Impact of the Salomon v Salomon & Co Ltd Decision on Company Law - Assignment Example

The rationale and impact of the Salomon v Salomon & Co Ltd. decision on company law Grade (November 4, The rationale and impact of the Salomon v Salomon & Co Ltd decision on company law The rationale of the case Salomon v Salomon & Co Ltd [1897] AC 22 was to reaffirm and to re-establish the principle of the supremacy of law over the opinions and personal views of the judges, which had been abstained by the lower courts in the ruling under the case Broderip v. Salomon [1985] 2. (Kershaw, 2012:325). Rationale of the case Salomon v Salomon & Co Ltd The case Salomon v Salomon & Co Ltd [1897] AC 22 affirms the rationale of the supremacy of the law, owing to the fact that it was the memorable case where the intuitions, opinions and personal judgments of the judges were replaced with the rule of law as the core of jurisprudence. The conflict between the personal opinion of judges and the legal provisions of the law has been in existence for years, and this conflict has resulted in the determination of cases in a manner that does not reflect the legal provisions. However, under the case Salomon v Salomon & Co Ltd [1897] AC 22, the supremacy of the law as the principle that guides courts in determining cases was cemented. This is because; in both the High Court and the courts of appeal, the judges held that the merit of the case Broderip v. Salomon [1985] 2 simply warranted the consideration of Salomon Ltd as an ‘alias’, thus allowing for the treatment of Salomon Ltd and Mr. Aron Salomon as one and the same thing (Rickett, 1998:16). Therefore, the High Court and the Court of Appeal ruled that Mr. Aron Salomon was responsible for paying the debts incurred by Salomon Ltd. However, the House of Lords unanimously overturned the ruling, by holding that the opinions and personal perspectives of the judges were subordinate to the provisions of the law, and the provisions of the law under Companies Act (1862) had provided that a company could be incorporated for as long as it had seven members, regardless of whether the members contributed to the company in any substantial way or whether they were just mere individuals enlisted as part of the company ownership (Sealy, 2010:36). Thus, the relevance of the case Salomon v Salomon & Co Ltd [1897] AC 22 in company law is that it cemented the position of law as the principle reference for which the courts should base their judgments, while placing the opinion and fair judgment of the juries subordinate to the principle of the law. This is considering the fact that judge Vaughan Williams J. of the High Court had applied his opinion in ruling the case Broderip v. Salomon [1985] 2, whereby he opined that as opposed to the application of the legal provisions of Companies Act 1862 in the case, it was a bit more prudent and fair to apply the ordinary regulations for the agent and agency relationships, which provides for the agent being the representative of the agency, thus allowing both entities to be treated as a single entity (Griffiths, 2013:77). This opinion was refuted by the House of Lords, where the justices provided that the law allowed for the incorporation of a limited liability company under the provisions of Companies Act 1862, so that the relationship between the principle and agent in the running of an incorporated business could be eliminated, and in its place replaced by the creation of a separate legal entity from its owners/shareholders, such that the owners could not be liable to indemnify the business for its loses or debts incurred (Morse, 2010:47). Additionally, the House of Lords refuted the opinions and claims made by the Court of Appeal judges, where the judges sought to ignore the separate legal personality of Salomon Ltd as a company, and rather look into the manner in which the company was formed, whereby Judge Lindley LJ opined that the manner in which Salomon Ltd was formed suggested that it was incorporated for illegitimate purposes and possibly for the purpose of committing a fraud (Mallin, 2007:65). In refuting the ruling of the court of appeal, the House of Lords sought to affirm that the separate legal personality of the company could not be ignored, regardless of the perceived or suggested intentions, or the manner in which the company was formed, since under the provisions of law in Limited Liability Act 1855, a limited liability company once established removes the responsibility of paying for the debts and losses of the company by its shareholders or owners (McLaughlin, 2014:73). The ruling by the High Court and the Court of Appeal had applied a retrogressive approach, by ignoring the provisions of both the Limited Liability Act (1855) and the Companies Act (1862) which prohibited the transfer of the burden of debts from the owners or shareholders of the company, back to applying the provisions of the Joint Stock Companies Act (1844), which still required the shareholders of a company to be liable for its debts. Impact of Salomon v Salomon & Co Ltd decision on company law The decision of the case Salomon v Salomon & Co Ltd [1897] has impacted on the company in two major ways: i. Corporate legal person as the supreme principle for modern company law The impact of the decision under the case Salomon v Salomon & Co Ltd [1897] AC 22 is that it defined the separate legal personality of a legally constituted business from that of its owners, thus establishing both the Limited Liability Act (1855) and the Companies Act (1862) as the fundamental laws guiding the company law, while at the same time separating the owner of the business from being considered its legal agent (Hicks & Goo, 2008:102). However, despite the fact that the provisions of the law under both Limited Liability Act (1855) and the Companies Act (1862) had offered for the legal separation of the owners of a business from the business entity, it is only the decision under the case Salomon v Salomon & Co Ltd [1897] AC 22 that eventually created a company as a legal person (Sealy, 2010:271). Therefore, despite the previous attempts by the judges and the courts to circumvent the law so that they could cross the line separating a company from its owners and venture into the territory of treating the owners of the business as the parties liable to the debts of the business, the decision under Salomon v Salomon & Co Ltd [1897] AC 22 established the principle of corporate personality, which is the cornerstone of company law to modern day (Griffiths, 2013:72). Through confirming the legitimacy of the claims made by Mr. Aron Salomon; that he should be paid from the proceeds of liquidation of the company where he was the majority and virtually the single shareholder, the House of Lords went ahead to stamp the legal authority of corporate legal personality, and limited liability of the owners of the company, for the company’s debt (Bourne, 2013:24). The stamped authority of a limited liability company being a legal person, was evident in Adams v Cape Industries plc [1990] Ch 433, a subsequent case that happened over a full century after Mr. Salomon’s case. The ruling in this case prohibited the lifting of the corporate veil in order to establish the true owners of the company, for the sake of holding them responsible for the liabilities of the company. In the ruling, Justice Slade LJ held that the courts are not free to disregard the principle of corporate legal personality established under the ruling in the case Salomon v Salomon & Co Ltd [1897] AC 22, for the simple reasons that the courts believe that justice would require such an action (Dignam & Lowry, 2009:90). In this respect, the decision in the Salomon v Salomon & Co Ltd [1897] AC 22 has remained a cornerstone of the company law in the modern society, where the corporate legal person principle is still upheld as the supreme identity for any legally constituted business, and where the courts cannot simply neglect this principle and start treating both the business and its owners as a single entity, for the sake of being seen to execute a decision that they feel is fair either for an individual or the society (Rickett, 1998:16). Similarly, the principle of corporate legal personality established under the case Salomon v Salomon & Co Ltd [1897] AC 22 was applied in determining the case Bank of Tokyo Ltd v Karoon [1987] AC 45n, which pitched Mr. Karoon against the Bank of Tokyo in New York and the Bank of Tokyo in London. In the case, Mr. Karoon claimed that the Bank of Tokyo in New York, which was the parent company to the subsidiary Bank of Tokyo in London, had breached the confidentiality principle in disclosing confidential account information to the subsidiary (Rickett, 1998:17). Therefore, he required that both the subsidiary and the parent company should be treated as the same corporate entity. However, in the ruling, Lord Justice Robert Goff observed that; though it was appropriate to consider both the parent company and its subsidiary as a single entity for economic reasons, the principle established under the case Salomon v Salomon & Co Ltd [1897] AC 22 requires that the legal consideration of corporate legal personality should take precedence over any other consideration, no matter how fair such a consideration might be to an individual or society at large (Morse, 2010:63). Thus, applying the principle of corporate legal personality established in the decision of Mr. Salomon’s case, Lord Justice Goff declined to allow for the legal treatment of both the Bank of Tokyo in New York and the Bank of Tokyo in London as a single entity (Rickett, 1998:17). In this respect, the principle of corporate legal person, as established in the case Salomon v Salomon & Co Ltd [1897] AC 22, remained the guiding principle of the company law, through to the 20th century. ii. Corporate legal person as the origin of New Company Laws The decision under the case Salomon v Salomon & Co Ltd [1897] AC 22 has resulted in the creation of new company laws, based on the principle of corporate legal person that was established under this case. Following the decision in Mr. Salomon’s case, a new law was established in the form of Companies Act of 1985, to provide for the separate legal status of the corporate entities that have been incorporated under the Limited Liability Act (1855), such that these entities should be treated separately in law, from the individual owners or the shareholders who have established the business. In this respect, section 13 of the Companies Act of 1985, requires that business entities that have been registered under the business registration act as limited liability