Facts in the Case Salomon v A Salomon & Co - Essay Example

Salomon v A Salomon & Co Ltd [1897] AC 22 Introduction Salomon v A Salomon & Co Ltd [1897] AC 22 remains a landmark case in the history of company in the United Kingdom. The case revolutionized company law by introducing the doctrine of corporate personality. The case influenced the formation of successive laws to govern businesses in the country. The doctrine of corporate personality refers to the appreciation of the difference between a company and either its shareholders or managers. As such, a creditor for an example would not sue the respective shareholders and managers but would instead sue the company (HANNIGAN, 2012). The case and its subsequent ruling were significant in informing successive laws that would help mitigate on the numerous dispute arising from business engagement. The doctrine of corporate identity for example exempts the shareholders of an insolvent company from any case by creditors since the company becomes the defendant in such cases. Facts in the case Mr. Aron Salomon ran a successful shoe manufacturing in the United Kingdom. The boot manufacturing business was a major success thus enticing his sons who expressed interest in joining the business. As such, Mr. Salomon turned his business into a limited company, which then purchased his previous business at a cost of £39,000. Mr. Salomon became the company’s largest shareholder after he purchased 20,001 shares of the company’s 20,007 shares. Additionally, he loaned the company £10,000. Unfortunately, subsequent years became unfavorable for the business thus causing massive loses for the company. The government, which was the company’s major customer, withdrew its tender thereby leading to a massive decline of the company’s revenue. The company therefore began defaulting on the £10,000 debenture it owed Salmon. Half of the debenture belonged to Broderip who the sued the company thus forcing the government to put the company under liquidation. The company paid Broderip his £5,000 but this left the company at an unstable position since it could not pay the other unsecured creditors. The company failed to reimburse the unsecured creditors. The liquidator concluded that the government should not honor the floating charge. Such an action would make Salmon personally responsible for the debt. Salmon contested the decision in court thus instigating a lengthy court battle that would reform the country’s company law. At the end of the length court cases that ended up at the House of Lords, the lawmakers appreciated the fact that a company is independent and therefore a separate legal entity. In cases of dissolution of a company, the creditors must petition the company as a legal entity but not the individual shareholders. The ruling coupled with the successive changes in the country’s business law would change the business landscape in the country to dat. The case made it clear that the company is neither the directors nor the shareholders. As such, in cases of conflicts, plaintiffs must always identify their defendants as the company but neither the company’s directors nor its shareholders as was the case in Salomon v A Salomon & Co Ltd. The general rule arising from the case was that companies are artificial people capable of handling its conflicts. As a legal entity, people must always specify the nature of the interaction in order to limit conflicts. When interacting with a company, must understand that a company is an artificial persona therefore a legal entity. The law distinguishes the company from both its shareholders and directors. As such, neither the shareholders nor the directors are responsible for the failures of the company. The two are therefore not responsible for the defaults of the company. Mistaking either the shareholders or the directors for the company have diverse legal ramifications and may include compensation for the damages arising from the subsequent cases of libel. According to the law, the incorporation of anew company in an economy always implies the introduction of a new entity. The entity has rights and privileges since the company law in the country separates a company from either its directors or its shareholders. A company sustains itself and must therefore take care of its revenues and expenses. This way, it becomes liable to any court cases that may arise from its existence (CASSIDY, 2006). As such, the company has specific rights and duties. Such rights and duties are separate from those of the company’s shareholders and directors. The argument in the case is integral since soon after incorporation of a company, the company becomes independent of its developers. Salmon for example created the company. However, soon after incorporation, the company became a separate entity and he would not therefore take responsibility for the company’s debts. The Companies Act 1862 Key among the fundamental legislations that influenced Salomon v A Salomon & Co Ltd [1897] AC 22 was the Companies Act of 1862. Enacted by the Parliament of the United Kingdom, the act provided an effective legal framework for the existence and operation of businesses in the country. Key principles of the act continue to influence the operations of companies in the country with its key descendant being Companies Act 2006. Key among the provisions of the act was its creation and portrayal of limited liability companies as virtual persons thus independent legal entities (DE LACY, 2002). The act explains that any seven people can enter an association to form an incorporated company. Such companies may have or lack limited liabilities depending on the structure adopted by the seven proprietors. Such companies automatically become legal entities thus independent and separate from the proprietors. In arguing the act, the House of Lords raised fundamental concerns none of which deterred the provision of the law. Key among such arguments was the fact a shareholder might have more interest in a company than the others thus influence the operations of the company. A shareholder with more than fifty percent shares of the company has more influence in the company than the other shareholders. In such case, the shareholders always influence the operations and decisions of the company. However, the representatives agreed that a limited liability company is a legal entity regardless of the spread of the shares among the shareholders. The Lords argued that a creditor interacts with a company and not the respective shareholders. As such, the company faces any resultant case as an independent entity. Some of the Lords argued that Salmon exploited such a provision. Salmon owned 20,001 of the company’s 20,007 shares. This made him the largest shareholder with the margin of his shares making him the most influential shareholder in the company. With such amount of shares, Salmon influenced the operations of the company a feature that informed Broderip’s argument in the court. However, the law stipulated that at incorporation, companies automatically become independent legal entities. This implied that Broderip could not sue Salomon since he did not loan Salmon the money. Instead, he loaned the company a feature that makes the company liable thus the most probable defendant in the subsequent court case. Section 167 of the act created the function of a liquidator. The liquidator charged company directors among other significant individuals in a company who commit crimes in relation to the companies. Managers, directors and shareholders