Gulshan Prakash v. State of Haryana (2010) 1 SCC 477||Case Summary Introduction In this appeal, the Court has interpreted Article 15(4) of the Fundamental Right. It has been added by the 1st Amendment Act, of 1951. Facts The State of Haryana instructed Maharshi Dayanand University (MDU), Rohtak to conduct entrance examination for MD/MS/PG courses for the Session 2008-2009. The appellant made a representation to the Health Secretary for providing reservation for SC and ST in the Post Graduate courses, Since there was no response from the Health Secretary the Appellant filed a petition in the High Court. The High Court dismissed the petition of the appellant therefore the appellant approached the Supreme Court by Special Leave Petition under Article 136. Appellant Contentions MDU, Rohtak has provided 20% reservation for the graduate level courses or undergraduate courses therefore the said University should also provide reservation in for the PG courses. The Government o
This case is mainly concerned with the "Independent legal personality" or "Separate legal entity" of the company.
The facts of the case
The appellant, Aron Salomon, carrying on a business as a leather merchant and boot manufacturer, formed a company named "Salomon and Co. Ltd" to carry on the business. The subscribers to the memorandum of the association were the appellant, his wife, daughter, and four sons. The nominal capital of the company was £40,000 of which 20,007 shares were issued, the appellant had 20,001 shares and other subscribers had one share each.
Salomon sold his business to the newly formed company "Salomon and Co. Ltd." for £38,782. In return, the Company paid the appellant £6,000 in cash and £10,000 in debenture as decided by the directors of the company consisting of the appellant and his two sons.
In 1893 an order was made to wind up the company. As it was indebted to unsecured creditors other than Salomon (secured creditor), the total assets of the company were £6,000 in the market, and liability on it was nearly £17,000 (£10,000 to Salomon and £7,000 to unsecured creditors).
"The action was brought by the liquidator" against the appellant.
VAUGHAN WILLIAMS, J.- allowed suit, declared that the company was entitled to be indemnified by the appellant to the amount of £7,733. This decision was affirmed by the Court of Appeal.
The formation of the company was a mere scheme to enable Salomon to carry on business in the name of the company, which is wholly contrary to the true intent and meaning of the Companies Act.
Arrangements made by the appellant for the formation of the company were a fraud upon the creditors of the company
No board of directors of the company was ever appointed
As Salomon was a major shareholder, managing director, and debenture holder or secured creditor so after winding up, the first payment should be to unsecured creditors not to Salomon.
Issue
Whether 'the Salomon and Co. Ltd.' is a public company as per the Companies Act.
Whether Salomon will be liable to indemnify the company.
Ratio Decidendi
1. Lord Halsbury
As the respondent company was formed by seven persons, it satisfies the condition set by Section 1 of the Companies Act, 1948, and Section 3 of the Indian Companies Act, 2013.
The Act does not mention the extent to which shares are to be held by each subscriber, one share is enough. Also, the Act does not talk about the motives of the shareholders. A shareholder is a shareholder for all purposes.
Once the company is legally incorporated, it must be treated like any other independent person with rights and liabilities.
The Court of Appeal was wrong in its finding that the company was formed to enable Salomon to carry on its own business, as the Act gives a company a legal existence with its own rights and liabilities. The ideas and schemes of those who brought it into existence do not matter.
Vaughan William J. was errored in his judgment that Salomon had incorporated the company as its agent to carry its own business and that he was bound to indemnify that agent- the company. As a company is a legal entity with its own rights and liabilities it can't be an agent of anyone.
Lindley J. also in its judgment erred by stating that the other six members of the company were subscribed only to enable Salomon to carry his business with limited liability.
2. Lord Watson
Shareholders must be independent and beneficial interested persons.
Company and members are 'Separate entities'.
Salomon was a major shareholder does not mean he will not get the first priority to pay at the time of winding up.
Therefore, Salomon and Co. Ltd. was a company as per the Companies Act of 1948, and as a major shareholder and secured creditor, Salomon will get first priority of payment after winding up of the company.
he will not indemnify the unsecured creditor as it was lawful for the 'Secured creditor' to get payment at first after winding up of the company.
Judgment
Appeal allowed.
Salomon as a secured creditor will get the first payment from 'Salomon and Co. Ltd after winding up.
The Company, in simple terms, means a voluntary association of persons who have come together to carry out some business and share the profit therefrom. As per Section 2(20) of The Company Act, 2013, Company means a Company incorporated under this Act or under any previous law. On registration, the Company becomes a body Corporate i.e. it acquires a legal personality of its own, separate and distinct from its members, A registered Company is created by law and law alone can regulate, modify, or dissolve it.
