Landmark Judgments Of Corporate Law

Introduction

There has been immense growth in the corporate sector all over the world. Mostly in many countries, the corporate sector is the backbone of its economy, especially in India. It contributes almost 53% to the Indian GDP. In this sector, an individual is offered ample opportunities to grow. So, this growth led to a proper and well-established corporate law that involves overseeing all legal and external affairs matters such as investigation, litigation, merger, and acquisition, international trade issues, etc. So, to safeguard the legality of commercial transactions, advising the employees of their rights and duties and also representing the companies. This also focuses on the corporate governance necessary for the better working of a company. This piece talks about the landmark judgments in corporate law and this will help users in understanding the take of the court in respect of diverse issues faced by people working in this sector.

Salomon v Salomon & Co. Ltd

Background Facts

The business of Aaron Salomon was incorporated into a company in 1892 comprising of wife, daughter, four sons, and himself. Mr. Salomon being the managing director of the company has sold the company for the £39,000 amount and took £10,000 debt for himself out of it. An advance of £5000 was paid by Edmund Broderip on the Security of the debentures to Mr. Salomon. Soon after this, there was a decrease in sales followed by strike action leading to a downturn in business. To enforce security, Mr. Edmund sued Mr. Salomon because of his position and responsibility in the company.

Issue

Whether Mr. Salomon can be sued because of his position and responsibility in the Company and is responsible for the debts himself?

Judgment

A company is a separate legal entity distinct from its members and so shielding Mr. Salomon, the founder of the company from personal liability to the creditors. The court maintained the doctrine of corporate personality stated under the Companies Act 1862. Therefore, creditors of an insolvent company could not sue the shareholders of the company to pay up outstanding debts.

Durga Prasad V Baldeo

Background Facts

Durga Prasad being the plaintiff requested the district collector to built some outlets in the city. Those outlets were rented to the defendant for doing business. The rent was fixed but later on, the defendant offered to pay a 5% commission on all commodities he going to sell from the rented outlets in consideration of the building of the outlets. However, the defendant failed to submit such a commission. Therefore, the plaintiff filed suit against the defendant. 

Issue

Whether a contract is valid and is it a legitimate contract?

Judgement 

The court annulled the contract because of the lack of a consideration which is necessary to constitute a contract as clearly stated under Section 25(iii) of Indian Contract Act 1872 “ that an agreement without consideration is void.

Balfour v Balfour

Background Facts

Mr. and Mrs. Balfour were living together while he worked as a civil engineer with the government in Ceylon (Sri Lanka). Now, both the husband and wife suffered from rheumatic arthritis. Mrs. Balfour was advised by her doctor to stay back in England because of the unfavorable climatic condition in Ceylon. Mr. Balfour promised to provide her with £30 per month. However. he failed to keep the promise.  Therefore, Mrs. Balfour sued Mr. Balfour for the failure to keep the agreement on terms as promised by him.

Issue

Whether the contract between Mr. and Mrs. Balfour was valid?

Judgement

The court held that the promise between husband and wife cannot be deemed as a contractual agreement. Mere promises cannot form a contract.

Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd

Background Facts

In the present case appellant who was accepted as a shareholder in the respondent Company for the present proceedings alleged that the company has failed to file a return of the allotment of his shares with the registrar as the law mandates and moved the High Court at Calcutta.

Issue

The meaning of the word allotment stated under Section 75(1) of the Companies Act, 1956 was questioned and was brought before the court.

Judgement

The Court held that the re-issue of a forfeiture share cannot be the same as an allotment of a share as prescribed under Section 75(1). The term allotment is described as the acceptance of the company to take the offer of shares.

The State Trading Corporation of India Ltd. &Ors V. The Commercial Tax Officer, Visakhapatnam & Ors

Background Facts

The State Trading Corporation approached the court for issuing special writs against the state government agencies on the ground sales tax which was levied on the corporation. The petition was made to determine the facts in Article 32 of the Constitutionwhich permits the Supreme Court to issue special orders for the implementation of the rights of citizens.

Issue

Whether the State Trading Corporation which is a company that is listedand registered under the Indian Companies Act, 1956 and can it be regarded as a citizen and can seek for the implementation of the fundamental rights of citizens?

