Company Law

Unit 4
Case Study
-------------------------------------------------------------------------------------------------------------------------------------
1. Explain Case of Solomon V/s Solomon
Base of Case (Separate legal entity of company):
The case of Solomon V/s Solomon is on the basis of one of the features of company. The feature is
separate legal entity of a company which is distinct from the members. This can be explained as
follows:
According to N. V. P. “Company is the child of law. Its birth, growth and death is done by law”
According Chief Justice of America, “A company is an artificial, invisible and intangible person in the
eye of law.”
It means company can sign an agreement on its name. It can hold all the rights like a living person. It
can also perform all the duty like a living person. The assets of the company do not belong to its
members; it is only of the company itself. Similarly, the liabilities of the company do not belong to its
members, it is only the company itself. Once company is registered, it such independent and legal
entity comes into existence.
Case of Solomon V/s Solomon:
 Salomon v. Salomon was a case in Great Britain in 1897. Solomon is person who has own
business of shoes. It was a proprietor concern shop run by Mr. Solomon. Solomon sold his
shoes business to a limited company. This company was also incorporated by Solomon himself
and his family. He was the managing director of the company. He incorporated the company
with 20,000shares, each of one pound.
 Later on Solomon failed to run the business successfully. The company went into liquidation.
Unsecured creditors of the company filed a case in the court. They claimed that it was a fake
company, started by Mr. Solomon. He was liable for the failure of company. So, he should pay
unsecured creditors from his personal money.
 The lower court accepted the claim of unsecured creditors, but the House of Lords cancelled
the judgment of lower court with complete majority. They explained that it was a limited
company, started by Mr. Solomon. The company is a child of law. Its birth, growth and death
are done by law. The company has separate legal entity which is distinct from its members.
Therefore, the company was liable to pay its debts, not the member personally. It was the
liability of Solomon Company Ltd. to pay its unsecured creditors, not of the personal liability of
Mr. Solomon.
2. Explain Case of Ashbury Carriage Company V/s Riche
Base of Case (Doctrine of Ultra Vires):
The case of Ashbury Carriage Company V/s Riche is on the basis of one of the clauses of M.O.A.
The clause is ‘object’ of company. This can be explained as follows:
The object clause of MOA clearly mentions object & scope of setting up the company. It mentions
the activity to be performed by the company. The company cannot undertake any activity outside the
scope of the object clause of MOA. If the company does so, it is considered to be “Ultra Vires” Ultra
means ‘beyond’ and Vires means ‘power.’ Thus, when the company acts beyond its power, the act is
known as ‘ultra vires.’ Such ultra vires act is void (cancelled / Invalid). It is not lawful, means it is
illegal. It does not create any legal liability in part of the company. The company is not liable for such
activity.
When a person deals with the company, he should study the M.O.A. carefully. Despite of knowing
about the limits and powers of the company, he enters into a transaction with the company and it is
an ultra-virus transaction, then, such transaction cannot be enforced against the company.
Case of Ashbury Carriage Company V/s Riche:
Ashbury Railway Carriage and Iron Company Ltd. Was incorporated in UK under the Companies
Act,1869. It was started with the object – ‘to make and sell, or lend on hire, railway-carriages’ The
said object was mentioned in object clause of M.O.A. But the company agreed to give Riche and his
brother a loan to build a railway in Belgium. Later on, the company refused the agreement. Riche filed
a case in court. The court gives judgment in favour of the company. As it was an ultra vires act, which
is illegal and not lawful. Thus, Riche lost the case.
------------------------------------------------------------------------------------------------------------------------------------
3. Explain Case of Peek V/s Gurney
Base of Case (Liability of mis-statement in Prospectus):
The case of Peek V/s Gurney is on the basis of liability of mis-statement in prospectus. This can be
explained as follows:
The purpose of issuing prospectus is to invite general public to subscribed shares for the capital of
the company. All the members of the general public do not know about the company, its project and
its directors. Every person who is interested in investing his capital in the company has right to know
where his money is going to be utilized and what would be a profit of his proposed investment.
Prospectus is the main source of information. Because, it gives complete details about the company
and its project. Investor relies upon the statement in the prospectus and invests his money in the
company. So it is the duty of the promoters and the directors to present the true picture and not the
rosy picture of the company based on false details.
If any of the details, contents or statements of prospectus is misleading and incorrect, then it is called
mis-statement in prospects. The company’s directors - responsible officers are personally responsible
for such mis-statement.

Case of Peek V/s Gurney:

Mr. Peek had purchased 200 shares of Gurney Company from the stock exchange. He had read out
prospectus of the company before purchasing the shares. The prospectus states strong financial
position of the company, but actually it was false. Later on the company was
liquidized and Peek had to suffer a loss of £100,000. He filed a case in the court, to receive a
compensation for the loss suffered by him. The court said that the company and its directors were not
liable for the transactions after the allotment of shares. Peek did not purchase shares from the IPO of
company, but form the open market. Hence, the company cannot be held liable to pay any
compensation for such damages. Thus, court gives judgment in favour of the company. As it was not
called liability of mis-statement in prospectus. In this way Mr. Peek lost the case.
-------------------------------------------------------------------------------------------------------------------------------------