Separate Legal Entity - Assignment Example

Separate legal Entity Author’s name Institutional affiliations Separate Legal Entity Introduction The concept of the separate Entity principle is universally accepted as the basic principle of Company Law that is universally applied (Tricker, 2015). Additionally, according to this principle, a company should be treated as a separate or rather a distinct entity in respect to its members. In other words, the distinct entity principle permeates company law and in the process, it has resulted into extensive implications on practical and theoretical implications (Bosselmann, 2016). Therefore, in order to understand the concept of Separate Entity, it is important to discuss the issue of legal entity using the decision that was arrived upon in Salomon case and thereafter, try and analyze some of the statutory exceptions as far as the Separate Entity principle is concerned, and wind up by examining the circumstances that permit the principle of corporate veil to be pierced or lifted by the court of law. Separate Legal Entity as a double –edged sword. Company registration is believed to bring with it a number of benefits .In this case, when a company is registered, it brings with it limited liability, it becomes a separate legal entity, it becomes more flexible and in the end, it boasts of perpetual succession (Bosselmann, 2016). Upon the company’s incorporation, it is accepted that it becomes an independent and new legal entity in such a way that it is separate completely from the subscribers who manage it and those who formed it. In such circumstances, a creditor is only allowed to sue the company in its own right and not the members in case they want to recover any damages (Tricker, 2015). The issue of separate legal entity was applied first in R v Arnaud case. Additionally, in this case scenario, it is believed that a registration authority declined to offer a ship registration rights on the argument that the ship owners included foreigners (Hiller, 2013). Moreover, it was a British Chartered company owned ship whose members had foreign roots. Result, the registration company was ordered by the company to offer registration rights to the ship on the basis that it was owned by the British company rather than the company members (Tricker, 2015). However, the landmark of Company Law is believed to emanate from the unanimous decision that was arrived upon in the Salomon v Salomon and Co Ltd which is believed to confirm a company as a separate legal entity and possess unique legal personality. Mr. Salomon sold his shoes to his own company registered under the Companies Act. Additionally, the company registration was completed and its members included Salomon and his family. After receiving his own shares of approximately 10000 euros, he assigned his debentures to another party which made the business operations of the company to decline hence making the company to run into insolvency (Bosselmann, 2016). In this case, the liquidator argued that Salomon should be held responsible for the debts of the company and moreover, he should not be permitted to benefit, the liquidator also argued that the company was acting simple as Salomon’s agent and therefore he should indemnify the company creditors and the company itself as far as the debts incurred by the company are concerned. The holding of the House of Lords in this case was that: First, Salomon was neither under the liability of the creditors of the company nor the company itself. Second, they held that the debentures offered to Salomon were issued validly (Bainbridge, 2015). Third, one of the Lords, Lord Halsbury was of the opinion that the statute had enacted the procedural and formal requirements upon the company registration yet they did not enact the legal requirements that revolve around the degree or extent of interest that are held by each company subscriber or the influence of one shareholder over the other shareholders (Hayek, 2012). Fourth, the house of the Lords was also of the opinion that after the company registration, as much as the business may be still the same company as before with the same hands obtaining net revenues, according to the law, the company cannot be considered as an agent of its members or its subscribers. Nevertheless, it should be crucial to note that in Salomon’s case, the House of the Lords were of a general opinion that, as much as seven of its shareholders may not be considered as truly independent, Salomon % Co Ltd was a company that had been established and incorporated under the Companies Act 1862 (UK) (Tricker, 2015).In this case, it is believed that all the legal and statutory requirements were met owing to the fact that the company possessed seven shareholders. In simple terms, from the unanimous decision that was made in this case, it is wise to point out that the debt of the company belongs to the company, the property of the company is the company’s property, companies are in a position to contract with their outsiders, directors and its members, and finally, companies can as well be engaged in crimes and torts (Tricker, 2015).. The above mentioned learning points had earlier been confirmed in a number of cases. To begin with, the issue of a property of the company had been reasserted in Macaura V Northern Assurance Co. The appellant in this case, Mr. Macaura’s claim for compensation for his company had been rejected by five insurers on the grounds that Macaura did not possess an insurance interest since the insurance policy was