Transcript for:
Understanding Company Law Principles

the study of company law is mainly based on these two principles the first being the separate the separate legal personality the separate legal personality theory and the second principle is the theory the theory of limited the theory of limited liability the theory of limited liability these two principles will form the foundations of what we will mainly discuss hereafter as the concepts the principles the foundations of company law so I would wish to start with the first one which is the principle of separate link or personality so what has this principle say this principle is about the company being a separate entity the company being recognized by law as being a separate person from its members this is to say if we had to have our company and our company as members let's say 1 2 3 this would be persons with names we can have mark James and Jane all these being members of this company the principle of separate legal personality suggests that our company is a different person in law from our Jane James and Smith over 1 2 3 but these members of this company are recognized by law as being different entities from our company this would further mean that our company is created by law as it's all rights will have its own obligations which will be very different which will be very distinct from the obligations of one two three who are the members of this company that owned the rights of one two three one on the rights of the company one two three cannot claim any benefits on the obligations of this company one two three may not be required to perform or to make good the obligations of this company we have a very famous case that I would want to refer to which establishes this principle of separate legal personality this is the case of Salomon versus Salomon and Company Limited mr. Salamone who was a lender my challenge and in his business as another merchant he operated as a sole trader but subsequently he formed a company by the name Salomon and Company Limited now to this company he sold his leather business for some amount of money but most interestingly we had the membership of this company comprising of Salomon in the family but the members of this company comprised of mr. Salamone and his family members the wife the science and the daughter were the members of this company Solomon and Company Limited now in part of the exchange in the part of the transaction that is Salomon selling his business to the company Sullivan & Company Limited he was paid by way of credit where the outstanding amounts it was he became a creditor where I became a creditor to this company and a secured creditor for that matter now the security given to Salomon was by way of a charge created on the assets of Salomon and Company Limited so that if you are now to look at the relationship that became of Salomon and Salomon and Company Limited that first Salomon was a member of this company and Salomon doubled as a creditor the board is a creditor of this company in respect of the purchase price of his business that he was not paid Solomon became a creditor of this company and in respect of the credit Salomon was given security in all the assets of Solomon very limited now this company Salomon and Company Limited which now takes over the leather business of Salomon dimensions went on to contract of course debt from other creditors but at the end this company was in financial problems and the company was to be wound up now as you would later know that in the process of winding up when the assets of the company I realized when the SS of the company are sold we have the secured creditors being paid fast before any other creditors of this company appeal so the case at it as it would be Salomon being the only secured creditor all the assets of this company that were sold were applied to pay Salomon and Loan and all the other creditors of this company did not get any payment from the sale of the assets of this company now the issue was that these other creditors were complaining through the liquidator that Salomon the owner of Salomon and Company Limited had paid himself from the assets of Salomon and Company Limited that had been sold so they went to court this as you see Salomon was a Salomon and Company Limited is an appeal case the first case was the liquidator of Salomon and Company Limited was a Salomon the member so that the issue was was Salomon the same as Salomon and Company Limited due to the special relationship that Salamone has with the company that is a majority shareholder and all the members of the company happened to be his family members so it was not until they appeal of this case lodged by Solomon himself at the House of Lords where Lord magnet and makes an observation that even though Salomon and the family are the only shareholders of this company the company's Salomon Salman and Company Limited our difference that Salomon and the family and Salomon and Company Limited in law are different persons the obligations of Salomon and have been limited to ads other creditors are not the obligation of Salomon the member so from the decision of the House of Lords in this case Salomon and Company Limited we get this groundbreaking principle but at law the company is regarded as a separate legal person but at law the company is different from the subscribers to the memorandum that the members and the company will be regarded in law as different persons it is because of that principle that Salomon the member of the company is not to be responsible to the other creditors of this company Salomon and Company Limited the responsibility towards those other creditors is the responsibility of Salomon and Company Limited the company which is a different person from Salomon the member of the company so just to emphasize this point irrespective of how much control a member has in a company that member cannot be the company you may own a hundred percent of the shares in a company but still you are not the company the company will retain its own rights the company will have its own obligations which will not be the obligations of that member which will not be the responsibilities of that individual member so from this case we now have this principle the principle of separately gopis personality from which we shall henceforth regard the company as a separate legal entity on to the second principle