Arguments in Salomon v Salomon & Co Ltd - Case Study Example

Salomon v. Salomon & Co. Ltd affiliation Introduction Salomon v. Salomon and Company case will go down as a cornerstone in legal liability and entity of the business description in English company laws. Although the case is too remote (1892), the impact of the ruling still old great relevance to modern corporation Laws. In essence, the case provided an important relation in liabilities, entities and how such dispute should be solved upon insolvency of a company. While many businesses today have separate legal entity from their owners, this did not happen until the monumental ruling1. During the case, the judges established a precedent that shifted liability of the company to the company and saved the owners from the uncertainties. The decision of the House of Lords described Salomon Company as a legal entity, different from Salomon personal assets and as such the company had an obligation to meet its liabilities2. Arguments in Salomon v. Salomon & Co. Ltd During the case, the liquidator acting in a position of the company argued that Salomon had acted fraud for receiving payment from the liquidator while the company had turbulent financial crisis. In his argument, the liquidator requested Salomon be compelled to reverse payments he received and debentures canceled. In addition, the liquidator questioned the reasons of Salomon of liquidating the business at excessively high prices while the business was in serious financial state. In an argument, the liquidator argued that he (Salomon) had violated his fiduciary duty and had acted in fraud3. Furthermore, the plaintiff argues that setting companies operate in the manner Salomon was acting would subject unsecured creditors huge financial obligations and fraudulent business persons and entities. According to the Company, the legal obligation should dictate that Salomon payment be reversed in order to meet the financial recovery of the company. It suggested that the limited liability of company be reversed, and Salomon personal benefits of the business be plowed back to the business. The decision by the House of Lords during the case meant that the legal entities be given a separate entity different from those of the shareholders. Notably, the decision was meant to bring a legal framework that was needed to enhance economic liberation in England. During this time, businesses would be closed down due to management misappropriations and personal assets auctioned to settle the liabilities. It is argued in this paper that the general implication of the paper is positive; the impact has been able to spur economic development to modern corporate laws. While the company admitted the need to protect individuals assets from business failures, the company argued against the intention of the defendant. Recovering Salomon debentures back to business would restore the business and discouraged fraud-like tendencies in the future. The case was also argued on the basis of the business entities moral standing and need to establish business ethics. The issues raised by the company were quite heavy; it questioned the misuse of separation of the entity by individuals to advance personal gains. The plaintiff noted that the case would set a bad corporate practice if favor were granted to the defendant claiming that his actions depicted an orchestrated strategy to establish fraud against unsuspecting entities. Rationale of Decision At first, the High Court judge Vaughan Williams had ruled that Broderips was valid. In the initial ruling, the judge observed that the payment of 200 shares was undisputed and as such, the company had right to indemnity against Salomon. In providing reason, he cited that the Salomon was almost the full owner of the business and had his family as his agents; it was entitled to indemnity. At the court of appeal, the judges confirmed the decision of Vaughan Williams on the grounds that the Salomon had abused the privileges contained in incorporation and limited liability Act. The purpose of the Act was to confer an independent bona fide shareholders as independent minds and not mere puppets in business operations4. In the light of the case ruling, the House of the lords unanimously overturned the ruling of the courts rejecting argument on the agency and fraud. There was a number of observations from House of Lords, firstly in accordance to the corporate Act, it noted that there was nothing indicating that the companies liabilities be settled on the grounds of number of shares owned5. In addition, it stated Salomon had erroneously been mistreated by law by virtue of being the biggest shareholder. Secondly, the house argued that the statute does not provide a ruling based on the right of the court to add or take from the basic requirements of corporations. Thus, the work of the court was to adhere to adhere diligently to the statute6. In addition, the House of Lords in its observation noted that either limited company had a legal entity or not if the business belonged to Mr. Solomon alone. In this case he has associates making the entity shared. It was easy to establish, therefore, that company existed with or without the majority shareholder. Thus, the law provides for protection of shared entity and resolutions on shared entity should be shouldered by the business, not individual7. Furthermore, Lord Halsbury in his judgment noted that the company was indeed a registered entity with seven shareholders, irrespective of the share value of the entities in the business; the statute recognized it as a company. In expressing disagreement with courts judgment, Lord Macnaghten argued that there was nothing wrong if Mr. Solomon decided to take advantage of provisions of the statute. He affirmed that it was legitimate for the shareholder to do so, and the judges erred in reading the limitations of the statutes on opinion. Moreover, Lord Herschel, while agreeing with Lord Managhten ruling, observed that it is a common practice within English system to have companies with more disinterested members. While dealing with such