The Issues of Corporations Laws in Support of Equity and Fairness - Report Example

Name Tutor Course Date Corporations’ laws Introduction The case of Lord Macnaghten, Salomon v Salomon & Co Ltd, highlighted some of the important issues with regards to the relationship between a company and its owner1. Legally it was determined that a company is a separate entity from the owner. This means that a company has a dual nature as dulia nature both as an association of its members and a person separate from its members. During the time it was common for the companies to be incorporated as was the case of Macnaghten, Salomon v Salomon & Co Ltd. This was aimed at ensuring that the owners or shareholders are not held liable in case the company incurs debts. However, it is also controversial since the same shareholders are entitled to the profits made by the company. This brings into question whose interest the companies are governed and what are the duties of the directors. The Companies Act 2006 attempts to provide some answers in order to ensure that the creditors and stakeholders are protected. However, concerns are being raised with regards to the recognition of separate legal personality when it comes to a company. The paper this discusses the Issues of Corporations laws in support of equity and fairness for the purposes of modifying the legal principles. Background In the case of Macnaghten, Salomon v Salomon & Co Ltd, the incorporation of companies was common during the 19th century. The company would be sold to the members who were previous owners and had to be seven in number. Mr. Salomon incorporated his Bootmaking Company and it was named A Salomon and Co Ltd. It members were himself, his wife, a daughter and four sons. They became the subscribers of the company’s memorandum and each took a one £ 1 share as the business was sold to the company for £ 39,000. Mr. Salomon used £ 20,000 of the purchase price for subscribing to the share of the company; £ 10,000 was not paid by the company but was instead issues debentures which gave him floating charge of the assets as security2. The business however failed, and it went into liquidation. If Salomon was to apply his floating charges, the creditors would have ended up with nothing. The liquidator favoured the creditors and resisted the move by Salomon to be paid. Instead the liquidator wanted Salomon to take charge and pay the creditors for the debt of his company. During the first instance, in the case of Broderip V. Salomon, It was held that the company was acting as an agent of Salomon and was therefore liable for the debt3. However, during an appeal based on the Companies Act 1862, it was held that Salomon had incorporated the company contrary to the true intent of Companies Act 1862 which amounted to fraud. As a result the company should have been declared to be working under a trustee and Salomon should indemnify the company for all the debts incurred. This argument was however rejected by the House of Lords in the case of Macnaghten, Salomon v Salomon & Co Ltd. It was held that Salomon had not done anything prohibited under the Companies Act 1862. Lord Macnaghten also highlighted that the company is a different person from the subscribers of the memorandum according to the law and the company is not an agent of the subscribers legally. This meant that Salomon is not liable for the debts of the company as the subscribers are not legally liable for the company. This led to the development of Companies Act 1900 and Companies Act 1907 to protect the liquidators from floating charges provided to secure the pre-existing debts. Discussion The case of Macnaghten, Salomon v Salomon & Co Ltd, has therefore led to the notion that the company’s business is its business. This makes the company a separate entity from the person running. Consideration of equity and fairness is required for the purposes of avoiding any form of abuse by the directors of the company. The legislation poses a risk to the companies where a director or directors may commit crimes and end up being excused in the context that it is the company that committed the crimes4. This is considering that an individual who has committed a crime may be sued alongside the company. It therefore impacts negatively on the operations of the company and the directors involved may get away with the crimes. The company May end up losing some money at the expense of the rogue directors. According to section 15(1), the company’s Act 2006, a company becomes incorporated once it has been registered. This means that it becomes a different entity from the shareholders. This may also impact negatively on the process of transferring the share of the company to another party. This may affect the family business in case of the death of a major share holder. In the case of Re Lewis’s Will Trust, Mr. Lewis had indicated in his will that his farm be inherited by his son5. However, his farm was later incorporates hence separating him from his farm legally. When he passed on, his son could not inherit the farm as it was under the company and not his father. The legislation also makes it difficult of the individuals to obtain fairness. Legally, the company may sue the members while the members cannot sue the company. The legal rights of a company belong to the company and not the individuals. The legislation therefore requires some changes with consideration of equity and fairness to both the members and the company. According to section 16(2), the subscribers to the company are body corporate by the name contained in the memorandum6. This makes the company a different legal entity with legal powers over the subscribers. As a separate legal entity, the company may enter into a contract with the members of a particular member for the purposes of carrying out a certain activity. However, this may expose the members to difficulties in case of in eventualities. In the case of Lee v Lee’s Air Farming Ltd, Mr. Lee who was the majority