SEPARATE LEGAL ENTITY

Introduction:                 Unlike Partnership, the company is distinct from the person who constitute it.  Hence, it is capable of enjoying rights and of being subjected to duties, which are not the same as those enjoyed or born by its members.

The first case of the subject, even before the famous Solomon's case, was that of Konclali Tea Co. Ltd. In this case certain person transferred a tea estate to a company and claimed exemption from advalarem duty on the ground that they themselves were the shareholders in the company and therefore, it was nothing but a transfer from them in one to themselves under another name.

Rejecting this, the Calcutta High Court observed- "The Company was a separate person, a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property as if the shareholders had been totally different persons.

In the well-known case of Solomon Vs Solomon and co. Ltd, Solomon was a prosperous leather merchant.  He converted his business into a Limited Company –

Solomon & Co. Ltd. The company so formed consisted of Solomon for £ 39,000/- the purchase consideration was paid in term of up 10,000/- debentures conferring a charge over the company's assets  £ 20,000/- in fully paid up share each and the balance in cash.  The company in less than one year ran into difficulties and liquidation proceedings commenced. 

The assets of the company were not even sufficient to discharge the debentures, held entirely by Solomon himself, and nothing was left for the unsecured creditors.  The House of Lords unanimously held that the company had been validity constituted, since the Act only required seven members holding at least one share each.  It said nothing about their being independent or that there should be anything like a balance of power in the constitution of the company.  Hence, the business belonged to the company and not to Solomon.  Solomon was its agent.  The company was not the agent of Solomon.