salmon vs salmon case presented by Usman Ali

2. Usman Ali

3.  Background
 Forms of Business
 What Is Company?
 Company As Separate Legal Entity
 Conclusion

4.  The idea of separate legal entity was originated
from the case named as Salmon Vs Salmon.
 The facts in this case disclosed that a company
had been incorporated by Mr. Salomon in which
he and members of his family were the only
shareholders.
 The issue arises when the company’s business
turns to be a failure.
 The value of the assets was insufficient to pay
out both Mr. Salomon and the company’s other
creditors.

5.  At that time the statement of affairs’ was like
this:
Assets : $ 6000
Liabilities:
Saloman as debenture holder $ 10,000
Unsecured creditors $ 7,000
 The unsecured creditors claimed a priority
over the debenture holder on the ground that
company and Saloman were one and the same
person and the company was a mere agent in
the eyes of law.

6.  1. Legal Entity
A company is an artificial person created
by law.
 2. Perpetual succession:
 Perpetual succession means continued existence. A
company is a creation of the law and only the law
can bring an end to its existence. Its life does not
depend on the life of its members.

7.  3. Limited liability:
 As a company has a separate legal entity, its
members cannot be held liable for the debts of
the company.
 4. Transferability of shares:
 The capital of a company is divided into parts.
Each part is called a share. These shares are
generally transferable.
 A shareholder is free to withdraw his
membership from the company by transferring
his shares. However, in actual practice some
restrictions are placed on the transfer of shares.

8.  5. Common seal:
 All the acts of the company are authorised by
its common seal.
 6. Separation of ownership and control:
 Members have no right to participate
directly in the day-to-day management of a
company. They elect their representatives,
called directors, who manage the company's
affairs on behalf of the members.

9.  8. Artificial legal person:
 A company is an artificial person created by
law. It exists only in contemplation of law. It
is competent to enter into contracts and to
own property in its own name. But it does not
take birth like a natural person and it has no
physical body of a natural human being.

10.  The House of Lords held that the existence of
a company is quite independent and distinct
from its members and that the assets of the
company must be utilized in payment of the
debentures first in priority to unsecured
creditors.

11. High Court:
The judge, Vaughan Williams J. accepted this
argument, ruling that since Mr. Salomon had
created
the company solely to transfer his business to
it, then the company and Salomon were one
unit;
the company was in reality his agent and he as
principal was liable for debts to unsecured
creditors.

12.  The appeal:
The Court of Appeal also ruled against Mr. Salomon,
on the grounds that Mr. Salomon had abused the
privileges of incorporation and limited liability, which
the Legislature had intended only to confer on
"independent bona fide shareholders

13.  The effects of separate legal entity are:
◦ It has perpetual existence, despite changes of its
members and constitution.
◦ It can own property of any kind, and thus buy and
sell property in its own name.
◦ It can be a party to a contract.
◦ It can sue and be sued in its own name.
◦ Limited liability.
◦ Transferability and transmissibility of shares.

14.  Saloman’s case established new boundaries
that in law a registered company is an entity
distinct from its members, even if the person
hold all the shares in the company.
 There is no difference in principle between a
company consisting of only two shareholders
and a company consisting of two hundred
members, In each case the company is a
Separate Legal Entity.