Law 200

Individual Assignment Sec: 8

Prepared for: Barrister Saheen Ahmed Faculty Member North South University

Prepared By:

Kashfia Mahbub ID- 0910388030

Submission Date: 13th April

Table of Contents
Topic
Introduction Salomon v Salomon & Co. case [1897]

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Lee v Lees Air Farming Ltd (1961) State Trading Corporation of India Ltd. AIR (1963) SC 1811 Macaura v Northern Assurance Co. Case [1925] Findings from the Case Conclusion Bibliography Web References

Assignment Topic
A company at Law is distinct from its members. Directors of a company are neither agents nor trustees of the company

Introduction
In the eye of law a company is a legal person and distinct from its members having separate legal entity. It can suit or be suited in its own name. Since it is not a natural person and is called artificial person and as such it is run by board of directors. The liabilities of members are limited by the shares they held. Directors act as not the owner of the company not as agent but they have to perform the functions and discharged their duties in accordance with the company law. Artificial person having legal entity and it is perpetual until or unless wound up for the reasons and under process set by company Law. "The company is at law a different person altogether from the subscribers to the Memorandum, and though it may be that after incorporation of the business is precisely the same as it was before and the same persons and managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustees for them. Nor are the subscribers or members liable in any shape or form except to the extent and in the manner provided by the act." This notation was made by the House of Lords in 1897, which has later emerged as one of the most debated and talked about doctrines in the history of company law. The company has contractual capacity in its own right and can sue and be sued in its own name members, as such, are not able to bind the company. One of the main motivations for forming a corporation or company is the limited liability it offers its shareholders. By this doctrine (limited liability), a shareholder can only lose only what he or she has contributed as shares to the corporate entity and nothing more. For analyzing the statement that The company Law is separated from the Directors- here are some cases.

Salomon v Salomon & Co. case [1897]

Mr. Salomon carried on a business as a leather merchant. In 1892 he formed the company Salomon & Co. Ltd. Mr Salomon, his wife and five of his children held one share each in the company. The members of the family held the shares for Mr Salomon because the Companies Acts required at that time that there be seven shareholders. Mr. Salomon was also the Managing Director of the company. The newly incorporated company purchased the sole trading leather business. This was not an attempt at a fair valuation; rather it represented Mr Salomons confidence in the continued success of the business. The price was paid in 10,000 worth of debentures giving a charge over all the companys assets. That means the debt is secured over the companys assets and Mr Salomon could, if he is not repaid his debt, take the companys assets and sell them to get his money back. The company also issued 20,007 shares of 1 each. Mr Salomon thus held 20,001 shares in the company, with his family holding the six remaining shares. So, at this moment, Mr. Salomon has three types of role in the newly formed company: 1. Mr. Salomon was the major shareholder of the company. He had 20,001 shares out of 20,007 2. He was the Managing Director of the company. 3. He had 10,000 worth of debentures secured by all of the firms assets. That made him a secured creditor of the company. After a year, things were not going well for the company and Salomon had to sell his 10,000 debentures. But it was not enough to save the company. The company became insolvent. When the company went into liquidation, the liquidator argued that the debentures used by Mr. Salomon as security for the debt were invalid, on the grounds of fraud. The judge, Vaughan Williams J. accepted this argument, ruling that since Mr. Salomon had created the company solely to transfer his business to it, the company was in reality his agent and he as principal was liable for debts to unsecured creditors.

The Court of Appeal also ruled against Mr. Salomon, though on the grounds that Mr. Salomon had abused the privileges of incorporation and limited liability. When question arose about whether the debenture holders or the other creditors got higher priority on the assets, the decision was against the debenture holders. The House of Lords unanimously changed this decision, rejecting the arguments from agency and fraud. Lord Mcnaughton finally concluded that the company is a separate individual from its subscribers to the memorandum and although the business remains same as before, the company is not in law the agent or trustees of the subscribers. The rule in the Salomon case that upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders has continued till these days to be the law in the western country courts, or common law jurisdictions. The case is of particular significance in company law thus: Firstly, it established the canon that when a company acts, it does so in its own name and right, and not merely as an alias or agent of its owners. Secondly, it established the important doctrine that shareholders under common law are not liable the company's debts beyond their initial capital investment, and have no proprietary interest in the property of the company. A company at Law is distinct from its members. Directors of a company are neither agents nor trustees of the company

Lee v Lees Air Farming Ltd (1961)

Lee who was a pilot, who conducted an aerial top-dressing business, formed a company to conduct the business. Lee holds 2999 shares of the 3000 shares in the company. The remaining one share was taken by his solicitor as nominee for Lee. Under the articles of association, Lee was governing director with very wide powers. Workers compensation insurance was taken out, naming Lee as an employee. Lee was killed when his aero plane crashed while engaged in aerial top-dressing. His widow made a claim for payment under the Workers Compensation Act 1922. Her claim was initially rejected on the ground that as Lee had full control of his company he could not be a "worker" within the meaning of the Act. "Worker was defined under the Act as a person "who has entered onto or works under a contract of service with an employer." Although Lees case is undoubtedly correct as a ruling in company law and in particular as the authority for the proposition slated above, however the question whether a person should be regarded as an "employee" of a company which he can control as a director or major shareholder may not always be clear-cut-for instance, in the context of the legislation relating to redundancy payments, the court may not consider that such a person is to be treated as an "employee" entitled to compensation for unfair or wrongful dismissal.

