Company Law in Salomon v Salomon - Essay Example

Company Law Introduction Company law largely relies on the verdict of Salomon v Salomon & Co. (1987). This verdict has legalised the existence of a corporate entity by assigning it as a ‘legal personality.’ This legal personality has every right, authority, capacity and ownership right; it can sue or can be sued as well. In other words, this verdict has provided a veil between an owner and a company and through this veil the owner would not be personally blamed or persecuted if corporate actions have been taken on behalf of the company; Thereby, the company would itself be held accountable and responsible for all business actions and their ramifications as well. For example, the verdict of this case law also highlights that the company can also be sued or can sue others as well. Through this authority, the company will be given an opportunity to defend itself and provide grounds for legitimising their business actions and their ramifications as well. At the same time, the company has right to own property, assets and liabilities as well. When these characteristics are compared with a natural human being, it can be deduced that both corporate entity and human being have similar rights, authority and ownership of assets. However, there are certain circumstances in which this artificial existence is not allowed but the veil of incorporation is lifted for ascertaining liability or any other legal issue that have necessitated such action. In the following parts of this essay, first the case study background has been provided in which the basic facts and other details have been included. Subsequently, the related held has also been provided. It is followed by various sections highlighting the influence on English company law and common law as well. In this discussion segment, both aspects have been highlighted so as to ascertain and understand the usefulness of this case law. For this purpose, support of subsequent other case laws has also been provided. Case Background: Salomon v Salomon & Co Ltd (1987) Case Facts Salomon was a merchant in the boot and leather business. With the passage of time, the business experienced a steady rise which required additional capital and members as well. In order to meet the needs of growing business, Solomon decided to form a limited company by taking his family members as partners. Subsequently, he sold the business control and ownership to the new company as the new company paid cash, debentures and shares as well. However, due to the certain events, the company was liquidated and the case was moved into the court because the parties argued that Solomon and the company was the same. Thereby, it was Solomon’s responsibility to pay damages to creditors and others as well. Held After hearing all the facts, the court decided that before the liquidation process, a company was formed which was a separate legal entity. Thereby, the company debt would not be paid by Solomon but the company was itself responsible for any outstanding amount. Influence on English company law This case has laid the very foundations of today’s corporate law. First, prior to this case, there was no clear-cut separation between owner and company itself. Consequently, this situation raised a number of problems for courts for deciding or assigning responsibility of any damages or outstanding amount due to the owner and the company. At the same time, it was not possible for parties to define and understand their current and future individual liability if a group of people was doing business collectively. However, after this case and its hearing, the English company law experienced considerable strategic change as the main contentious issue about a company formation was resolved properly. At the same time, it contributed a new type of business venture (i.e. company) after having sole proprietorship and partnership. On the progress and performance of both partnership and proprietorship, a considerable work has already been done. Subsequently, thanks to the verdict of Salomon v Salomon & Co., company within the legal framework saw a new progress through which it can exist and work like a legal personality having its own rights, assets, liabilities, shareholders, investors, managers, directors, creditors, suppliers and other members who are directly or indirectly interested into the day to day affairs of company. Limited liability Limited liability refers to liability restricted to a particular specified amount. Previously, there was no ruling on this issue and partners or members of a company were required to pay damages more than their level of ownership or capital invested in the company. This was the major effect of the verdict of Solomon v Solomon & Co. In other words, after this case, no one is accountable or required to pay others’ debt until it is mentioned in any form of contract or agreed mutually. For example, private companies are not required to accept additional liability. If the company directors are willing to take this responsibility, in that case, they need unconditional approval from the shareholders, who are the real owners of the company because the payment of additional liability will not be paid by the individual directors but it will be the company’s responsibility to pay additional liability. In this regard, it is also important to highlight that, in that case, the director should provide full access and information to the