. The D company contented that C company was an alien enemy company (Germany being at war with England at that time) and that the payment of the debt would be trading with the enemy. The court agreed with the contention of the defendants.