Page 205 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes 14. Where a company has control over another company, it is known as the Holding Company
and the company over which control is exercised is called the ………………Company.
15. In the case of a private company minimum number of persons to form a company is two
while it is …….. in the case of a public company.

Case Study Salomon’s Limited Liability

alomon 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.
SThe 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 difficulties 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.

Question
Do you agree to the claims of the unsecured trade creditors? Comment.

7.6 Summary

A company is an association of many persons who contribute money or money’s worth to
a common stock, and employs it in some business, and who share the profit and loss
arising there from.

Shares in a company are transferable.
An association of persons, once incorporated under the Companies Act, 1956 become a
legal entity, having its own entity separate from its members.

The company, being a separate person, its members are not as such liable for its debts.
A company limited by shares is a registered company having the liability of its members
limited by its memorandum of association to the amount, if any, unpaid on the shares
respectively held by them.
The advantages of incorporation are allowed to be enjoyed only by those who want to
make an honest use of the ‘company’.
In case of a dishonest and fraudulent use of the facility of incorporation, the law lifts the
corporate veil and identifies the persons who are behind the scene and are responsible for
the perpetration of fraud.
If such an association is formed and not registered under the Companies Act, it will be
regarded as an ‘Illegal Association’ although none of the objects for which it may have
been formed is illegal.

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