Historical Background of Separate Legal Entity Doctrine - Essay Example

Separate Legal Entity Introduction Salomon had a leather and boot selling company that he was the sole proprietor. Although his business was generating the profit, he decided to convert it to a corporation thus changed its name to A. Salomon & Company, Limited. He became one of the largest shareholders of the company, holding 20,000 shares but the registry also included family members. The new corporation did not do well in the first year of its formation thus Salomon provided the company with an influx as a debenture but the continued losses meant that he had to liquidate the company (Campbell, 2007). This move to liquidate the company led to the case at hand since the unsecured creditors claimed that the company did not clear its debts before it became insolvent. Salomon claimed that he did not owe anyone since the company is a separate legal person as indicated in the company rules thus no shareholder is responsible for any debts of the company. The creditors filed a case against Salomon claiming that although the company had been incorporated Salomon held almost all the shares thus he should be responsible for the debts by the company. The court discredited these assumptions since the incorporation was proper and abide by the company’s rule thus the number of shareholders did not change the fact that this was a limited company and no longer a sole proprietorship. This was one of the most heated cases at the close of the 19th century, but Lord Mac-Naghten claimed that the law governing the limited companies had to be followed. He stated that in any company’s liquidation, the creditors should be given preferential claims of assets but since this was not the case in the liquidation of the company. The law at the time did not state anything of the sort, and the debenture holders had claimed everything from the liquidation (Campbell, 2007). Historical Background of Separate Legal Entity Doctrine This rule is under Companies Act section 6 formed in 1862. It claims that seven or more people can join and form a company under it. This rule was made to end frauds from unregistered limited companies (Campbell, 2007). This law states that a limited company is a separate legal person can sue or be sued. This means that any malicious activity or fraud cases associated with the company, the plaintiff can only sue the company but not the shareholders. The company is also mandated to sue anyone violating its rights, since this rule has made it an artificial person who is recognized by the law. Over the years, the Companies Act has been amended to ensure that the shareholders and directors of the companies are more liable to the companies’ activities. The amendments ensure companies take calculated risks that do not result to frauds to the creditors. The creditors are advised to look at the capital of the company before engaging in to reduce the chances of loss. The law claims that when liquidation occurs, the creditors should have preferential claims to the assets. This law ensures that the debenture-holders are liable thus reduce frauds (Jovanović, 2012). The law is trying to ensure that companies’ owners are more liable than it was the case in the 19th century. In the case of Salomon vs. Salomon in 1897, it is clear to note that a single person owned the company although he had other family members as shareholders. Salomon’s company had all the characteristics of a sole proprietorship since a single person, and his family owned it. The influx inform of debentures by Salomon proves that he was in full control of the company and acted just as in a sole proprietorship. This company have almost no characteristics of a limited company thus in the current law it can be under private company in which the owner(s) is liable to the company’s activities and is supposed to pay any debts of the company (Jovanović, 2012). Critical Analysis on Salomon vs. Salomon In1897 The ruling by the House of Lords on this case provided different opinions in the entire universe. The ruling was in favor of Salomon thus the ruling stunned the accusers since there were contagious issues that they believed were not addressed in the right way. Salomon, on the other hand, was pleased with the ruling and felt the ruling was fair in addressing the issues. This case took place at the end of the 19th century, but it is very crucial since it gave a new meaning of a limited company being a separate legal entity (Jovanović, 2012). It has also shaped the Companies Act and has been used in cases that are complicated to ensure that the judges use the rule of law in their rulings. Pros of the ruling The ruling in some extent was fair since it used the concept in the Company Act Section 6 of 1862 that states that a limited company is a separate legal entity. Salomon had used the proper method to change his sole proprietorship to a limited company. This move ensured that the company was liable for its activities thus he could not be held responsible on its behalf (Jovanović, 2012). This is the main reason the case was ruled in his favor since although the accusers claimed that a single person owned the company the judge stated that in the registration, the company had other shareholders thus ensuring it qualified to be termed as a limited company. The case formed the basis of the separate legal entity that has developed over the years. It has also made the law develop better ways to handle complicated issues since it is used in judgments of related cases, and the defendant can use it to argue his case. Cons of the ruling The ruling is a two-edged sword since although it made the basis of the separate legal entity it also provided the basis of fraud. The action to change the sole proprietorship into a limited company by Salomon