The Decision by the House of the Lords in the Case of Salomon versus Solomon - Assignment Example

Introduction: The decision by the House of the Lords, in the case of Salomon vs. Solomon provides the notion that a company is a legal person. It is this doctrine that first established the rule that a corporation should have a separate legal ownership, when compared to that of its shareholders. On a general level, this was a good decision by the House of Lords. By giving corporations an ability to be viewed as separate legal entities; this case endowed the companies with all the attributes, which could make the companies to be the main powerhouse of capitalism. On certain circumstances, this was a bad decision by the House of the Lords1. Furthermore, through the extension of the advantages of incorporation to small companies, this case of Salomon manages to promote fraud, and the evasion of certain legal obligations. This article explains the impact that Salomon vs. Salomon has had on companies and corporations. Rationale of the Case: On a general perspective, the judgment by the House of Lords was a good decision. This case is recognized all over the world as a good authority, regarding the principle of a corporation being a separate legal entity. Under this case, the House of Lords firmly established that after incorporation, a new and a separate artificial organization comes into existence. Under the law, a company is a distinct person, and it has its own personality, which is separate and independent from the people who created it, invested in it, and those who direct and manage the operations of the company2. Impact: From the principles established in this case, the duties and rights of a corporation are different from the duties and rights of the directors, members, or the stakeholders of the corporation. These people are always obscured by the concept of the corporate veil, which normally surrounds the company. A corporate veil refers to a legal concept which is responsible for separating the personality of that of a corporation, from the personality of the shareholders of a corporation. Furthermore, this personality protects the managers and shareholders of a corporation from personal liability of the company’s debts, and any other obligation that the company may face3. However, this protection is not impenetrable or iron clad, and this is mainly because the court can rule that the activities of a company are not conducted as per the provisions of the legislation that guides the operations of a company, or the managers or shareholders of a company were engaged in carrying out illegal activities. Based on these facts, the courts may hold the shareholders liable, and hence lift up their protection, under a concept referred to as lifting of the corporate veil. The recognition of the fact that a corporation or a company is a legal separate entity is the foundation of the corporate laws that guide the operations of a company currently4. This principle of a separate legal person of a company was supported in the 1989 case of McLaine Watson vs. Department of Industry and Trade. Under this case, the judges denoted that every legal system, that has a certain degree of maturity, is always compelled by an increase in the complexity of human affairs5. Due to this situation, the courts are forced to create personalities who are not men. This is because these complex legal systems are characterized by the interaction of organizations, and people, and it is difficult to solve any conflict that arises from these interactions, without giving institutions a legal personality. This means that the identification of these organizations and companies as human personalities or people. Furthermore, the court ruled that the reason why capitalism in the UK is successful is because of the recognition of the fact that companies have a separate legal entity, from that of their owners. This makes it easier for people to take risks, and form companies, which in turn helps to spur the economic growth of the country. Support for this principle of separate legal personality is shared amongst different academic and legal commentators. Support for this principle is very strong in the judicial and legislative circles. For example, this principle was incorporated in Corporations Act, section 1246. Furthermore, the judiciary, with minor exceptions, has reaffirmed on the need of treating this doctrine of separate legal entity, as very serious. Subsequently, the Australian and the English judicial systems, have constantly upheld the principles contained in the case law of Salomon vs. Salomon. In other words, after the House of Lords passed the resolution forming the principles of Salomon, the separation of a corporation, from that of its owners has gained full support, and legal practitioners have never doubted it. This ruling, with few exceptions, has withstood the test of time7. There are a variety of reasons given, that explain the reason for the creation of a legal entity, of a company. Theoretical framework of corporate entity agrees on the fact that there is a need of creating an artificial personality, in which the legal systems will use to identify a corporation, or a company. Take for example the concession theory. According to this theoretical framework, the concept of corporate personality is a privilege, that the state grants to companies or corporations, for purposes of making it easier for them to conduct business. Furthermore, it helps these institutions or organizations to easily access credit, as well as protecting the personal properties of directors, employees, and shareholders of an organization8. This makes it easier to form a company, or a corporation. The contractarian theory on the other hand argues that the corporation law is able to reduce the transaction costs, through an implication that the company or a corporation should be a separate legal entity. Furthermore, this principle believes that it is only through a separation of legal entities that a corporate organization can manage to effectively carry out its obligations or activities. This is because the shareholders and directors of an organization are protected from the activities of the company, as long as they do not engage in activities that are illegal or against the law. This principle is therefore an important element of corporate law, and it helps in facilitating the corporate activities of an organization9. In a variety of ways, this view is supported by legal scholars and members of the judicial system, who assert that the principles established in Salomon plays a role in the formation and regulation of contractual relationships, that exists between corporations, shareholders, employees, suppliers, credit institutions, and other stakeholders of the company. Take for example, the relationship between a company, and a credit institution. Credit institutions cannot take control of the assets of the shareholders and directors, in case the company defaults on the payment of credit10. However, these credit institutions can take control of the assets of the company. The major reason is that the products and equipments owned by shareholders do not belong to the company. Based on this fact, credit institutions cannot claim the properties of the shareholders, if the corporation or company under consideration defaults in paying of its debts. Advocates of the natural entity theory claim that the separate legal entity of a corporation is beneficial in giving a company, a legal capability to develop and act on its own mission, and visions11. Theoretically therefore, there is a general agreement that a company or a legal corporation is a separate entity, from that of its shareholders, or directors. This is a necessary factor, as it motivates people to form companies, which are the backbone of capitalism. This concept of a separate legal entity or personality of a company is the reason why the government favors the formation of