companies, have a separate legal status from their owners or shareholders (French, Mayson & Ryan, 2013:123). Secondly, the decision under the case Salomon v Salomon & Co Ltd [1897] AC 22 has led to the creation of a subsequent law in the form of the Insolvency Act of 1986, which seeks to safeguard the principle of corporate legal person that was established in Mr. Salomon’s case, while making exceptions for the situations under which the corporate veil can be legally unveiled so that the law can establish the ownership of a company and then treat the business entity and the ownership of the company as a single entity (Hannigan, 2012:42). Thus, under section 213 of the Insolvency Act 1986, the law provides that; in the process of winding a business where it becomes apparent that the business was established with the intent of defrauding the creditors, or for any other fraudulent purposes, the courts can lift the corporate veil and indentify the owners of such business who were involved in the fraud, for the sake of holding them responsible for the liabilities of the business (Mallin, 2007:85). Further, section 214 of the Insolvency Act 1986 is a law that was created in order to clarify when the principle of the corporate legal person can be vacated in law, under circumstances where the courts are able to find the directors of such companies as having been intentionally negligent in causing the creditors to incur losses, such that the directors of such a company and its owners can be treated as a single entity, for the purpose of making contributions towards the payment of the creditors (McLaughlin, 2014:73). Under this provision of the law, the courts can lift the corporate veil, so as to identify the directors of the company who were aware of the possibility of liquidation the company, and did nothing to alert the creditors from incurring more losses. This way, the directors of the company and the company itself are treated as a single entity for the purposes of making the necessary contributions to repay the creditors. Lastly, the decision under the case Salomon v Salomon & Co Ltd has led to the creation of another law in the form of Companies Act 2006, seeking to safeguard the principle of corporate legal person that was established under Mr. Salomon’s case, which has made companies a legal person that is separate from its members (Dignam & Lowry, 2009:19). Therefore, under section 15 of Companies Act 2006, a company should be treated as a separate and independent entity from its members, for the sake of conducting businesses, entering into contracts, and paying for the liabilities arising out of the business of the company (Sealy, 2010:47). However, the Companies Act 2006 can also take away the privilege of corporate legal person, and allow the lifting of the corporate veil for treating the owners of the company as a single entity with the company, as was provided by Lord Diplock under the case Dimbleby & Sons Ltd. V National Union of Journalists [1984] 1 W.L.R. 427, where the owners of the company were identified for paying the defrauded creditors. Thus, this section of modern company law has been established based on the decision under the case Salomon v Salomon & Co Ltd, as the first to affirm the principle of legal person in company law. Conclusion In conclusion, the rationale behind the ruling in the case Salomon v Salomon & Co Ltd was to affirm the rule of law as supreme to the opinion of judges in deciding legal questions in a court of law. Further, the ruling under this case established the concept of the corporate legal person as the supreme principle guiding the company law. Finally, it is as a result of the ruling under this case that new laws clarifying or building on different aspects of the company, for example the Insolvency Act 1986 and the Companies Act 2006, which provide for the procedures o winding up a company and those of lifting the corporate veil respectively. Reference List Adams v Cape Industries plc [1990] Ch 433 Bank of Tokyo Ltd v Karoon [1987] AC 45 Bourne, N. (2013). Bourne on Company Law (6th ed.). Routledge. Broderip v. Salomon [1985] 2 Companies Act (1862) Companies Act 2006 Dignam, A. J., & Lowry, J. P. (2009). Company law. Oxford: Oxford University Press. Dimbleby & Sons Ltd. V National Union of Journalists [1984] 1 W.L.R. 427 French, D., Mayson, S. W., & Ryan, C. (2013). Mayson, French & Ryan on company law. Griffiths, A. (2013). Company Law. Pearson. Hannigan, B. M. (2012). Company law. Oxford [u.a.: Oxford Univ. Press. Hicks, A & Goo, S.H. (2008). Cases and Materials on Company Law (6th ed.). Oxford University Press. Insolvency Act of 1986 Kershaw, D. (2012). Company law in context: Text and materials. Oxford, U.K: Oxford University Press. Limited Liability Act 1855 Mallin, C. A. (2007). Corporate governance. Oxford: Oxford University Press. McLaughlin, S. (2014). Unlocking Company Law. Routledge. Morse, G. (2010). Partnership Law. Oxford University Press. Rickett, C. F. (1998). Corporate personality in the 20th century. Oxford: Hart. Salomon v Salomon & Co Ltd [1897] AC 22 Section 13 of the Companies Act of 1985 Section 213 of the Insolvency Act 1986 Section 214 of the Insolvency Act 1986 Section 15 of Companies Act 2006 Sealy, L. S. (2010). Sealys cases and materials in company law. Oxford: Oxford University Press. Read More