1973 PLP 459 (PTD)

Now, it is elementary that a person cannot sell to himself in favour of income‑tax, because a person cannot make profit out of himself. The basic idea underlying section 10(2)(vii) is that the vendor has made profit by the transfer of his assets . . . . . If he transfers it to himself, he cannot make profit either real or notional." Their Lordships were, therefore, of the view tat this was a sale by a person to himself. With the greatest respect for this view we are unable to subscribe to their Lordships' opinion. A company registered under the Companies Act is a person. The shareholders of that company do not own anything owned by the company. Sales to the company are not sales to the shareholders. The property of the company is not the property of the shareholders. We may refer to the time honoured decision of the House of Lords in Aron Salomon v. A. Salomon & Company Ltd. (1897 A C 22). In that case a trader by the name of Aron Salomon sold a business to a limited company with a nominal capital of 40,000 shares of 1 each. The company consisted only of the vendor, his wife, a daughter and four sons. why subscribed to one share each. At page 30, their Lordships observed‑ "I observe that the learned Judge (Vaughan Williams, J.) held that the business was Mr. Salomon's business, and no one else's, and that he chose to employ as agent a limited company; and he proceeded to argue that he was employing that limited company as agent, and that he was bound to indemnify that agent (the company). I confess it seems to me that that very learned Judge becomes involved by this argument in a very singular contradiction. Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr. Salomon. If it was not, there was no person and nothing to be an agent at all; and it is impossible to say at the same time that there is a company and there is not." Their Lordships repelled the contention that the company was only an alias for Solomon. One of the learned Judges observed‑ "Under these circumstances, I am at a loss to understand what is meant by saying that A. Solomon & Co. Limited, is but an "alias" for A. Solomon. It is not another name for the same person; the company is ex‑hypothesi a distinct legal persona." Another Noble Lord expressed himself as follows :‑ "I cannot understand how a body corporate thus made "capable" by statute can lose its individuality by issuing the bulk of its capital to one person, whether he be a subscriber to the memorandum or not. The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act. That is, I think, the declared intention of the enactment. If the view of the learned Judge were sound, it would follow that no common law partnership could register as a company limited by shares without remaining subject to unlimited liability." It is, therefore, quite clear that once a company has been duly Incorporated under the Companies Act it becomes a person different from its shareholders. These very shareholders in the instant case were the partners in the firm of the same name. They transferred the property of life firm to the company and we have seen that they were not the company, therefore, the transfer was by the persons in the firm to the other legal A personality, that is, the corporation which had been brought into being under the Companies Act. The ingredients of a sale, that is, transfer of the property by one person to another for a consideration were all present and the mere fact that the partners of the late firm were the only shareholders of the corporation would not, we respectfully say, detract from the independent legal personality of the corporation. We may in this connection refer to John Foster & Sons Limited v. The Commissioners of Inland Revenue ((1894) 1 Q B 516). By deed between the eight partners composing a firm of the first eight parts and a limited company of the ninth part, it was recited that the partners were desirous that their business should be reconstructed as a limited company and had agreed that the whole of the undertaking, property and liabilities of the firm should be transferred to a company to be formed of all the partners in the firm exclusively, for the purpose of taking over the same; and there should be allotted amongst the partners, in proportion to their shares in the partnership, the whole of the shares in the company. It was held that "The deed was a transfer of property from individuals to a corporation in consideration of "stocks or securities" within the meaning of section 71 of the Stamp Act, 1870, and accordingly was a "conveyance on sale" . . . . . and was none theless so because the eight partners who conveyed the property were also the individuals who constituted the corporation." Lindley, L. J. on appeal observed‑ "Pausing there for a moment: although the persons of the first eight parts may be and were members, and the only members, of John Foster & Co. Limited, John Foster & Co. Limited, is not those eight individuals ; John Foster & Co' Limited, is a corporation. We have accordingly two parties one party consisting of several Individuals, and the of her party consisting of a corporation. Whether they are or are not the members, or the only members of the corporation, is wholly immaterial. The corporation is a totally different person from them in any capacity you choose to assign to them except a corporate one. (The Lord Justice then stated the recitals in and the operative part of the conveyances, and continued:‑) Then the parties of the first eight parts put their seals to the instrument, and the company put its seal to it. Now, what is that instrument? It is certainly