Rationale and Impact of the Decisions on Company Law - Assignment Example

Rationale and impact of the decisions on company law; Salomon v A Salomon & Co Ltd affiliation Rationale andimpact of the decisions on company law; Salomon v A Salomon & Co Ltd According to the English company Law, the company is viewed as a juristic person. Even though it does not possess the body of a natural being, it has a place in contemplation of law. The company has to depend upon the people, who are in this case natural namely, the officers, directors, corporate managers and shareholders for its day-to-day running and its management1. The natural persons only represent the company, and all activities they carry out are in the name of the company and not themselves. In the case of Salomon vs, A Salomon & Co Ltd the rule was based on various principles of the company. Salomon was the main shareholder of the company since he owed 20, 001 of the shares out of the 20,007 of the total. Mr. Salomon sells this business to the new corporation and assumes the place of the principal creditor2. In such a scenario, if the company failed, Mr. Salomon would at no instance have liability for the company’s debt and in addition, he would claim the assets that were left to pay off the debt since his debt ranked at a higher priority. The business does not go according to the plan and Mr. Salomon had to sell the debentures to save the company. It is evident that there is a case of insolvent liquidation in regards to the company since it did not have enough funds to clear its debts and there was need for a liquidator to distribute the funds owed by the debtors by releasing the company’s assets. There are advantages of trading within the medium of a limited company such as the Salomon Co Ltd. The members of the company are only tasked to contribute towards the payments of the owed debts to a limited extent. In a case that a company is limited in the form of shares, the shareholders liability to contribute towards the loan is determined by the nominal value of shares that a person holds3. Once an individual who held the shares pays that nominal value and the agreed premium, he or she is no longer liable for further contributions. On the other hand, companies may be formed using unlimited liability of members who may guarantee a specified amount. The liability of the members, in such cases, is not limited to the face or nominal value of their shares and the agreed premium. The law also states that in case of unlimited liability companies, the members should continue to be liable until the whole debt is paid. Additionally, also provides that if the company is unable to clear its debts, the creditors may take steps to petition the court to wind it up as seen in the case of Salomon and Salomon Co Ltd4. A separate legal entity is the chief advantage of incorporation that is followed by many. In the real sense, the business of owned by an artificial person is run for the benefit of other individuals. The analysis shows that some people are the real beneficiaries of the advantages of the corporation. It is in such as case that the corporate personality of a business or rather a company is used to commit improper, illegal acts and frauds. For the reason that an artificial person is not in a position to do anything fraudulent or illegal, the façade of the personality held by the corporate have to be removed to reveal the guilty activities5. This is what is termed as lifting the corporate veil. In most cases, the court never interferes. It sticks to the principle of the separate entity as evident in the case of Salomon. As time passes by, the courts come to realize that there are possibilities of mischievous and fraudulent schemes that are drawn by members and promoters of the companies6. It could be for the interest of the company members in general or the public interest to reveal and punish the individual who misuse the aspect of corporate personality. It was considered convenient to allow the companies to have their own legal personality in Salomon’s case as a judicial intervention in the economic life of the country. However, the technical- legal concern that surrounds the modern nature of the company is how it came to possess the traits of the distinct legal personality that it enjoys. The decision of the House of Lords regarding Salomon’s case clears shows that companies have a distinct personality7. Anyone going through the decision that was reached in the case is the presence of certainty among the members of the House of Lords. The speeches make little reference to the existence of case law or any contemporary sources or ideas. An alternative analysis that the judges in Salomon’s case would have been to claim the company was a cipher for Salomon’s personality and not at all a distinct person. This perception of companies of being mere avatars where people carried on their activities finds a provenance in the common law. In the past, companies were viewed as persons. They occupied a life world of their own in relation to the employees, members and the creditors8. The decision that is reached in Salomon’s case was built on the logic that has the basis on an ideology of the company as an economic actor and a sentient actor. The benefit that flows from the principles that are used in Salomon’s case is one of efficiency. Previously a company organized inform of partnership had complicated ways of creating contracts. Each member had to become a party to the contract, and it involved various hidden natures of obligations and rights of the individual partners. After realizing that the company is a legal and distinct person by itself, the company can then create contracts by its own name9. Consequently, the process of companies creating contracts was made much simpler. The parties were only required to create a single contract involving a human being who is natural and who has authority to create that contract on the behalf of the business. It is usual in large contracts to have people authorized to create a contract agreed by a formal