share holder of the company was contracted by the company and was killed in the course of carrying out the duties for the company7. The insurers refused to pay for the compensation arguing that it was the responsibility of the company. This was because the contract had been made between the insurers and the company and not Mr. Lee. This is despite Mr. Lee being the owner of the company with a majority of shares. This is an indication that the legislation has some disadvantages and it has some negative effects on the shareholders. In the case of Mr. Lee, technically his money will be used for the compensation of his death which is not fair. The legislation also posses challenges to the shareholders in terms of taxation. Under ordinary circumstances the company is supposed to pay taxes for the profit made. The same applies to the shareholders who are also required to pay taxes for the same profits distributed to them by the company. This can be attributed to the different entities between the company and the shareholders8. It therefore ends up increasing the burden of tax leading to a decrease in profitability. Equity and fairness is therefore required in this situation for the purposes of avoiding the challenges being faced by the shareholders in terms of taxation. The legislation also has some challenges in terms of dealing with people evading enforcement of existing rights. In the case of Gilford Motor Co Ltd v Horne, there was an attempt by the defendant to evade a covenant not to compete with a claimant9. The defendant has financed his wife to open up a company to compete with the claimant. Since the company is different from the shareholders, in accordance to section 16, the covenant would not have been broken. This is an indication that the legislation has negative impacts on covenant and agreements between different parties. In the case of John v Lipmann, Jones transferred the land to his company before he had completed payment to Lipmann who had sold to him. Legally the land belonged to the company which was a different entity from Jones. This was considered a way of avoiding recognition and payment of the balance in the eye of equity. The ability of persons to evade their obligations is therefore one of the negative issues of the legislation. It therefore contributes to the exploitation of the individuals or different parties. The duty of fiduciary may also be breached y the employers to their employers. An employee may register a company in legally in accordance to section 15 of the companies Act 2006. The company may compete with the subsidiary of the parent company where the employee is working. Since the company and the shareholders are legally different entities, the employee may breached the fiduciary duty but continue to operate the company. The legal costs may also increase as a result of separating the company from the shareholders. In case of a dispute, the shareholders will be forced to pay their own legal fees and the same will be applied to the company. This therefore impacts negatively on both the shareholders and their companies. The issues of corporate veil has also emerged as a result of the legislation and hence impacting negatively on the principles of fairness and justice. The directors of some of the companies usually use their companies for the purposes of evading justice. The issue of hiding under the corporate veil has been highlighted in most of the cases including that of Briggs v James Hardie & Co Pty Ltd10. This is an indication that some of the unethical practices in the corporate scene are as a result of the weaknesses in the legislation. The concept of the corporate veil also contributes to difficulties in terms of dealing with the case of fraud by the directors in different companies11. In most cases, the companies are usually forced to pay for the fraudulent activities of the individuals. This is despite the separation between the individuals and the company. The notion of justice and fairness is affected by the issues of the corporate veil putting the courts in a dilemma. This can be attributed to the case of Macnaghten, Salomon v Salomon & Co Ltd, where more emphasis is placed on the legal issues as compared to justice and public interest. The legislation may have negative impacts on the economy due to the issues associated with lifting the corporate vein. The unsecured creditors of the company may also be affected by the legislation. Although section 172 require the interest of the shareholders and creditors to be considered, it is still not possible to entirely deal with the challenges that may face the creditors and hence leading to negative effects to the creditors. Conclusion In conclusion, it is evident that the case of Macnaghten, Salomon v Salomon & Co Ltd, contributes to some changes in the way companies and their directors operate. The major shareholders may commit fraudulent activities in the name of the company. On the other hand, issues such as inheritance are also affected by the legislation. Most of the directors who are shareholders of the company who are directors have also been hiding unfed the corporate veil and committing some crimes. Changes are therefore required in the legislation so as to promote equity and fairness. References Lord Macnaghten, Salomon v Salomon & Co Ltd [1897] AC 22, 51 Companies Act 2006 Broderip v Salomon [1895] 2 Ch 323 Re Lewis’s Will Trust [1985] 1 WLR 102 Lee v Lee’s Air Farming Ltd [1961] AC 12 Gilford Motor Co Ltd v Horne [1933] Ch 935 Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549 Hutchinson, Allan C., and Ian Langlois. "Salomon Redux: The Moralities of Business." Seattle UL Rev. 35 (2011): 1109. Watson, Susan. "How the Company Became an Entity: A New Understanding of Corporate Law." Journal of Business Law (2015). Sahu, Shweta. "Piercing the Corporate Veil: A Necessity Today in India and Abroad." Available at SSRN 2352489 (2012). Goulding, Simon. Principles of company law. London: Routledge, 2013. Read More