granted in his own name rather than the company’s name (Hayek, 2012). In this case, the court concluded that Macaura even if he is the sole owner of the shares of the company, he is not the Company and besides, no one including the company creditors have any rights as far as the company assets are concerned. Moreover, as much as this decision does not work in favor of the company subscriber, in the meanwhile, this principle should as well be employed (Hayek, 2012). The issue of the company’s debt had clearly been explored in Salomon V Salomon & Co Ltd by the House of the Lords. Salomon’s case can be argued to be the primary landmark in the Company Law in UK since this case had the foundations of the established basic principles of Company law (Klabbers, 2015). Additionally, a company according to this case can be assumed to be a legal individual separate from its subscribers and members while at the same time, it can be taken to be an association of its members (Hayek, 2012). In other words, the property of the company is owned by the company as a separate legal person and not by its subscribers, its business dealings are conducted by the company in its own right as a person since it is the company that enters into relationships or contracts as far as the company’s property or business is concerned (Münkner, 2015). Salomon’s Case Evaluation It is universally acknowledged that a Separate Entity principle has managed to exist over time since it basically implies that the company has a practical utility (Hayek, 2012). In other words, backed by perpetual succession, separate legal entity, flexibility, specialized management, majority rule among other corporation attributes, it is important to note that the Corporation possesses many socially and economically beneficial functions. In this case, by ensuring that the company is separated from the management, then the company is able to permit the investing public to revel in the company’s net revenues without necessarily being involved in the day to day management of the company (Bainbridge, 2015). Moreover, since the company is established as a person under the law, then the company’s personality of association is maintained. In other words, the company can continues to exist for as long as it wants without having to worry about the biological death of any member. Limitations and limits of Separate Legal Entity On the other hand, the decision made in the Salomon’s case implies that the concept of separate Legal Entity is weak in protecting and guarding the interests of outside creditors. In other words, it offers the benefits of limited liability to incorporators that are very honest in an effort of encouraging them to continue with their business operations (Hayek, 2012). In simple terms, The Separate Entity principle separates business management from subscribers or shareholders and because of the limited liability benefits; the subscribers are not allowed to participate in the controlling and monitoring of the commercial ventures of their company (Miller & Oats, 2016). Besides, it is also accepted that, subsidiaries can be abused easily in pursuant of Separate legal Entity to avoid debts through asset transfers between subsidiaries and the parent company. Some of the limitations to the legal recognition revolve around the fact that Legal entities cannot vote, cannot marry or hold any public office and in some jurisdictions, it is accepted that there are certain offices that they cannot hold (Werle & Jessberger 2014). Additionally, the degree tom which a separate legal entity can commit a tort or a crime depends on the host country such that certain countries are against the opinion of a legal entity having human rights. Conclusion A company as a separate legal entity basically means that the company is able to stand on its own and conduct its business operations in its own right. Additionally, it is a distinct item from the company members and other company subscribers (Salomon v Salomon & Co Ltd). Moreover, by ensuring that the company is separated from the management, then the company is able to permit the investing public to revel in the company’s net revenues without necessarily being involved in the day to day management of the company. However, it is believed that the principle of Separate Legal Entity is weak in protecting and guarding the interests of outside creditors. Therefore, it is important for the company owners to ensure that in case of anything, there company is well registered in order to enjoy the benefits that come with the incorporation of a company as a separate legal entity. References Bainbridge, S. (2015). Corporate Law. West Academic. Bosselmann, K. (2016). The principle of sustainability: transforming law and governance. Routledge. Hayek, F. A. (2012). Law, legislation and liberty: a new statement of the liberal principles of justice and political economy. Routledge. Hiller, J. S. (2013). The Benefit Corporation and corporate social responsibility. Journal of Business Ethics, 118(2), 287-301. Klabbers, J. (2015). An introduction to international organizations law. Cambridge University Press. Miller, A., & Oats, L. (2016). Principles of international taxation. Bloomsbury Publishing. Münkner, H. H. (2015). Co-operative principles and co-operative law (Vol. 34). LIT Verlag Münster. Tricker, B. (2015). Corporate governance: Principles, policies, and practices. Oxford University Press, USA. Werle, G., & Jessberger, F. (2014). Principles of international criminal law. OUP Oxford. Read More