The Rationale and Impact of Salomon v Salomon & Co AC 22 on Company Law - Assignment Example

The rationale and impact of Salomon v Salomon & Co [1897] AC 22 on company law al affiliation: Introduction English Company law of the UK is a regulation of corporate formations; guided by the Companies Act of 2006, EU directives, UK Corporate Governance Code, Insolvency Act of 1986 and most importantly court cases. It is one of the legal vehicles and a primary jurisdiction of businesses. Through company, law businesses maintain sanity and initiate ethical working conditions aimed at developing UK economy1. It specifies the registration procedure, revenue collection, tax returns and arbitration initiatives in case of a dispute. Where the management is centralised to a board of directors, the law also provides a clear relationship to limit duplication while also confronting emanating challenges2. Much chaos dominated the UK industry before changes that brought calm and order. Among the many inputs that streamlined the English company law is a ruling on Salomon v Salomon & Co [1897] AC 22. The paper, therefore, focuses on the case impacts and rationale on the corporate law framework. Solomon’s case and background Historically, Salomon v Salomon & Co [1897] AC 22 has received recognition and accolade from businessmen, legislators and researchers in equal measure. Its impact on the UK company law remains imperative to date despite being conducted at the past3. The case involved one Mr. Solomon in a shoe making business in a premise located at White Chapel High Street. As the leather business boomed and gained more customers, more resources and partners came into light. Among the interested parties were Mr Solomon’s sons who wanted to become partners in the business. To prevent the seclusion and further problems, Mr Solomon agreed to let in the family embers into the business at 39,000 pounds. Notably, the price was slightly higher than its net worth hence raising questions on the intentions of new partners. Interestingly, Mr Solomon did not relinquish the owner to appoint the new partners but left it at his discretion4. Out of the 20, 007 shares representing the company, Mr Solomon took 20,001 shares controlling a major share of the company. However, transfer of the company took part in 1892 even as the company awarded Mr Solomon with 10,000 pounds as part of the debentures. After incorporation, the promising future changed into uncertainties hence a decline in boot sales. The main customers also split their contracts to avoid more risks hence bringing Mr Solomon’s business into a standstill5. In response, Broderip sued the company attracting liquidation. He was paid 5000 pounds leaving the company with 1055 pounds of assets. At the court of appeal, Mr Solomon’s company was described as a mere myth and fiction6. The court noted that they were independent shareholders with the ability to scrutinize the process; however, several irregularities came into light. Failing to meet his expectation at the court of Appeal, Mr Solomon moved to the House of Lords, which unanimously overturned the Appeals court decisions. According to the upper court, the fraud and agency cases had no proof7. Lord Halsbury LC noted that no statute drew a boundary on the proportion of interest or shares held by each party. Based on the House of Lords assessment, the company was either legal or illegal. Indeed, the statute did not stipulate middle grounds for any company8. Lord Lindley LJ ascertained that the authority and intentional purchase supersedes other inquiries. Most importantly, a company is, “capable forthwith” at birth and all subscribers in the memorandum are liable to the company’s decisions of enactment. Rationale of the case Because of Solomon’s case, justice and fairness are no longer a question or concern among companies in the English nations. Both proprietors and shareholders share responsibility in equal measure. On the other hand, both are protected from exploitation or uncertainties rocking companies. It has also allowed pyrrhic victories in Company law, which plays an important role in streamlining growth and development. Law lord in Solomon were able to reconcile principles of fairness and justice. In many instances, judges require dictum instead of inspiration. As a result, several cases have not attained the required attention as public interest override legal certainty. The case was a landmark ruling that shaped the landscape of justice. In the case, Solomon was responsible for debts; however, no common law could be subjected to unlimited liability. From this perspective, the decisions drew a line between liabilities, which for long have been a cause of disagreement. Because of Solomon’s case ruling limited liability companies no longer have unlimited liability. In the Case of Solomon, he together with others formulated a limited company but faced suits and demands of compensation even after the business running into problems. Shareholders have limited liability in limited companies and a company can face lawsuits until all the assets get exhausted during compensation. Many people form public limited companies to avoid risk, escape bankruptcy or increase facility value to borrow money. In the case of Solomon, the idea to transform the company to a limited liability was good but not met by a good working environment9. The obstructions of international and national trade led to slowdown in economy hence limiting investments of substance. At the time of Solomon’s case, economic slowdown was a reality, and no future existed for many companies. In response, a series of insurance companies have surfaced to cater for uncertainties in various economic disciplines. Undeniably, the catastrophe in science fictions in many instances has derailed operations among companies. Global companies currently control large stock exchange; they perform cross-border transactions, hold proxy meetings and video conferences. Interestingly, it is not the agenda of any company to leave creditors in cold. Sustainable economic growth requires creditors to be satisfied with a working environment same to companies. Nevertheless, both sustainable and unsustainable businesses require a limited liability to protect shareholders against malpractices. Dependence of shareholders is a key factor in formulation of companies. Before Solomon’s case no line existed between shareholders forcing people to land in unnecessary problems. For example, many people were forced to compensate shareholders with their personal savings or out of the company. In this light, shareholders did not feel a change in market conditions. Contrary to the contemporary company law, the previous law gave immunity against shareholders to suffer from losses. As a matter of fact, many enjoyed profits but were quick to demand their investment on suspecting losses. Courts awarded them victories leaving proprietors to suffer from losses. The House of Lords determined that limited companies are legal entities separate from the shareholders. Therefore, the case instituted a foundation for judgment that makes every shareholder liable for both losses and profits10. Notably, it does not matter to what extent or degree of shares owned by an individual, nevertheless liability is a subjected to all partners. The insuperable difficulty manifested by current company law finds base in Solomon’s case. Through the case, an affirmative proposition representing the law came into light. Apparently, no judge is allowed to infer laws but only to interpret11. Evidently, lower courts in Solomon’s case found him guilty of swindling creditors; however, no law was put into action to explain the decision. Undeniably, the far-reaching decision took into account the issue of non-interested parties who do not take part in management, but require profit from the proceeds. Indeed, anyone registering a company is aware of any uncertainties incurred in the process. Nonetheless, a breakdown in inevitable during operation according to Lord Herschell12. From this perspective, the case became a turning point for all business malpractices that for many years have left many in dire poverty. In the current company, a lawsuit against a proprietor is valid only if clear limitations are available. Most importantly, Solomon’s case has not only impacted the justice system but its extensive impulse has also been felt in the legislature. Impacts of the case For decades, the Solomon principle has stood the test of time in shaping English law. The case is widely quoted in a number of books and articles. Otto Kahn-Freund, in his article published (1944) called the decision ‘calamitous’ considering that it did not take into consideration the different stakeholders in a company. In this respect, he calls for the abolition of private companies, a factor that raises more questions than answers. Benched on Solomon’s case, the contemporary court system has changed into courts that respond to limited liability rather than prosperity in business. Additionally, they focus on decisions arrived at by board meetings and not choices of operation. As a result, most court decisions do not focus on management but principles that practitioners and academicians struggle to trace their origin. Solomon’s case harmonised the UKs national law expositing fundamental freedoms and other treaty rights. In the contemporary world, laws are formulated based on legal stipulations. A legal personality has two consequences with regards to ownership. A company’s property is not related to the management, shareholders or directors under any circumstance. As a result, even if one is a 100 percent shareholder of a company while at the same time a director, he can still be charged for stealing from it. The change in event did not have any impact until the turning point of Solomon’s case. In the same note, many corporate swindlers have landed in the wrong side of the law after forgetting the basic principle that govern company law. Solomon’s case also acted as an eye opener in the liabilities question, which had no boundary between shareholders and propriators. For example, in the current company law, a company is culpable