State Trading Corporation of India Ltd. AIR (1963) SC 1811

It was held that As soon as citizens form a company, the rights guaranteed to them by article 19(1)c has been exercised and no restraint has been placed on the right and no infringement of that right is made. Once a company or corporation is formed, the

business which is carried on by the such company or corporation is the business of that company or corporation and is not the business of the citizens who get the company or corporation incorporated and the rights of the incorporated body must be judges on that footing and cannot be judged on the assumption that they are the rights attributed to the business of individual citizens.

Macaura v Northern Assurance Co. Case

[1925]

The case of Macaura v. Northern Assurance Co. (1925) AC 619 seems to have served as vivid illustration of the impact of separate personality and limited liability. Mr. Macaura owned an estate and some timber. He agreed to sell all the timber on the estate in return for the entire issued share capital of Irish Canadian Saw Mills Ltd. The timber, which amounted to almost the entire assets of the company, was then stored on the estate. On 6th February 1922 Macaura insured the timber in his own name. Two weeks later a fire destroyed all the timber on the estate. Mr. Macaura tried to claim under the insurance. The Insurance Company refused to pay arguing that he had no insurable interest in the timber as the timer belonged to the company. Allegations of fraud were also made against Mr. Macaura but never proven. Eventually in 1925 the issue arrived before the House of Lords who found that the timber belonged to the company and not to Mr. Macaura. Even though he owned all the shares in the company, Mr. Macaura had no insurable interest in the property of it. Just as, corporate personality not only facilitates limited liability by making the debts belong to the corporation but also it means that the companys asset belongs to it and not to the shareholders. Therefore the House of Lords identified the following points: The House of Lords found that: The timber belonged to the company and not Mr Macaura Mr. Macaura, even though he owned all the shares in the company, had no insurable interest in the property of the company Just as corporate personality facilitates limited liability by having the debts belong to the corporation and not the members, it also means that the companys assets belong to it and not to the shareholders. 8

The insurers were not liable. Only Macaurs company, as owner of the timber had the requisite insurable interest in it. Only the company and not Macaura could insure its property against loss or damage. Shareholders have no legal or equitable interest in their companys property.

Findings from the Case:

The mentioned cases demonstrate different aspects of corporate personality. From the analysis of those famous cases, some of the notions of corporate personality can be summarized here. Company is not an agent of the shareholders. It is a legal person. That means, law considers it in such a way that, as if it is a person. (Salomon vs. Salomon) Company as a legal person has its own debt and its own assets. (Salomon vs. Salomon) The shareholders have limited liability for companys debt and their personal insurance will not cover companys assets. (Macura vs. northern assurance co) Company is legal person, so it can engage in contractual relationship, even with the owners. The shareholders can become manger or creditor of the company. (Salomon vs. Salomon) The company can even employ its owner/shareholder. (Lee vs. Lee)

The member of a company may come and go but a company never dies. It is an entity with perpetual succession. The members and other peoples including the directors in the company may change from time to time but that does not affect the companys continuity.

 Company is not an agent of the shareholders. Its a legal entity separate from its shareholders. Company as a legal person has its own debts and its own assets. Shareholders have no legal or equitable interest in their companys property.

Conclusion
A company is a legal entity in its own rights, and the members have limited liability for its debts and obligations. Along with the facts trustees in law is the owner of the trust property and deals with it as principal. However a director is not the owner of the funds which he has to apply. The company owns those property and funds which are merely under the control of the directors. So its clear that company at law is distinct from its members. Directors of the company are neither agents nor the trustee of the company.

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Bibliography
Sen, A. K. (2008). Commercial Law Including Company Law And Industrial Law (26th Ed.). Kolkata: The World Press Private Ltd.

Zahir, M. (2005). Company and securities law. Dhaka: The University Press Limited.

Web References
1. http://en.wikipedia.org/wiki/United_Kingdom_company_law 2. http://en.wikipedia.org/wiki/Salomon_v_A_Salomon_%26_Co_Ltd 3. http://www.lexvidhi.com/article-details/case-study-on-separate-legal-entityof-a-company-129.html

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