The Rationale and Impact of the Decision on Company Law - Case Study Example

The rationale and impact of the decision on company law Salomon v Salomon & Co [1897] AC 22 The case of Salomon vs. Salomon Company limited remains best described as the epitome of the redefinition of the laws of incorporation. The case allowed the development of a new insight on the prospective distinctions that calls to be incorporated the laws of incorporation. The perception of the company being regarded as an independent entity paved way for the liberation of the entire law. Apparently, the perception of the company of being independent interest over the considered owners has been regarded as being ambiguous in respect to the impact they have in the corporate world. The global perception of the laws of incorporation is considered to have been redefined by the ruling. The details of the lawsuit have been studied and reflected in the establishment of decisions regarding the functions of the company. Apparently, its application has been sidelined from the arbitration of the matters or dispute related to the company as an institution. Instead, the basic operations of the institution have been limited to the independent perception associated to the eventual embrace of the ruling. The distinction of a firm as a separate entity has been described as a challenge in many jurisdictions in respect to the shareholders and the eventual impact they have on decision making. However, the application of the entire law on tends to be extended on the eventual prospect upon which the impression is shaped under the structuring of the company. The eventual desire to incorporate the decisions of the management and proceed to impose a harmonious relationship between the units and the company remains the leading virtue in the consideration of the law. There arises a need to establish a distinction in the contribution as well as offer guidance in decision making. It may be regarded as rather odd to insinuate that a firm or company is subject to principles of separate entities, yet it is mandated to be run by individuals. However, these are the virtues and privileges defined by the law of separate entity. They reflect on the assumptions made by the house of lords in the case of Salomon Vs. Salomon Co. Limited. Perceiving the impact such decision along the greater impression of management and leadership proceeds to define the relationship that may be extended to the company by the rest of the population. Analysing the background of the case Salomon Company Limited was developed from a humble enterprise of Salomon. Apparently, Salomon was a humble leather worker who had maintained his enterprise for a remarkable period. The progress of his enterprise attracted the interest of his sons. Salomon considered having their input deduced into an action that could elevate the status of the enterprise. He considered founding a company with his wife and children who were to, later, purchase the enterprise from Salomon. Apparently, Salomon floated the cost of the firm by selling it to the company at thirty-nine thousand sterling pounds (£39000). The company management was structured to include two nominee directors and the rest of the shareholders being subscribers. The country rules on companies capped the minimum subscribers for a company to seven persons. Salomon had navigated this challenge by incorporating his five children, his wife and himself to meet the considered minimum threshold. The process of share allocation was considered critical in the regional rules. Each of the members upon the establishment of the firm was assigned a single share. However, the firm had twenty thousand and seven shares (20007). The remaining twenty thousand shares (20000) were allocated to Salomon in a criterion that was agreed onto by the rest of the subscribers. Such observation implied that Salomon had twenty thousand and one shares (20001)1. The process was finalized on by the 1st of June of 1892, mapping the fiscal year of the company. The implication upon the finalization of the entire process implied that Salomon was the lead shareholder of the firm. Apparently, the process left the firm with a ten thousand sterling pounds (£10000) debt to Salomon2. The firm was convinced to debenture the debt to Salomon, making him the lead creditor for the firm, as well as the commanding shareholder. By the course of operation, Salomon transferred part of his debenture to a third party (Edmund Broderip). Broderip gave Salomon an advance payment that amounted to half the debenture. The implication of the debt remains regarded as a debenture irrespective of the considered change in ownership. However, a twist in the leather market allowed for the re-evaluation of the performance of the company, and the eventual arousal of concerns in the shareholders. The leather market was not performing as intended. There was a progressive decline in the prices of shoes die to the progressive strikes in the leather industry. The government had a challenge on the regulation of the leather industry. The challenges escalated into strikes in the entire industries. The progressive role of the leather market had an impact in the success of the Salomon Company Limited. The changes in the market remaining detrimental to the performance of the company. The business failed immensely, and the creditors expressed concerns over their considered dues. There was progressive default in the payment of the dividends and interest to the considered creditors lead to the concern of the lead debenture. Broderip made request for the payment of his dues. The firm was not in a position to make such payment; thus he opted for the liquidation of the most promising assets of the firm towards meeting his debt. The action was contemplated after