can always commit crimes in relations to a company. A shareholder or a manager can easily dupe the public while occupying their rightful positions in the company as was the case with the American Enron. The at foresaw such a possibility thus creating the liquidator whose sole objective remains to bring legal charges to managers, directors and shareholders who commit varied economic crimes in relation to a limited company. Broderip thought that Salomon had tricked him in the debenture deal. He therefore sought the help of a liquidator who then placed the company under liquidation thus securing him the money he had loaned the company. Such was a wise move that safeguarded his interest. The other unsecured debtors who had an equally formidable case sought to sue Salomon instead of the company. Such was a legal oversight that did not protect their interest. Impact of Salomon v A Salomon & Co Ltd [1897] AC 22 The case revolutionized company law. By viewing a company as a legal entity, the case proved that a company is a personalized figure that faces judicial tussles independently. As such, a company has specific legal rights. Companies in the contemporary societies can own property and make investments in order to enhance their profitability. Most companies in the current society have various other investments thereby using such to cushion themselves from incurring loses. This argument distinguishes the company from its shareholders and directors since they do not own the company’s property and investment. Instead, shareholders are interested parties who marshal resources the company invests on their behalf. In case of a legal confrontation as was the case with Salomon, a company must always protect itself without implicating either the shareholders or the directors. The outcomes of the case influence the economy to this day, opening a limited liability company implies that one creates a new legal entity, one that is independent of the employees, directors and shareholders. The case created the concept of corporate veil. The corporate veil refers to the fact that the case extended privileges of limited liability companies to small enterprises. The shoe manufacturing company was Mr. Salmon’s brainchild. He understood the industry and owned the largest number of shares. This implies that the business was arguably a sole proprietorship. However, the House of Lords contented that by incorporating the company, Salomon created a new entity that had its own rights and privileges. As such, the unsecured debtors could not sue Salomon. Instead, the debtors should have sued the company as a legal entity. The case and its subsequent ruling created a formidable precedent for many other cases that sought the application of the corporate veil. In 1961, in Lee V Lee’s Air Farming limited the court argued that the company was a separate entity and Lee was an employee of the company. Apparently, Mr. Lee had formed a limited company that perfected the art of crop spraying, he as an employee, a director and a shareholder at the company. After his death in an accident, his wife sued the state seeking welfare compensation asserting that her husband was a “worker”. The courts argued that Mr. Lee was self-employed since he worked for the company. As such, the legislation did not cover him. The case is a perfect example of a scenario where a company separates from the owners to become a legal entity with rights and privileges (CAHN & DONALD, 2010). Another equally insightful case was Battle v Irish art promotion limited in 1968. In the case, the company had a legal proceeding but could not afford an effective legal proceeding. As such, the plaintiff who was the company’s director and majority shareholder sought to defend the company. The courts denied him the opportunity explaining that the company was a legal person thus represented only by either a barrister or a solicitor. Such are unique scenarios where the law distinguishes the company from the owners and directors. The principle of separation is a vital inclusion in company law since it helps resolve commercial conflicts thus creating a peaceful business environment. According to the corporate veil, a sole proprietor can form a limited liability company with him as the only shareholder, director and employee. However, soon after the formation of the company, the proprietor and the company become two distinct entities with relative privileges and rights (WALLACE, 2002). The corporate veil in this context protects the company from anyone who would instigate a legal tussle against the company. Instead of suing the proprietor, the aggressor sues the company, which then is a legal entity with both rights and privileges. Additionally, such an understanding protects the company by separating personal conflicts between the proprietor and the company. A private legal tussle between the proprietor and a third party remains just that. The third party cannot drag the company into the conflict since the company is a legal entity that exists independently. The principle of separation and the corporate veil are two primary principles in company law both in the country and globally. The fact that companies are legal entities with rights and privileges and therefore separate people from their proprietors is vita in the management of companies in the country. However, in some unique scenarios the company and its owners are identifiable thus sued as one. Infusing business law and contract laws for example presents a scenario where the courts investigate the terms of the offer, acceptance and the intention. In investigating intentions in contracts, the courts can establish a situation where a proprietor and a business are identifiable thus were both accessories to a crime. In this context, the courts can punishment both either individually or collectively depending on their roles and relationship. Conclusion In retrospect, Salomon v A Salomon & Co Ltd [1897] AC 22 influenced the company law in the world today. The case set phenomenal precedent that informed the formation of successive business laws both in the country and throughout the world. The principle of separation provides an effective way of dealing with both companies and shareholders among others in a company. Corporate veil on the other hand protects companies from exploitative and unscrupulous business people. The veil covers the company by separating it from the shareholders. This way, the company acquires a degree of anonymity and does not feature especially in cases facing the proprietors. This creates an enabling environment for both the company and the proprietors to enhance the longevity and profitability of the business. References Battle v Irish Art Promotion Center Ltd (1968). CAHN, A., & DONALD, D. C. (2010). Comparative company law: text and cases on the laws governing corporations in Germany, the UK and the USA. Cambridge [etc.], Cambridge University Press. CASSIDY, J. A. (2006). Concise corporations law. Annandale, NSW, Federation Press. DE LACY, J. (2002). Reform of United Kingdom company law. London [u.a.], Cavendish. HANNIGAN, B. M. (2012). Company law. Oxford [u.a.], Oxford Univ. Press. INTERNATIONAL BUSINESS PUBLICATIONS, USA. (2008). United Kingdom Company Laws and Regulations Handbook. Intl Business Pubns USA. Lee v Lee’s Air Farming Ltd (1961) Salomon v A Salomon & Co Ltd [1897] AC 22. WALLACE, C. D. (2002). The multinational enterprise and legal control: host State sovereignty in an era of economic globalization. The Hague, M. Nijhoff. Read More