decree from the board of directors or identified in the company’s articles of association. The aspect of corporate personality hence makes trade simpler when complex commercial organizations are on board. The Salomon’s principle also reveals personal benefits as in the case, we see the sole trader, Aron Salomon, having his property protected from the company’s failure. If an entrepreneur carries out business as a sole trader, there are higher chances of facing risk that all of the properties would be lost in case the business fails10. When an entrepreneur organizes his business, inform of a company, he or she puts distance between the company’s property and personal property so that in case the business fails, only the company’s property will be lost. The only problem that is evident in Salomon’s case is an ethical one. The opposite of the personal benefit is discussed above when viewed from the perspective of individuals dealing with the company from the external part. If Salomon’s property has been protected then, the individuals dealing with the company will only have the assets that the company owns available to them in case it fails. This means that a person in the position of Salomon may have less attention and care to the need to operate by honesty and deal fairly with the company’s third parties since he face no personal risk of loss. Moreover, other shareholders of the same company face no risk of loss if there is a failure since the limited liability that has been granted by the company law by definition controls personal liabilities11. The point, the ethics of the economy become questionable since no one is ready to face the risk of a personal loss that is open ended. The shareholders, of course, do face the risk of losing their investments in the company. An entrepreneur encounters loss of reputation among investors and other traders that were attached to the business. What they never face is the loss of personal property. In addition, there are criminal liabilities due to fraudulent and illegal practices hence the individuals cannot simply use the company as a shield to carry out activities regarded neither as illegal nor for any deliberate attempt to con the third parties. A company occupies a moral position that is different from that of an individual since the stigma related to the company, and its actions do not necessary translate to direct stigma of the individual. The English Law has accepted the possibilities of companies committing crimes, but that is not a link to attach the stigma related to criminal or illegal activities to the employees, directors, shareholders and the management of the company. The company enables individuals, as a cipher, to hide behind these façade associated with corporate personality. In the case of Salomon and Salomon & Co Ltd, the House of Lords’ decision verifies the claim Gooley’s surveillance that the doctrine of separate legal entity was some sort of two-edged swords12. It is however, a good decision at a general stage. By coming up with diverse legal entities, he case facing Salomon gives the company all the key qualities to make power linked to capitalism. By extending further the advantages of integrating within the small private enterprises, the Salomon case has caused evasion and actions related to fraudulent of the legal obligations. On the other hand, the case created a legal existence that is independent for the registered companies, which are the principle with significant importance regarding the company law. If this is applied flexibly, it can unfairly shield individuals as evident in Salomon’s case to the loss of individuals dealing with the companies13. Through the House of Lords emphasizing the independent nature regarding corporate personality, it legalizes the use of the corporate form of small partnerships and sole traders. Creditors of limited companies such as A Salomon & Co Ltd should take the funds, which are in this case limited, into consideration and capital since it may discourage the shareholders from controlling and monitoring the commercial operations of their company. Creditors of a company should at times bear the risk associated with dealing with the companies that are limited. There is a main concern of whether the limited liability should strive to minimize the amount of capital since different kinds of creditors have varied capabilities to shield themselves when such dangers occur14. There are instances where the veil of corporate personality is lifted as the company law provides. The advantage of limited liability and distinct entity may not be allowed to prevail in various circumstances such as reduction of membership, misrepresentation in prospectus, mis-description of name, fraudulent conduct, and liability for ultra acts that are linked to the company15. The Salomon principle is credited for giving corporations practical utility. The corporation has many socially and economically beneficial functions as a separate legal entity that is subject to limited liability. In stressing the nature of independence of corporate personality, the House of Lords legitimized the use of corporate form by sole traders and small partnerships. As noted, the Salomon’s case was not particularly about a faded point of construction. They had endorsed a change of ideas regarding the company. They gave separate identity priority by legal forms and looked down upon the economic reality of a company owned by one person. The dilemma of if the decision in Solomon’s case is beneficial of has negative impacts is left unsolved. Some scholars say that the principle of separate legal entity has been instrumental in developing modern capitalism and wealth generation. On the other hand, this has not been largely neutralized by judicial action and joint legislative. Bibliography "A Very Popular CASE Salomon v. Salomon & Co. [1897] A.C. 22 (H.L.)." CA Rocks TBF. Accessed November 16, 2014. http://carocks.wordpress.com/2011/11/29/case-salomon-v-salomon/. Baringer, Dale. 2007. 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