a company, to carry out social and commercial activities. Furthermore, it will be more desirable for individuals to create or form companies when their liabilities are not directly placed on human beings12. Furthermore, an individual human being is short-lived, fickle, and a difficult personality to organize to a large scale political and economic associations or activities, on a permanent basis. On the other hand, it is possible for a corporation to exist for many centuries or years13. This is because they have a separate management system, which will continue despite the death or incapacitation of the people who formed the company. Based on this fact, majority of commercial enterprises or organizations are managed and owned by a corporate body, as opposed to individual owners of the company, who are directly responsible for managing and controlling the company. This aspect is possible because of the recognition of the principle established in Salomon that incorporation of a company would achieve an interposition of a legal personality, between the natural person who controls and owns the organization, and the business action that an individual under consideration engages in. In essence, a corporation or a company is an artificial person that has been formed by a natural person. Section 124 subsection 1, of the Corporations Act recognizes the fact that a company enjoys the legal capacity that is attributed to a natural person14. In line with the principles established in the Salomon case, a company that is registered has the capability of carrying out all the functions associated with a body corporate. This is clearly depicted in Subsection 124 (1) of the Corporations Act. In other words, a corporate organization is a separate legal entity that is different from the people who formed and control the organization. This is the most important attribute or element of a corporate personality, from which, every other practical consequence is able to flow. As a separate legal entity, a registered corporation or company has the capability of being sued, and also suing. This is a principle that was established and recognized in the 1843 leading case law of Foss vs. Harbottle15. Under this case, the court denotes that a company has the capability of suing another party, in case the party under consideration has done some harm to the organization. This means that the company or corporation has the rights of suing or being sued in case of a breach in contractual relationships. The second advantage or benefit is that a corporation or company has a perpetual succession. This is a principle or fact recognized in the case law of Regal ltd vs. Gulliver. Under this case, the courts ruled that a director will be in breach of his or her duties, if he takes an advantage of an opportunity which the corporation would have an interest in, but did not take advantage of the situation under consideration16. However, it is possible to resolve this breach, in case the actions by the directors or managers are ratified by the shareholders of the organization. Another benefit is that a corporation or a company can engage in a contract, by using its own name. This was a principal which was established in the case law of Lee vs. Lee Air ltd17. This is a case that involved the concept of separate legal entity, and of corporate veil. This case affirmed the decisions of the House of Lords that a company or a corporation is a separate legal organization. On this basis, a director of the company can be under a contractual relationship, with the company that he or she formed. Another benefit and implication of the doctrines developed in this case is the fact that a corporation has the capability and power of disposing, holding or acquiring property. This fact is best established in the case law of Macaura vs. Northern Assurance Ltd18. Under this case law, the courts denoted that a corporation or a company has the capability of owning and disposing off of properties. This is because companies are treated as natural people, and in accordance to law, natural people can own, and dispose of properties. Furthermore, a company or a corporation can benefit from taxation issues, through minimizing of taxes. This is better depicted in the case involving Hobart Bridge vs. FCT, which argued that it is possible for a corporation to minimize its taxes, through payment of dividends. Furthermore, it is possible for a corporation to finance its operations through the creation of a floating charge. It is also possible to denote that the creation of a company means that its liability is limited. Under the doctrine developed in this case, a company or a corporation is exclusively liable for the obligations that it incurs on its behalf19. This means that the shareholders and directors of a company are not liable for the activities of the company that are carried out, when it legally seeks to achieve its objectives. This concept is very useful, in a capitalistic system. This is because it helps in maintaining the risk taking tendencies of business executives and shareholders. This is with the knowledge and belief that they will not be held liable for any activity of the company that is carried out while meeting its objectives. This is a concept referred to as the corporate veil. This concept of limited liability is useful in three major ways20. The first advantage is that a limited liability company manages to remove the costs that an organization will incur when it is engaged in the control and separation of the ownership of the organization. This is because it leads to a reduction of the need of monitoring the activities of the shareholders and the management. However, this does not mean that the management should be constantly observed for purposes of ensuring that they do not breach the law. Furthermore, the free transfer of shares, which is one of the major characteristics of a company, ensures that shareholders are able to control the company, irrespective of the existence of the separate legal personality of the company. This is therefore an incentive to the management and directors of a company, to initiate policies that are efficient in serving the needs of the company. Conclusion: The principles established in this case are very important under the company law. This is because the House of Lords established a rule, that a company can be viewed as a legal person. Based on these facts, a company has the capability of suing, and being sued, as well as engaging in contractual relationships. The principle of separate legal entity has played a great role in promoting modern capitalism, as a result generating extreme economic and social wealth. This principle further covers small business organizations or enterprises. This is in a bid to encourage investors or people to form companies or corporations. Despite the existence of these principles, the courts have always been involved in breaking the corporate veils, in a bid to prosecute people or directors who are engaged in breaking the law. This is an aspect referred to as piercing the corporate veil. This situation allows the courts to prosecute and jail the directors of a company, for illegal activities they have conducted while serving as the directors of the company under consideration. Bibliography: Vanderkerckhove Karen, Piercing the Corporate Veil ( Alphen Aan Den Rijn, the Netherlands: Kluwer Law International ;, 2007) Daniel Prentice, Corporate Finance Law in the UK and EU (Oxford: Oxford UP, 2011) Top of Form Bottom of Form Top of Form Bottom of Form Weber-Rey, Daniela. "Effects of the Better Regulation Approach on European Company Law and Corporate Governance." European Company and Financial Law Review(2007): 370-416. Print. Top of Form Bottom of Form Wildblood,Stephen Wildblood, Halsburys Laws of England.( 4.th ed. London: Butterworth, 2001) Top of Form Bottom of Form Holmes, Oliver Holmes, The Common Law (Cambridge, Mass.: Belknap of Harvard UP, 2009) Read More