Broderip filed for the enforcement of by October of 18933. The prospective implication of the implication of the process saw the liquidation of the firm’s most promising assets. The move left the firm embargoed from undertaking progressive business since the premises were liquidated. The process allowed for the payment of the principle depth, but the floated increases were met. The development saw the firm filed for liquidation since it was officially declared bankrupt. A receiver was identified for the processing of the needs of the creditors and the management of the entire process. Among the tasks of the receiver were the evaluation of the failures that led to the considered situation of bankruptcy. It was perceived that the firm was founded under incorrect perceptions. The receiver argued that Salomon bloated the cost of his business prior to his selling. He was further condemned to be running a dummy company since he was the principle shareholder of with over ninety (90) percent of the total shares associated to Salomon Company Limited. The decision by the receiver further allowed for the interrogation of his remaining debenture. It was argued that the cost should not be honoured since the firm was developed under unclear circumstances. Additionally, it was perceived that the eventual debts owned by the firm should be subjected to Salomon as an individual since there was no distinct separation of his entity from that of the company. The receiver argued that the information generated from the share distribution implied that the company was indeed an extension of the shoe enterprise owned by Salomon. The decision implied that Salomon had to pay for the debts owned by the speculated company. Broderip utilized the findings to seek the revival of the interests accrued from his debt. Salomon felt cheated from the decision by the receiver and sued the claims made by Broderip. His arguments were founded on the elemental requirements of establishing a company and the eventual rule that considers the firm to be of a separate distinction over the consider owners or parties. Analysing the offered verdicts The case escalated in three levels, with the high court being the most elemental. The court made its ruling against Salomon. Their argument considered the interest of the firm against the arguments of the laws of incorporation. They declared a sense of malice in the decisions made by Salomon. It was considered that indeed the action of forming the firm was an opportunistic ploy crafted by Salomon. The ruling implied that the Salomon stood to make enormous gains upon the failure of the firm. The implication of the finding pointed on possible touch of malice in the description of the actions undertaken by Salomon in the conduct of the entire venture. However, the primary verity established by the High Court was centred on the role of the shareholders in the composition of the company. It was argued that indeed Salomon Company Limited had met the required minimum shareholder threshold for the establishment of the firm. However, the allotment of the shares allowed for the reduced reference to the role of the perceived stakeholders in the description of the firm’s interests. On that regard, it was further established that the considered stakeholders remained regarded as mare dummies in reference to the role or value of their signatures4. The observation registered by the High Court implied that the capacity of Salomon in the management of the firm had to be evaluated further. The court established a relation between the firm and his private interest, thus treating him as an agent to the firm. The implication of the decision included the consideration of Salomon status as the principal of the firm being indemnified. The result of the considered indemnification implied that he could be held responsible for the debts of the firm. The court offered the liquidator an opportunity to amend the charge sheet and consider the indemnification of the Salomon from his position as the principal of the company as substantial grounds for his prosecution. The verdict was sustained by the Court of Appeal following a filing by Salomon.The court argued that indeed Salomon had abused the principles that are drafted to govern the process of incorporation. The appeal ruling failed to consider the interest captured in the establishment of a company, as well as the principle conditions upon which the debenture was transferred5. The decision implied that Salomon stood to fund the debt from his personal resources that are not associated with the primary company. It was further argued that the implication of the process remains best described along the verities that were considered in the establishment of the form. The observation implied that the interest expressed prior to the establishment of the firm could be speculated and be included in the eventual verification of the firm. Salomon felt the decision failed to honour the stipulations of the rules of incorporation and stood to undermine the eventual virtues upheld by the aforesaid regulations. The observation encouraged his interest to pursue a further arbitration from the house of lords. He deemed the ruling to be against the demands of the company act. The act considered the establishment of a company as an irrevocable act. The court had no jurisdiction in the revoking of the certificate of incorporation. However, the liquidator argued that the company had been formed under clandestine conditions; thus it stood not to be regarded as being incorporated. The ruling may have been considered detrimental in terms of its favouring of the concerns raised by Salomon. However, it paved way for the establishment of novel arguments regarding the validity of Solomon Company Limited. The argument was on the