Whether STO is an organ of the government and can request for the implementation of the rights of citizens against a state as provided under part III of the constitution of India.

Judgement

The Appeal was dismissed by the Supreme Court on the 26th of July 1963 as implied by the Powers of the Corporate entity, all citizens are persons but all persons cannot be a citizen, and a Company or a corporation ceases to be a person from the date of its incorporation. Since the corporation performs the functions of a commercial entity, it cannot be regarded as an organ or a department of the government of India.

Re South of England Natural Gas and Petroleum Co. Ltd.

Background Facts

In the present case, the shareholders of the company received copies of the Prospectus with a title that clearly stated that it is meant for private circulation only and therefore not to be advertised to the public. Around 3,000 copies of the document in the form of a prospectus were distributed among the members of certain gas companies only.

Issue

Can a prospectus be shared and circulated among the public at large even if it specifies that it is for private circulation only.

Judgement

The court ruled that the prospectus is a public offer of shares despite the indication that it has to be private circulation only.

Seth Mohan Lal v. Grain Chambers Ltd

Background Facts

The respondent company was designed for carrying out specific business related to the exchange of commodities that included jaggery. The AOA of the company made it obligatory for all the company’s members to participate in the business transactions of the company. These transactions were carried out based on the 1913 Companies Act which did not prohibit the director from entering into transactions with the company. Later on, the Act was amended in 1936 which prohibited directors from entering into transactions with the company. However, this did not change the Company’s mode of operation.

The appellant company entered into a transaction with the respondent and had made huge deposits in monetary terms in the respondent’s account in respect to the transaction. The Indian government on February 15, 1950, issued an order that prohibits any person from entering into transactions on ‘future’ in jaggery or make or receive payments relating to any futures after the said date. 

Issue

Filing of petition for settling all outstanding transactions before the closing day at the prevailing rate against the company following such resolution and closing down their business.

Judgement

The appellant court held that the notification had voided any outstanding transaction in guts and futures. Thus, no case was made out from the closing of the company and the notification against the transactions in futures in the gut was to operate in the perspective.

Re Yenidje Tobacco Co Ltd

Background Facts

Two men were the sole shareholders and directors of a Yenidje Tobacco company, having equal rights of management and voting power. Further, they had equal numbers of shares. However, after some time they became hostile to each other and opposed staff’s appointment and other matters. Their communication used to take place through the secretary. Despite this, the company made substantial profits.

Issue

Whether a company could be wound up on an application even though it prospers and earns profit?

Judgment

The Court held that since the company was not in a state that has been considered at the time when it was formed and thus it must be terminated as soon as possible. In a case where a company undertakes business entirely on common understanding and general intent then the absence of it leads to winding up the business.

Bates v. Standard Land Co.

Issue

Whether there is a distinction between the personality of a person and that of a company when brought before Court?

Judgment

It was held that the board of director are the only brains of the company and the company can act only through them. But still, for many purposes, the company is a legal person like a natural person. It can enter into a contract and can sue or be sued under its name either by its members or outsiders. However, it's not a citizen that can enjoy the Fundamental Rights provided under Constitutionof India.

Ramasgate Victoria Hotel v. Montefiore

Background Facts

Mr. Montefiore, the defendant wanted to purchase shares from the hotel owned by the complainant. He made an advanced deposit to the bank account held by the hotel’s owner with the intent of implementing the transaction in June. After six months, a letter was received by him of acceptance of the offer from the complainant. By that time the shares had lost their value and the defendant to has lost interest in the business. However, Mr. Montefiore declined to continue with the transactions but did not remove his shares.

Issue

A question of the existence of an agreement between the parties was brought before the court along with the specific performance of it.

Judgment

The court ordered the dismissal of the claim of specific performance of the contract that a great deal of time had passed before the offer was made. As the period of six months has elapsed it is enough time for the termination of shares being offered.

Conclusion

In this, we came across different issues that a company or their shareholder or company employees and employers face while working. The issues such as whether a company is a separate entity or not can be sued and sue in its name or companies’ member will be held liable for any wrong. Further, we noticed the issue concerning the publication of the prospectus, wounding up business, etc. So, all these issues are dealt with by the court providing solutions and giving reasonable nexus that lies behind it, thereby giving us clarity and insight on such issues.