Case Laws

255

CASE LAWS:
1. Salomon v. Salomon and Company (1897):
Introduction: This case is related to one of the most
important features of a joint stock company i.e. the feature of
separate legalentity. The existence of a company is independent
and separate from its members. In other words, a company has an
independent corporate existence.
Facts of the case: Salomon sold his shoe business to a newly
formed company, 'Salomon & Co. Ltd.', for £ 30,000. Salomon
himself, his wife, one daughter and four sons took up one share of
£1each in the company. Salomon also took another 20,000 shares
of £ 1 each and debentures worth £ 10,000 with a charge created
on the assets of the company as the consideration for the transfer
of the business. Owing to trade depression, the company went
intoliqidation within a year and it was wound up. On winding
up, the assets of the company were found to be worth £ 6,000 and
the liabilities amounted to £ 17,000, of which £ 10,000 was due to
Salomon (secured by debentures) and £ 7,000 was due to unsecured
creditors. The unsecured creditors claimed that Salomon and the
company were one and the same person and that the company
was a mere agent for Salomon and hence they should be paid in
priority to Salomon.
Judgement: The Houseof Lords held that the company was,
in the eyes of law, a separate person independent from Salomon
and was not his agent. Salomon, though virtually the holder of all
the shares in the company, was also a secured creditor and was
entitled torepayment in priority to the unsecured creditors.
Conclusion: A company formed and registered under the
Companies Act has a separate legal existence entirely different
änd independent from its members.
2: Royal British Bank v. Turquand (1865)
Introduction: This case is related to the doctrine of indoor
management. According to this doctrine, a person dealing with
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the company is not presumed to have the knowledge of internal

proceedings of the company. An outsider is presumed to know the
constitution of a company, but not what may or mnay not have taken
place inside the doors that are closed to him.
Facts of the case: The Articles of Association of Royal British
Bank contained a provision that the directors had powers to borrow
money on bonds if authorized by a resolution passed at the general
meeting of the company. The directors borrowed money from Mr.
Turquand and issued bonds to him without passing the required
resolution. The shareholders contended that the loan was taken
without authority, and therefore Mr. Turquand could not recover it
from the company.
Judgement: The Court held that the company was bound
by the contract since Mr. Turquand was entitled to
assume that
the necessary resolution must have been passed. Mr.
could recover the amount of the bond from the
Turquand
company.
Conclusion: The persons dealing with the company in good
faith have a right to assume that the internal
requirements
prescribed in the public documents of Memorandum and Articles
have been observed. They are not bound to
enquire into the
regularity of the internal proceedings. In other words, if the internal
formalities have not been complied with, the contract will still be
binding on the company and it will be liable to the outsiders.
3. Daimler Company Ltd. v.
Continental Tyre and Rubber
Company (1916)
Introduction: This case is related to the concept of lifting
of corporate veil' under judicial
interpretation. It is an important
Concept in the company law according to which, in certain
circumstances, the separate legal entity of the
or not taken into account. The company and its company is ignored
members are treated
as one person.
Facts of the case: A company was incorporated in
England
for the purpose of selling tyres manufactured in Germany by a
German company. The bulk of the shares in English company were
Case Laws 257

held by the Germ¡n company. And the remaining shares (except

one) were held by the Germans residing in Germany. Moreover, all
the directors of the English company were also Germans, residing
in Germany. Thus, in fact, the real control of the English company
was in German hands. During the First World War, the English
company commenced an action for the recovery of a trade debt.
The question arose whether the English company had become an
enemy Company, and therefore should not be allowed toproceed
with the action.
Judgement: It was held that the company had assumed an
alien enemy character, and was debarred from maintaining the
action i.e. the company was not allowed to proceed with the action.
Conclusion: The corporate veil of a company can be lifted in
case of war where the company is controlled by persons who are
residents of an alien enemy.
4. Ashbury Railway Carriage v. Riche (1875)
Introduction: This case is related to the doctrine of ultra
vires (i.e. the doing of an act beyond the legal power and authority
of the company).
Facts of the case: A company was incorporated with the
followingobjects:
(a) to make, sell, or lend on hire, railway carriages and wagons;
(b) tocarry on the business of mechanical engineers and general
Contractors;

(c) topurchase, lease,work, and sell mines, minerals, land and

buildings.
The company entered into a contract with Riche for the
financing of the construction of a railway line in Belgium. The
question raised was whether that contract was covered within
the meaning of 'general contractors' and valid or not.
Judgement: The House of Lords held that the contract was
ultra vires the company and void, and that not even the subsequent
assent of the whole body of shareholders could ratify it.
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Conclusion: If an act is ultra vires the Memorandum (or

company), it does not create any legal relationship. Such an act is
absolutely void and even the whole body of shareholders cannot
ratify it and make it binding on the company.