Characteristics of Company
1. Incorporated Association of Person
2. Artificial Person by law
3. Separate Legal Entity
4. Perpetual Succession
5. Common Seal
6. Limited Liability
7. Limitation of Action
8. Transferability of Shares
9. Separation of Ownership and Management
10. Risk Bearing
11. Capacity to sue and be sued
12. Registration
13. Statutory Obligation
14. Contractual Capacity
15. Lifting of the Corporate Veil.
"Separate Legal Entity"
The concept of a Separate legal entity was formed in the late 19th Century and grew significantly by judicial precedents, in which the Company is Separate from its members and Shareholders, As a result, the Company has its own rights and liabilities.
In other words, A Company can do all such acts which a natural person would do in the Course of his business, like forming a Contract, Opening a bank account, or can be used in its own name, in the Salomon Case, 1897 it has been proved that the Company and its member are Separate therefore after winding up despite the fact of major shareholder, Company's liability cannot be imposed on other, similarly, Lee V Lee's Farming Ltd., 1960: it has proved that the Company is Separate entity If Director is working as an employee, he will get his right as an employ, despite the fact of governing director as Company and its member, right and liabilities distinguish from the veil of Separate legal personality.
Exception of Separate Legal Entity
In some cases, the Separate existence of the Company from its members and Shareholders can be withdrawn. s per Palmer in the following situation Veil of Corporate Personality can be lifted.
1. Companies are in the relationship of holding or Subsidiary Companies:
The Company is an artificial person who cannot act in the disinterest of members and shareholders etc therefore when a Subsidiary Company forms due to which some activities have taken place beyond the interest of Shareholder and Members, the Court prefers to Lift the Veil to discover the truth of the action of the natural person on the name of the Company as said in Workmen V Rubber Industry Case
2. Shareholders become directly liable to Certain Creditors
In General, Shareholders do not become personally responsible for the Company's debt and losses but where a situation comes in which shareholders become directly liable to Certain Creditors and Lose the privilege of Limited liability, the Court can Lift the Veil.
3. Matter about the Law of Taxes, Duties, and Stamps
A scenario that has been created to avoid taxes is seen in the CIT v Meenakshi mill, 1967 where the Company has formed in a State where tax is not levied by the British Government, in such cases for the stability of the Economic situation, it becomes essential to discover the truth and look the person who stands behind such wrongful act by lifting the veil.
4. Law relating to Exchange control
In the law relating to Exchange Control, to maintain the Sovereignty and Integrity of the Country, the Court lifts the veil of Corporate Personality.
5. Law relating to trade with the enemy
When a Company trades with another Company, the majority Shareholder of which belongs to the Country that is in the War, the Court can Lift the veil as in the Concept of trade with the enemy Country, the Court considers the nationality of members and shareholders as said in the Daimler Co., Ltd. v. Continental Tyre and Rubber Co. (Great Britain), Ltd., 1916.
Ashbury railway carriage v riche|| Case Summary Introduction This case is related to the " Doctrine of Ultra Vires". In this case, the directors of the appellant company made an agreement with the plaintiff which was beyond the objectives, as mentioned in its MoA, of the appellant Company. Since the agreement was beyond its objectives, the appellant company repudiated the agreement later. Therefore the suit was brought by the plaintiff to recover the damages. Facts The directors of the appellant company (Ashbury Railway Carriage) had contracted to obtain a concession from Gillon and Poeters Baerston, who obtained this right from the Belgian Government, to make a railway. For this purpose, the directors of the appellant company again entered into a contract with Riche, a contractor, the purpose of which was to establish a société anonyme, and as the plaintiff went on with the work, the appellant company had to pay into the hands of société anonyme, Earlier the sharehol
Workmen of Dimakuchi Tea Estate v. Dimakuchi Tea Estate, AIR 1958 SC 353 Case Summary Introduction The case of Workmen of Dimakuchi Tea Estate v. Dimakuchi Tea Estate involved a dispute between the management of the Dimakuchi Tea Estate and its workers. This case has discussed and cleared the meaning of the expression "any person" used in S.2(K) of the Industrial Dispute Act, 1947. The Supreme Court ruled in favour of a limited interpretation of the term "any person" thereby excluding the present appellant from the ambit of the Industrial Disputes Act of 1947. This decision denied the jurisdiction of the Industrial Tribunal to adjudicate the dispute and extended the benefits and protections of the Act to the employers. Facts of the Case The dispute was raised over the termination of the service of Dr K.P. Banerjee, who was appointed as an Assistant Medical Officer in the Respondent's estate (Dimakuchi Tea Estate), on the grounds of being incompetent. Although th
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