possibility of having the firm having been structured in an incorrect manner. The ruling implied that the concern may be challenged further in respect to the legality of the entire prospect. Both the High Court and the Court of Appeal had refused to honour the incorporation process embraced by Salomon in respect to the validity of his company. They perceived the move to be comprised of hidden interest that were never disclosed prior to the development of the company. The House of Lords seemed to offer a novel sense of knowledge to the arbitration of the suit. They considered the implication of the Company’s Act as being central in the definition of the process of incorporation. It was established that indeed Salomon Company Ltd had meet all the requirements allowed for the process of incorporation. There existed a minimum threshold of shareholders, and a quantifiable management structure. The perceptions that sought to limit the establishment process on the grounds of share allotment were, thus, nullified by the Lords. The implication of the verdict stretched further to the ruling made by the High Court that indemnified Salomon from being regarded as a principal to the status of the agent. The approval of the incorporation process implied out that Salomon was protected by the principle of separate entities. Impact to the laws of incorporation The ruling by the House of Lords allowed for the reconsideration of the implication of laws governing the company. The role of the management in the running of the firm was evaluated extensively. The lords established that the principle argument that allows for the consideration of the company remains vested on the qualifications related to the laws of establishment. Counter arguments involving the procedures involved in the equity allotment and the eventual implication of such measures stand dismissed upon the consideration of the validity of the company. The ruling allowed for the conceptualization of the strength of the rule of separate entities. The firm could not be related to the characteristics of the principal. The abilities of the team involved in the management of the company, and the subsequent role of the firm in decisions and ownership of assets was regarded to be extensively distinct. The decision paved way for the proposal of treatments that needs to be accorded to assets being exchanged between the two parties. They are considered to be treated as a debt to either of the parties that stands to benefit from their usage. The elimination of the considered relationship between the involved parties implied that the eventual assumptions on the implication of the laws of incorporation stood to be treated as an entity that was free from the considered. Additionally, the prospective liabilities assigned to the firm remained separated from the personal interests of the considered owners. The verdicts may be described to assist further in the shaping of the structures of the company and the depth of interactions shared in retrospect to the parties involved in the company. The decision may be argued to have promoted a sense of responsibility in the management of the firm, as well as offering a podium for critical decision making. If the House of Lords had ruled against Salomon, the implication of the verdict could have had an impact on the extend upon which the stakeholders are regarded in a firm. Such a ruling was bound to interfere with the decisions making organs that are ascribed to a firm. Additionally, the ruling may have impaired the flexibility in risk taking as perceived in the distinction of the company. Taking risks could have been curtailed by the concerns of the extend of the responsibilities assigned to the firm. The arguments under reference further proposed on the possibility of having the stakeholders allow the firm to undertake its decision as an independent entity. Such an accession remained advised by the assumption that the only loss they stand to experience remained vested on their capital pool. The ruling may be considered to have stabilized the interests associated to companies. Apparently, it may be argued to have encouraged individuals towards considering their business for elevation into being regarded as companies. The primary interest that may be described to be driving the considered input remains best entitled on the safety that is accorded to the stakeholders over the decisions of the firm. The same principle may not be associated to an enterprise owned by a single person. On that regard, the ruling remained best described as a validation of the laws of incorporation and a podium for the enlightenment of the implication of the principle of separate entities. Applications of the verdict The case was referenced in a number of suits made in the periods subsequent to the ruling. The implication of the verdict in the definition of the description of the principle of separate entities remained regarded as being central in the description of the interests of the involved persons. The verdict has been referenced in various curriculums that seek to enlighten on the principles of incorporation, as well as the associated privileges. Additionally, there exists a mention of the prospective role that remains vested on the functions of the directorate in relation to the values and considerations that are associated with the firm. The verdict offered an opportunity of perceiving the considered conditions as being products of the meticulous interests aspired by the developers of the respective acts that sought to govern the process of incorporation. The same standards have been reflected in the future acts as embraced across the world. Reference Sealy, L. S., and Sarah Worthington. Cases and Materials in Company Law. Oxford: Oxford University Press, 2010. Read More