Corporation As a Legal Entity - Case Study Example

After carrying on a leather business for sometime, Mr. Salomon turned his business into a limited company. At that time the law required the number of shareholders to be essentially seven. Mr. Salomon held 20,001 shares with his wife and five children holding six remaining shares, making him the majority shareholder of the company. He also acted as the sole director of the company. Mr. Salomon sold his previous business to the company and received the payment in the form of debentures. The debentures were worth 10,000, which were secured by him with the charge, making him a secured creditor of the company.

After some time his business failed and he had to liquidate the company. The debentures were paid off out of the remaining assets but nothing was left to pay the unsecured creditors of the company who sued Mr. Salomon to be personally liable for the debts of the company. The court's decision however went in the favour of Mr. Salomon on the basis that he had not committed any fraud and that he could not be held liable for his company's debts as a company is a separate being from that of its owners and directors, even when the majority of shares and debentures were held by him (Griffin, 2000) It is therefore evident from above illustration that a company's owners, shareholders, directors, and management cannot be termed as the same entity as the company itself, because in the light of law, these are distinct from each other.

Therefore, the claim of the Bensons Carpfit Ltd's unsecured creditors that the owners and shareholders of the company should personally pay to them other than the company's assets is vague and has no legal obligation on the owner as commented by Cheffins (1997, p147), "in the ordinary course, a company's shareholders, directors, and officers are not personally liable for the company's debts". The case of Salomon v Salomon & Co validates this point and the court's verdict proved that director and shareholder could not be held liable for the debts of the company.

The claim of unsecured creditors that Ben who holds the majority of shares, is the sole director and rest of the shareholders being his trustees in the company, should be held liable for the company's debts because he seems to have traded the company solely. The same was the claim raised by the creditors in the case of Salomon v Salomon & Co that Mr. Salomon being the majority shareholder and sole director of the company should be responsible for the company's debts. However, the court disagreed that even if that had been the case, Mr.

Salomon could still not be held liable. Thus, the claim of the creditors of Ben's company holds no validity in the eyes of law. In the case of Levy V Abercorris Slate and Slab Co, the court enjoined that debenture entails existence or recognition of a debt. Ben also held debentures worth 10,000 having charge over the company's assets. The charge on Ben's debentures need to be determined by the court concerning their nature as being floating or fixed. In the case of Re Mamagh shoes ltd (1982), the court disregarded the parties' consideration of document as a fixed charge and reckoned it to be a floating charge.

It means that the Ben's loan to his company was secured and in case of liquidation he was much in a