The Foundation of Company Law

It is based on two fundamental principles.
i. Legal or corporate personality.
ii. Theory of limited liability.
Legal or Corporate personality
This principle means, when a company is registered it becomes a legal person separate and distinct from its members and managers. It acquires an independent existence with certain capacities and subject to in capacities.This principle was first formulated in the House of Lords in the matter of Salomon V Salomon Co Ltd., where Lord Mc Naughton was emphatic that the company is at law a different personal together from the subscribers to the memorandum.
This principle is now contained in the Companies Act which provides inter alia”
“From the date of incorporation mentioned in the certificate of incorporation, the subscribers to the memorandum together with such other persons as may be members from time to time, shall be a body corporate by the name contained in the memorandum capable of exercising all the functions of an incorporated company with perpetual succession and a common seal.”
In Salomon’s case, Salomon was a leather merchant who formed a company called Salomon & Company Ltd, with a capital base of £ 40,000 divided into 40,000shares of £1 each. Its members were Mr. and Mrs. Salomon, their 4 sons and 1 daughter. Each took one share. Subsequently, Salomon sold his business to the company for £39,000 which was paid £1,000 in cash, £20,000 in shares and
£10,000 by debentures secured by assets of the company. The balance of £8,000 discharged the debts of the company incurred before the purchase. The company had unsecured creditors. Shortly afterwards, it was wound up. Its assets were only sufficient to pay the secured creditors. The liquidator sought to have Salomon held liable for other debts of the company and the Court of appeal agreed. However, the House of Lords reversed the decision regarding the liability, holding that since the company was properly incorporated, it was a legal person distinct from Salomon himself. As such he was not liable for its debts. In the words of Lord Mc Naghton:
“In order to form a company limited by shares, the Act requires that a memorandum of association must be at least signed by 7 persons who are each to take at least one share. If the mentioned conditions are complied with what can it matter whether the signatories are relatives or strangers? … The company attains maturity on its birth; there is neither a period of minority nor interval of incapacity… The company is at law a different person altogether from the subscribers to the memorandum and though it may be after incorporation, the business is precisely the same as it was before and the same persons are mangers and the same hands received the profits, the company is not in law the agent for the subscribers or trustee for them, nor are the subscribers as members liable in any share or form except to the extent and manner provided by the Act.
Theory of limited liability
Liability refers to the extent to which a person may be called upon to contribute to the assets of a company and in the event of its being wound up.
The liability of a company may be limited or unlimited. It may be limited by shares or by guarantee.

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