companies, any entity should be aware of the nature of decisions that can impact to their business8. Furthermore, he questioned the Court of Appeal ruling of transferring blame to the shareholder while Salomons & Company owners had the opportunity to consult shareholders ownership status ahead of committing to take-over the business. A summary of the ruling identified three integral rationales for overruling the position earlier take by the court. Firstly, the House of Lords recognized the existence of the business as a company of seven individuals, whether interested or disinterested. In such case, the ruling noted that it was the work of those entering into business deals with the business to seek clarity on shares burden across shareholders. In such a manner, the right of each shareholder cannot be jeopardized by omissions of other partners. Secondly, the principal reason to induce a person into the company is the provision of the statute that delineate company liability and personal assets and the ability to borrow from savings9. In such way, reversing the statute would kill peoples perception of the protective nature of the companies from bankruptcy. In declaring that Solomon acted within the law, the house observed that Solomon showed good faith to the company by raising 5,000 on debentures in pursuit to protect the company is manifested. At the ruling, the House of Lords appeared determined to protect the legal entity and limiting liability stretch to protect entrepreneurs10. The ruling laid down legal framework of ensuring that small businesses be treated as legal entities able to handle its issues without involving the owners11. Although there was a reservation from some critics that the law will encourage fraud and transfer of legal obligations from shareholders to the corporations, the doctrine provides a unique example that describes the transformation of businesses into legal entities12. Businesses are now able to enter into agreements with other entities without involving the owners as option to shoulder burden. The doctrine has greatly transformed business ownership and protection of the individual owners from the burden of misappropriation and irrational steps that business managers undertake. Impact of Ruling The case saw formation of the Company Act 1862 that delineates companys assets and those of shareholders. In addition, the Act recognizes shareholders as separate legal entities hence, the companys actions and inactions should not affect individual shareholders in any manner. In the new Act, the company must be regarded in law as a separate entity and a corporate created for a legitimate purpose. Notably, one of the greatest benefits of the overruling by the House of Lords is that to date, companies have been established as separate legal entity that responds to its obligations and liabilities at its level. Besides, the landmark ruling has led to recognition of the doctrine of corporate personality. The Companies Act 1862, gives a company power to sue or be sued due to its actions or inactions. In line with this provision, the insolvent companies today can be sued by creditors but not individual shareholders. Both private and public company rules in English Business laws borrow from this doctrine13. The culture of legal suits should be founded on the act of the companies, but not the shareholders. The ruling created precedents that have directed ruling in subsequent cases. Evidently, during the Lee v. Lees Air Farming, death of Mr. Lee, saw the company pay the family workmans compensation despite Lee being the greatest shareholders14. During the ruling, the judges noted that Salomon v. Salomon & Company precedent provided for the separation of the entity15. In the case, it was ruled that the company had a legal obligation to pay the family workmans compensation because the company had an entity different from Mr. Lee. In another case, Wallersteiner v. Moir, Lord Denning held that despite the existence of puppets shareholders in the company, Wallersteiner would gain advantage of private company status as outlined in Salomon v. Salomon & Co. Ltd. The case was much similar where there was a conflict on the actions of the major shareholder appearing to control the business and fateful dealing of the individual shareholder on the existence of the company. In the case, the ruling identified that while it appears that the company was the owner subsidiary, it had a separate entity. And as such the law stated that the company entity was different from that of owners16. The case identified that one-company agent was limited despite dispute surrounding the legality of a major shareholder holding inconsequential members to meet the minimum shareholders and arguably abuse the position of companys entity due to the law protection. Conclusion Solomon v. Solomon & Co. Ltd ruling appears to have transformed business law by creating entity barrier that separate owners from business. The courts seemingly have been willing to pierce the veil in one-man companies, but the statute established has been too protective. The ruling saw the incorporation of separate legal entities include expanded space to one-man companies with inconsequential partners. Despite controversies on the ruling, the laws on companies have greatly benefited from separation of companys life and those of shareholders. Bibliography Adams, Alix. Law for Business Students. Harlow, England: Pearson Longman, 2010. Denoncourt, Janice. Business Law, 2009-2010. Abingdon, Oxon [UK]: Routledge-Cavendish, 2009. Elearn Limited (Great Britain). Managing Legal and Ethical Principles. Amsterdam: Elsevier/Pergamon Flexible Learning, 2009. Great Britain. Companies. A Bill to Amend the Law Relating to Companies and to Amend the Law Relating to the Fees Chargeable in Respect of the Registration of Business Names. Cambridge [eng.]: Proquest LLC, 2007. Great Britain. Private Actions in Competition Law: A Consultation on Options for Reform. London: Department for Business Innovation & Skills, 2012. Great Britain. Companies. 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