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Corporate Legal Framework

Notes by providing sanctions in the case of breach and subjecting the latter also to the more
restrictive provisions of law applicable to public companies.
The Companies Act, 1956 has been amended from time to time in response to the changing
business environment.

Advantages of a Corporate Entity

1. The member may sell his share in the company, thus withdrawing himself and making
someone else a member to whom he transfers shares. Thus, shares in a company are
transferable.

2. As a natural consequence of transferability of shares, the company has what is commonly
known as perpetual succession.
3. With the withdrawal or death of a member of a company, the latter does not come to an
end. The life of the company is independent of the lives of the members of the company.
4. Members may come and members may go, the company continues until it is dissolved.
5. Members have limited liability.

7.2 Salient Feature of a Company

Following are the features of a company:

1. Incorporated association: It should be incorporated under Companies Act.
2. Artifi cial person: A company is created with the sanction of law and is not itself a human

being, it is therefore, called artificial; and since it is clothed with certain rights and
obligations, it is called a person. A company is accordingly an artifi cial person.
3. Separate legal entity: Unlike partnership, company is distinct from the persons who
constitute it. Section 34 (2) says that on registration, the association of persons becomes
a body corporate by the name contained in the memorandum. Lord Macnanghtan in the
famous case of Salomon v. Salomon & Co. Ltd. (1877) AC 22 observed that:

A company is at law a different person altogether from the subscribers…..; and though it
may be that after incorporation the business is precisely the same as it was before and the
same persons are managers and the same hands receive the profits, the company is at law

not the agent of the subscribers or trustee for them. Nor are the subscribers as members
liable, in any shape or form, except to the extent and in the manner provided in the Act.

The facts of the famous Salomon’s case were as follows:
Salomon carried on business as 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 floating charge on the company’s assets in favour of Mr Salomon.
All the other shareholders subscribed for one share of £1 each. Mr Salomon was also the
managing director of the company. The company almost immediately ran into diffi culties
and eventually became 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 Salomon 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 the company was a mere alias or agent for Salomon.

Held: The contention of the trade creditors could not be maintained because the company
being in law a person quite distinct from its members, could not be regarded as an ‘alias’ or

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