shareholders particularly in an Annual General Meeting (AGM) in which type of liability, financial cost; length of redemption; current and potential consequences should also be shared and informed to the shareholders. At the same time, eventually, it will be the company’s responsibility to pay any amount which comes under the label of additional liability discussed with the directors of the company. Company owned property Like a natural human being, a corporate entity is entitled to own property. For example, after the commencement of business operations, the legal entity is legally and corporately allowed to retain property in the shape of subsidiary, associates, buildings, cash, account receivables and other fixed and current assets. On these owned assets, directors and shareholders will not have ownership or control right particularly in their individual capacity. At the same time, the company will have right and responsibility of liabilities mentioned in the balance sheet. Both current and long term liabilities are and will be paid by the company as it her name that is being used for carrying out financial and other types of business and commercial operations. However, certain unexpected problems cannot be avoided particularly in this context. For example, in the case law of Macaura v Northern Assurance Co (1925), a complainant lost this case. In this particular case law, the complainant was the owner of timber estate which later was transferred to a newly formed company; after incorporating the company, the owner continued to insure the timber estate on his own name rather than on the company name; after losing the timber, the complainant could not recovered the insurance amount as it was held that the timber estate was not owned by Macaura but the company; thereby, only the company had a legal right to claim insurance on the lost timber estate (Cassidy, 2006). Based on this case law, it can be extracted that both owner and company are two legally separate entities eligible to own property and other assets. In this regard, it is important to understand that the extent of liability is limited to the amount invested in a company. And no additional amount will be paid by the shareholder at the time of liquidation. Legal authority Legal authority extends rights similar to one given to a natural human being. In this situation, a legal entity has a legal authority (capacity) to enter into a contractual relationship with any other legal entity. In this relationship, this legal authority provides rights to define and elaborate the type of relationship and terms and conditions involved in the contractual relationship. Furthermore, this authority has another dimension. For example, in case of violation of any term mentioned in the contractual relationship, the legal entity can be sued and will also have authority to sue the contracting party if some infringement has been made by that party. In either case, the legal entity, in its individual capacity, will be required to face the consequences of subsequent events taking place and shareholders, employees or directors will not be held accountable or responsible to face the ramifications of the consequences. As a result, it can be highlighted that the legal authority is similar like a legal capacity owned and exercised by a natural human being and the implications of subsequent actions and their effects will only be faced by the natural human being and the same is applicable to the legal entity. Furthermore, through this legal authority, company can contact financial institutions and can obtain loan facility on its own name. By obtaining loan from a bank, the company itself will be responsible for the financial cost and repayment of all principal amount obtained from the bank. In this regard, it is important to highlight that directors manage day to day affairs of corporations and they are entitled to take all managerial and non-managerial steps for carrying out the business operations. Under such circumstances, the directors are not working in their personal capacity but in the official capacity delegated by the company law. Thereby, the directors will not be personally responsible for all acts and decisions of directors carried out on behalf of the company and they cannot be contacted to defend their actions. However, if certain strategic or operational decisions of directors have not paid off and instead have created more unexpected losses for the company and the shareholders as well. In this case, the directors would be contacted and they are required to defend their corporate decisions. Subsequently, a detailed investigation would be carried out to ascertain the claims made by directors. In this situation, if it is established that directors’ personal wealth have been increasing over these years and the company have been incurring corporate losses, then the court would ask the plaintiff to prove that their corporate decisions were taken to improve the financial condition and financial performance of the company. Continuous existence A company is different from its owners (i.e. shareholders). Thereby, it has its own distinct and separate existence from its creators (shareholders). Generally, private companies are created through corporate law for which it is highly essential that promoters should follow the necessary documentation and other legal processes for creating a separate and distinct legal entity. After satisfying the legal requirements