while using his family members to ensure he had at least seven persons to qualify in forming a limited company is a dubious activity that should not be allowed by the law (Lane, 2009). The move to acquire everything after the liquidation of the company shows greed by Salomon since the creditors did not have preferential claims on the assets. A court ruling in favor of Salomon means that it supported the fraud and many companies owners use the separate legal entity to carry out fraud. The ruling proved that since corporations were separate legal entities the owners could carry out risky activities since they were not liable for the activities of the company (Lane, 2009). This claim has led to the ruling by the House of Lords to be criticized since it is clear that the move by Salomon to liquidate the company after a short period after the company’s formation was a planned move and he changed his business to a corporation to ensure he escaped paying the creditors. The creditors had the right to be paid since although the company was registered as a limited company it was owned and managed by Salomon thus, he should have been held accountable for the company’s debts (Lane, 2009). The Law of U.A.E and Ways that Corporate Re-Structuring can Abuse Legal Entity Principle United Arab Emirates (U.A.E) is an independent and sovereign state made up of seven states. The states include; Abu Dhabi, Dubai, Sharjah, Ras Al Khaimah, Ajman, Um Al Quwain and Al Fujairah. Under the UAE Federal Commercial Companies Law No.8 of 1984, (CCL) different commercial entities have different liability (Library Information and Research Service. 1978). The law states that in General Partnership, the partners are liable for the company liabilities and thus can be sued on behalf of the company. This ensures that the partners pay the company’s debts with their personal assets. Limited partnerships are partnership where some of the partners are more liable to the company than others are. The liability is based on the number of shares and participation of the partner. The liable partners are the general partners whereas the others are just limited partners who only their investment is liable to the company but not their assets. In limited company, the CCL states that although the company is a separate legal entity the shareholders or owners of the company can be held liable of the companies’ activities. This is in the case of the shareholder assuming the management role of the corporation the other shareholders or third parties in any act of fraud, abuse of power or violation of the company articles can sue the shareholder. The shareholder in the management position will be sued as a worker but not as a shareholder since he is guarded by the shareholder limited liability (Library Information and Research Service. 1978). The shareholder of a limited company may personally give a surety to the creditors on full payment of the company’s debt to them. If the company fails to pay the creditors as assured by the shareholder, he is liable to be sued based on his guarantees to the creditors. The founding members of a limited company are liable to reimburse to any subscribed member of the company if they choose to rescind the incorporation. This is according to Article 84 of the CCL (Sagar, D., Mead, L., Foster, B. P., & Chartered Institute of Management Accountants. 2006). Failure to honor this, the subscribed member can sue the founding members in the Court of Law. Article 223 of the CCL states that if a partner of any limited liability company issues a share, the share must be valued in the company memorandum, where its amount on the capital it represents. If the contributor overstates the value the money above the real price is paid by the contributor of the share (Sagar, D., Mead, L., Foster, B. P., & Chartered Institute of Management Accountants. 2006). Conclusion The case on Salomon vs. Salomon of 1897 is a complex case that has clearly portrayed the separate legal entity of a limited company. The House of Lords did a fair job in ruling the case in favor of Salomon bearing in mind that the accusers seemed to have more points to argue the case in their favor. This means that the House of Lords abided by the Company Acts of 1862, in their ruling and their broad move has laid the foundation to exercise the separate legal entity. The cons associated with the ruling are justified, but the law has been amended severally to ensure such errors are not repeated. The accusers had the right to feel gutted by the ruling but in every ruling, the law is like a two-edge sword and the party that has used better concepts in arguing their case wins. The UAE changes of laws concerned with limited companies abuses the separate legal entity, but it helps in ensuring that the shareholders are responsible as much as the company is responsible for its activities. In conclusion, it is not clear the best ruling of the Salomon vs. Salomon case but it is clear that the world has learned to implement the separate legal entity and have laid better ways to ensure responsibility and liability of shareholders and companies at large. References Campbell, D. (2007). International liability of corporate directors. Salzburg: Yorkhill Law Publishing. Jovanović, M. A. (2012). Collective rights: A legal theory. Cambridge: Cambridge University Press. Lane, H. W. (2009). International management behavior: Leading with a global mindset. Chichester, West Sussex: Wiley. Library Information and Research Service. (1978). The Middle East, abstracts and index. Pittsburgh, Penn: Library Information and Research Service. Sagar, D., Mead, L., Foster, B. P., & Chartered Institute of Management Accountants. (2006). Fundamentals of ethics, corporate governance and business law, certificate level. Amsterdam: CIMA/Elsevier. Read More