to pay its debts and directors have no link unless otherwise. Notably liability could only be granted to individual companies before 1825; however, this changed after repealing section 2 of the Bubble Act. The pivotal point for these challenges; nevertheless, changed through Solomon’s case13. Apparently, modern case laws link corporate veil to Solomon’s case. In many instances, courts have rules against lifting of the statutory veil. In Adams v Cape industries, the decision prevailed proving the adamant effect of Solomon’s case. For instance, in the ruling, the high court said it had no jurisdiction to turn particular contracts of statues. At the same time, it brought into the light that it had no mandate to disregard the principles depicted by Solomon’s case. Before Solomon’s case, the company and owner were one person; however, several statutory changes have brought changes. The companies Act of 1985 (section 13) and companies Act 2006 (sections 15, 16) make the company a legal person, separate from members. The statutes furthermore take away the privileges of separate legal personalities, which in many instances have brought problems. Arguably, Solomon’s case pegged on personal wisdom and judgment based on existing laws; nonetheless, changes in the constitution have tried to minimize such effects. The insolvency Act of 1986 (section 213) creates a clear guideline for liability in case of dissolution14. The law applies several principles and contentious issues to prevent any uncertainties or partial judgment. In an event that a business decides to wind up, section 213 allows justice systems of the English law to impart liability on different parties. Conceivably, this is only in effect if the court can prove that any of the company activities took place with the intention of defrauding creditors. In this light, any person held liable for such operations is dimmed to pay creditors. Section 214 of the same Act, makes a more particular attention to directors or people responsible for running the affairs of companies15. In the section, it is stipulated that a director is liable to pay creditors only if the decisions leading to liquidation was not as a result of his neglect. From this perspective, the potential loss from creditors is tasked upon directors or managers of greater responsibility to the company. A corporate veil under the Company law plays an important role in fostering unity and harmony. Solomon’s case plays a key role in agency relationships16. Undeniably, the present company law attract special circumstances, which brings into light several questions, for example, who receives profits? Who is responsible for operations? Who is the brain and head of the venture? Who has control over the business? Most importantly, who appoints the directors? Certainly, these questions trace back to Solomon’s scenario that complicates agency relationships. In Woolfson v. Strathclyde Regional Council, dissolution of any company is possible unless, the company structure remains a façade concealing facts. Additionally, courts have a primary responsibility of piercing the corporate veil in case a corporate structure uses it to evade limitations. Furthermore, in a case where a defendant escapes responsibility imposed against him using the structure, the court can subject against such practices. In respect, formation, practice and lifting of corporate veil sources from Solomon’s case, which brought sanity into, company law17. Conclusion Historically, company law has undergone a series of developments; however, Solomon’s case marked a turning point for the important segment of the justice system. Despite receiving criticism from researchers like Kahn-Freund who referred to it as ‘calamitous’, the ruling has done more good than harm not only to the justice system but also other business entities. Undeniably, the boundary of liability emanated from the ruling. Apparently, in company law a clear line exists between limited and unlimited liability. As a result, both investors and shareholders have a sure share of a company in case of insolvency. To prevent further confusion, company law has also designed clear procedures of ending operations. Evidently, this has helped many companies evade unnecessary lawsuits, which in many instances lead to severe losses. In reference to Solomon’s case, company law promotes fairness from different perspectives. Additionally, based on Solomon’s case many legislative frameworks have surfaced to ensure smooth company operations. For instance, the insolvency Act stipulates clear guidelines on company dissolution. In this light, the case not only marked a turning point in the justice system but also promoted justice, fairness and sanity in company law. Bibliography Anderson, H, Directors personal liability for corporate fault: a comparative analysis (Kluwer Law International 2008) Kershaw, D, Company law in context: text and materials (Oxford University Press, 2012) Padhi, P, Legal aspects of business (PHI Learning, 2013). Rickett, C, Corporate personality in the 20th century (Hart Publishing 1998). Read More