by the original owner, the newly formed legal entity remains in existence even if the original creator (known as promoter or incorporator) expires. In other words, corporations’ existence has nothing to do with the existence of the shareholders and they continue to remain in existence till they continue generating profit for them. In order to wind up a company, it is highly essential that a legal procedure should be adopted in which all corporate and legal steps are carried out before formally and legally declaring an entity bankrupt or no more in corporate existence. Consequently, it can be deduced that a legal entity will remain in a perpetual corporate existence throughout its corporate period and will only die through following the established legal procedure. Veil of incorporation Veil of incorporation refers to a separation between owner and company and it highlights company as a separate legal entity having assets and liabilities mentioned on its balance sheet and these assets and liabilities are not owned by shareholders but the company itself (Rodgers, 2007). In other words, here veil works as a separation framework in which both owners and company separately and legally exist and are separately accountable and responsible for their business operations. Lifting of veil Lifting of veil refers to certain situations where court or common law experts take decision to lift the veil of incorporation so that the separation between owners and the legal personality is observed (Dignam and Lowry, 2012). Following are the certain examples where lifting of veil is carried out: Section 299 Companies Act 2006 has a legal requirement that the consolidated accounts are to be prepared and developed by a related group; within this context, authorised employees are required to include company name and may be personally responsible if they fail to incorporate the company name and other essential requirements mentioned in the provided company legislation (Kelly et al., 2014). Based on this example, it can be extracted that even after its formation and working in a separate legal capacity, a company and its owners may not be perfectly distinct and separate from each other. Any circumstances may require the lifting of veil of corporation so that mandatory legal procedure is adopted for ascertaining liabilities and other requirements necessitated by circumstances; consequently, shareholder ownership and separate legal personality are largely less compatible but due to the limited liability clause, the interests of shareholders have been safeguarded by the company law (Talbot, 2008). Common law There are a number of common law cases and situations where the court would prefer to pierce the veil of incorporation so as to ascertain legal liability or any other claim. “In DHN Food Distributors Ltd v Tower Hamlets (1976) Denning argued that a group of companies was in reality a single economic entity and should be treated as one; later on, the House of Lords in Woolfson v Strathclyde Regional Council (1978) specifically disapproved of Denning’s views on group structures in finding that the veil of incorporation would be upheld unless it was a facade” (Dignam and Lowry, 2014, p.35). Two additional qualifications relating to Salomon v Salomon & Co. have been acknowledged by the English courts: (1) the Salomon v Salomon & Co. verdict would not be applicable to the subsequent cases if it is established that the controlled entity was purely working as an agent of the parent company; or (2) it has been observed that abuse of the corporate form has been carried out (Wallace, 2002). Conclusion Salomon v Salomon & Co verdict has strategically changed the corporate law. First, the provision of limited liability has been the most important contribution to the corporate law as it enables shareholders and potential investors to experience a limited liability in case a company is required to liquidate its assets in order to pay out the outstanding amount of creditors. Additionally, after this case law, a company has been given ownership right under which it can own assets, liabilities and any form of property on its own name. Through this effect, the company would be in a position to record all assets and liabilities on the balance sheet. In other words, the owners have nothing to do with the type of assets owned by company and the company is itself responsible for any outstanding amount to be paid to creditors. At the same time, the case law also extends legal authority to a corporate entity. Under this framework, a company is legally authorised to apply for loan from a bank and the company itself will be responsible for the financial cost and the repayment of the principal amount. References Cassidy, J. (2006). Concise Corporations Law. 5th edn. Sydney: Federation Press. Dignam, A., & Lowry, J. (2012). Company Law. 7th edn. Oxford: Oxford University Press. Dignam, A., & Lowry, J. (2014). Company Law. 8th edn. Oxford: Oxford University Press. Kelly, D., Hammer, R., & Hendy, J. (2014). Business Law. 2nd edn. Oxford: Routledge. Rodgers, P. (2007). Commercial Awareness and Business Decision Making Skills: How to understand and analyse company financial information. Oxford: Elsevier. Talbot, L.E. (2008). Critical Company Law. Oxford: Routledge Wallace, C.D. (2002). The Multinational Enterprise and Legal Control: Host State Sovereignty in an Era of Economic Globalisation. The Netherlands: Kluwer Law Publishing. Read More