a conveyance of Property that is obvious. In order to amount to a conveyance of property there must be a person conveying and a person taking, and you have them both here. The persons conveying are the persons named in the first eight parts, and the persons taking are the corporation named in the ninth part. Now, what is the consideration? The consideration for the transfer of this property is, I agree, not money, but it is stocks and securities, which for this purpose are to be regarded as equivalent to money by reason of section 71 of the Act to which I have already alluded. Then what have we got? To sum it shortly, it is a conveyance of property from to be person to another, for money, or what is, according to the provisions of the statute, equivalent to money. What is that except a conveyance on sale? What else can you call it ? It is certainly not a gift; it is not an exchange ; it is not a partition; it is not a mortgage. I do not know what it is unless it is a conveyance on sale. I do not know what is necessary to constitute a sale, except a transfer of property from one person to another for money, or for the purposes of the Stamp Act, for stock or markettable securities. But then it is argued that it is only a redistribution of property. I do not consider it a redistribution at all. It is an entire transfer of property from one set of people to another person altogether, and whether there are, as there may well be hereafter, additional persons taking shares in this company, is perfectly immaterial." Reference may also be made to J. & P. Coats v. Commissioners of Inland Revenue ((1897) 1 Q B D 778) :‑ "I turn to the first paragraph of the agreement, and I find there that what the parties agreed to do was that the parties of the second part "shall use their best endeavours to procure all the holders of ordinary and preference shares of James Chadwick & Brother Limited, to sell and dispose of their shares to J. & P. Coats Limited." The words are "sell and dispose" of them. There could not be stronger words than those. It was to be a sale and disposition of property, not for money, but "in exchange for fully paid‑up preference and ordinary shares of J. & P. Coats Limited. "But it was a sale out and out. Instead of taking money for these shares the shareholders were to take the shares of J. & P. Coats Limited, and that is what they agreed to do." Salmond in his celebrated book on Jurisprudence observed at p. 360 of the Eleventh Edition that‑ "It is essential to recognise clearly that in neither of these forms of incorporation is the legal person identical with any single human being. A company is in law something different from its shareholders or members. The property of the company is not to law the property of the shareholders. In all these respects a corporation is essentially different from an unincorporated partnership. A firm is not a person in the eye of the law; it is nothing else than the sum of its individual members. There is no legal entity standing over against the partners, as a company stands over against its shareholders. The property and debts of the firm are nothing else than those of the partners . . . . . The incorporation of a firm‑that process by which an ordinary partnership is transmuted into a company‑effects a fundamental change in the legal relations of its members. It is nothing else than the birth of a new being, to whom the whole business and property of the partnership is transferred‑a being without soul or body, not visible save to the eye of the law but of a kind whose power and importance, wealth and activity, are already great, end grow greater every day." See also the following in para. 11, page 9, of Halabury's Laws of England, III Edition, vol. 9:-- "

11. Corporation of a distinct entity.‑The nature of a corporation may be shown by contrasting it, as a legal conception, with the individuals or mass of individuals in which it resides. In law the individual corporators, or members, of which it is composed are something wholly different from the corporation itself; for a corporation is a legal persona just as much as an individual. If a man trusts a corporation, he trusts that legal persona, and must look to its assets for payment; he can only call upon Individual members to contribute if the Act or charter creating the corporation has so provided. The liability of an individual member is not Increased by the fact that he is the sole person beneficially interested In the property of the corporation, and that the other members have become members merely for the purpose of enabling the corporation to become incorporated and possess but a nominal interest in its property, or hold their interest in trust for him Notice to an individual who happens to be a member of a corporation aggregate, and has not authority to receive notices, is not equivalent to notice to the corporate body; and where an action is maintainable by and in the name of a corporation, it cannot be maintained by individual members of the corporation. After the dissolution of a corporation the members, on their natural capacities, ran neither recover debts which are due to the late corporation not be charged with debts contracted by It." The reasoning advanced in the Rogers Company case is also the same as in Sir Homi Mehta's case and Doughty v. Commis sioner of Taxes (1937 A C 327). We are, therefore, respectfully of the view that the transaction has all the components of a sale and would, a therefore, accept the reference, answer the question in the negative, but in the circumstances of the case shall make no order as to costs. Reference accepted: