Salomon v Salomon and the UK Company Law - Essay Example

Company Law for Business Table of Contents Introduction 3 Salomon v Salomon & Co [1897] AC 22 3 Rationale for the Decision 6 Impact of Salomon v Salomon & Co [1897] AC 22 on the Company law of UK 7 Conclusion 10 References 11 Introduction Today, companies operate in an extremely challenging environment where they intend to take every possible step that can ensure a better position for them in the target market. In order to stay ahead in competition, companies have also been operating in a manner where they can surpass the operational effectiveness of their rivals. However, in order to limit the conduct of companies towards an ethical and legal direction, it is important that a particular legal boundary needs to be set to encourage companies to have an alignment between their policies and social responsibilities. Correspondingly, the UK Company Law came into prevalence. Corporate law or the company law is a set of statutory principles that are developed for the purpose of preserving the rights and interests of the stakeholders as intact. The law governs private and public companies operating in the UK. As comprehended under the UK company law, corporations, irrespective of their scale of operations, will have a separate legal entity towards the shareholders, which will be differentiated from the personal interests of the owners. Correspondingly, it has been noted that the policies documented as per the structure of the Company Law has considerable resemblance with the landmark case of Salomon v Salomon & Co [1897] AC 22 (Hannigan, 2012). Emphasizing upon this point, the essay intends to evaluate the UK Company Law and illustrate some of its policies that resembles with the Salomon v Salomon & Co [1897] AC 22 case. Salomon v Salomon & Co [1897] AC 22 As a common procedure, prior to the development of a new set of legal principles in any country, previous landmark cases are taken into consideration with due significance. Likewise, while developing the principle content of the UK company law, the rules mentioned or implemented in the landmark case of Salomon v Salomon & Co [1897] AC 22 are also taken into consideration. Subsequently, Salomon v A Salomon & Co Ltd is a UK company law case. One of the core decisions taken within the case include the aspect that any of the creditors of a particular bankrupt company will not be able to ask for monetary compensation from the shareholders of the business through legal assistance, as the founder and the company are considered separate entities with differentiated roles and responsibilities. In subsequence, based on this notion, one of the basic tenets was added within the UK company law that redefined the concept of a company. As per the case background, Aron Salomon, who was a maker of leather shoes, established his business in a joint venture with his son. Later, the business was formed into a limited company. Subsequently, the business was purchased by the newly formed company i.e. Salomon & Co, established by the same duo, at a price in excess of its actual value (Law Teacher, 2014). In subsequence, Solomon’s wife and children became the stakeholders of the business by inheritance, which further made the company and its operations, a one man business, having a total capital of 20,007 shares. Out of these 20,007 shares, a hefty percentage of 20,001 shares, were acquired by Mr. Salomon. Being the legal owner of the business, Mr. Solomon was also paid an amount of £10,000 as part of debenture. According to the UK company law, this particular fact depicts that Mr. Solomon provided a loan of £10,000 to the business for the purpose of its establishment. Consequently, owing to the shift in the market, after the establishment of the overall business, a considerable decline in the sales of its products was recorded. These happenings largely took place owing to the series of strikes that further encouraged the potential customers of the business to diversify their contracts amid different companies in order to minimize their risk. Such shift in investors’ confidence in turn led to the failure of the entire business of Solomon, making it incapable to repay the debts against the debenture provided by Edmund Broderip. After putting the company on the parameter of insolvency, the debt of Broderip was paid further, leaving the business with an asset of only £1,055. Subsequently, Solomon claimed for debts against the debenture he paid to the business, which would have left nothing for its creditors. It was thus argued that Solomon should be the person held responsible for paying the debt of the creditor and consequently, he was sued (Law Teacher, 2014). The creditors of the company claimed that Solomon must be held responsible for the hardships witnessed by the company and should be levied with the responsibility to pay back the debts of the creditors. They also highlighted that since Solomon sold the business at an excessive value than that of its original value, he was intentionally putting the well-being of the creditors at risk. In the high court, for the case of Broderip v Salomon, the decision was made in favour of the former on the basis of the indemnity clause. In similar regard, when the case was presented in the Court of Appeal, the decision of Judge Vaughan Williams was dictated on grounds of the policies as per the Companies Act 1862. The approach taken by Aron Salomon was regarded as an occurrence of fraud, against the creditors and investors of the corporation. The court further stated that Mr. Salomon’ s approach on creating the company was a mere fiction, as he just wanted to execute his business activities under the shadow of a limited company. However, the House of Lords later overturned the decision of the other courts and depicted the approach of Mr. Solomon to be completely legal (Law Teacher, 2014). The case presented above is often regarded as one of the landmark litigations in the history of the UK company law, owing to certain exceptional facts associated with it. At the foremost, the case raised several key arguments with regard to the prevalence of separate legal entity for companies operating in the UK. However, the influence of the case can be seen in many policies enacted under the UK Company law as highlighted in detail hereunder. Rationale for the Decision The decision made in the case of Salomon v Salomon & Co [1897] AC 22 was mainly based on the facts and the situations during that period, with lesser prevalence of the past cases relevant to the matter. It has often been argued that the decision of the court, with regard to the case, hold little resemblance with any of the past cases or contemporary legal policies. However, this approach of the Court of Law can be justified from the fact that the scenario was quite different in the case of Salomon v Salomon & Co [1897] AC 22, wherein its resemblance with the policies during the period was also quite minimal. Contradictory to the criticisms that were developed against the rules and case results of Salomon v Salomon & Co [1897] AC 22, there were also certain positive aspects associated with it. Notably, it is often believed that the decision made within the case is one of the most prominent and notable in the history of the UK Company law. Owing to these aspects, the case and its decision is depicted as among the landmark cases in the history of the UK law. The principles that emerged from the case provided a sign of relief for the creditors and shareholders of many business units, which was further considered as fair and justifiable. Owing to the principles associated with the case, aspects such as lifting of corporate veil and separate legal entity came into existence. These principles were further considered in notable cases, such as DHN Food Distributors Ltd and others v. London Borough, Bank of Tokyo v. Karoon [1987] AC 45N and Adams v. Cape Industries plc [1990] BCC 786 among others. It is often believed that owing to the prevalence of the case and its principle, a better balance and structure was gained within the UK Company law (Karasz, 2014). Contextually, the impact of the case and its principles upon the UK corporate law is highlighted in detail hereunder. Impact of Salomon v Salomon & Co [1897] AC 22 on the Company law of UK Among the several implications of the case of Salomon v Salomon & Co [1897] AC 22 on the provisions of the UK Corporate law, the indication of holding the identification of a separate legal entity is one of the prime. Notably, in the currently applied provisions of the UK Company law, the aspect of separate corporate identity is one of the integral and prominent parts. In the present legal structure relevant to the operations of companies in the UK, a separate legal identity prevails for the corporations other than that of the owners’ liability. As per the law, companies will have their own independent identity as well as a defined set of responsibilities that are separated from that of the owners. The company will itself act as a legal person for the stakeholders or investors, which can also be aligned with the rules presented by the House of Lords, as per the case of Salomon v Salomon (1897). It has been leant from the decision of the case that once a company is established with due adherence to the law, it will become liable to follow certain policies and norms that might differ from personal responsibilities and interests of the owner/s in turn. It has also been presented within the decision of the case that a particular corporation will be regarded as a separate individual within its own separate liabilities. These policies will be applicable for any business, irrespective of their scale of operations and the type of business activities they are executing. It has further been noted from the case of Salomon v Salomon (1897) that a corporation becomes a separate legal entity when the liabilities of the company is separated from the rest of its stakeholders, including investors, creditors and directors among others. One vital point that needs to be highlighted about this particular legal policy is that the directors and owners of the business have their existence post bankruptcy of the corporation (Law Teacher, 2013). To be noted in this regard, there are certain key consequences of the rules presented within the case of Salomon v Salomon (1897). Notably, owing to the concept of separate legal entity that emerged after the case, the property and assets of the business are to be defined as solely for the corporation, wherein the directors together with other key associated members will not be liable to obtain any share from the same. This can be justified from the fact that corporations are based on the structure of sole proprietorship with 100% of the share for their owners, which will also be under legal scrutiny for any sort of fraudulent activities against the business. Contextually, the creditors of the business will be bestowed with the legal powers to claim on behalf of the company against the owners for any sort of misuse of the assets and other resources along with the prevalence of any fraudulent activities in financial reporting. This further reveals that the creditors of the company will also be involved with the daily activities relevant to assets controlled of the company. Furthermore, the significance of the case and its implication upon the UK Company law can also be comprehended from the fact that owing to the issues presented, according to which, companies will be held responsible for their own debts and liabilities, wherein the accountability of the owners in this regard is supposed quite minimal at the same time (Outlaw, 2010). As stated earlier, the policy of separate legal entity has often been subjected to criticisms owing to some of the probable negative impact it can cause to the companies and its stakeholders. In this context, the most appropriate answer that can be provided is the decision of the House of Lords of the UK where it was affirmed that companies can have a distinct personality for themselves. However, it is often debated as to whether the decision of the House of Lords is accurate and reliable since their decision has little resemblance with any other past decisions or cases. Experts in this context argued that since the decision of the case has been made entirely on the basis of current facts in the given scenario and not on past cases, its reliability and wider acceptance will be under severe scrutiny. The decisions and implications of the case were in the form of major reversal of the policies within the UK Company law. It has been observed that as per the decisions of the court, the importance of the people working behind the establishment and daily operations of any business unit in the UK had decreased significantly, which was again considered as more or less against the policies of the common law. It has also been learnt from the probable scenarios that can emerge from the rule of Salomon v Salomon (1897) that creditors will find it challenging to search for the concerned body or authority within an organization with regard to make claims for their losses or un-repaid debts. This has further enhanced the complexity of company law and at the same time it has also made its practice in the contemporary scenario as quite uncertain. It has also been argued that the judgement of the court lacked both soul as well as conscience, which further reflected in the eventual decision of the case. The decision of the court for the case of Solomon was made mostly on the basis of present day practices of that period and not on the grounds of artificial facts and past case scenarios. Another significant contribution of the case to the UK Company law is in context to lift the corporate veil. Lifting corporate veil relates as a piece of law in accordance with the scenarios where separate legal entity are not been taken into consideration by courts. This aspect again raised concerns over the efficiency of the principles determined from the Salomon v Salomon (1897) case (Drukker Solicitors, 2014). Conclusion From the overall analysis of the paper, it can be comprehended that the UK Company Law of has been one of the most important piece of legislation that is governing the approaches of the companies in the UK. Although, it is apparent from the study that influence of the principles and rules emerging from the case of Salomon v Salomon (1897) is prominent upon the policies of the company law of UK. Especially, Salomon v Salomon (1897) is considered as influential and prestigious cases in the history of Corporate Law in the UK. In the contemporary scenario, major elements of the UK Company Law include the policy of separate legal entity for the corporations operating in UK. As per this particular policy the legal responsibility of the owners and shareholders of any business will be dependent with that of the rights and responsibilities of the corporation itself. This further indicates that there is a separate and independent liability for the companies towards their stakeholders and creditors and consequently, any of the debt of the company will be its own liability. This particular policy emerges directly from the case of Salomon v Salomon (1897). Hence, it can be ascertained that the impact of the rules of the case of Salomon v Salomon (1897) is indeed quite considerable upon the policies of the contemporary Company Law of UK. References Drukker Solicitors, 2014. Separate Legal Entity. Home. [Online] Available at: http://www.drukker.co.uk/publications/reference/separate-legal-entity/#.VFnaScmUe15 [Accessed November 05, 2014]. Hannigan, B., 2012. Company Law. Oxford University Press. Karasz, A., 2014. Corporate World Today: Courts Respond To Limited Liability And Boards Decision Making — A Fight For A Justice Or Rather Prosperity At Stake? Home. [Online] Available at: http://www.commonlawreview.cz/corporate-world-today-courts-respond-to-limited-liability-and-boards-decision-making-a-fight-for-a-justice-or-rather-prosperity-at-stake [Accessed November 05, 2014]. Law Teacher, 2013. Company Law Cases. Home. [Online] Available at: http://www.lawteacher.net/company-law/cases/ [Accessed November 05, 2014]. Law Teacher, 2014. Salomon v Salomon & Co. is a foundational. Home. [Online] Available at: http://www.lawteacher.net/company-law/essays/salomon-v-salomon-co-foundation-company-law-essay.php [Accessed November 05, 2014]. Outlaw, 2010. Basic Principles of Company Law. Home. [Online] Available at: http://www.out-law.com/page-8197 [Accessed November 05, 2014]. Read More