The incorporation of a company as artificial legal person is recognized as a legal person by law that exists independently with rights and liabilities. This implies that a company is treated as a separate person from the participants of the company. In the legal context, there are two types of persons, namely, artificial and natural (Jackson 2015). The former refers to human beings which law recognized as having rights and duties whereas the latter is recognized as human beings. Corporations are recognized as artificial person as it possess the right to purchase and sell any property or the right to sue or be sued against the third party.
The separate legal entity of the company as an artificial person has resulted in the feature of perpetual succession. A company has perpetual succession which implies that it cannot affected by disability, insolvency, death or disagreement of shareholder. The principle that a company is an artificial person and has a separate legal entity, which is perceived as the steadiest rule of corporate jurisprudence. This principle has been established in the case of Salomon v Salomon that only laid foundation of the English Company Law but of the commercial law regime universally.
Facts
Salomon initially operated as sole proprietorship business but transferred his boot making business to a company (Salomon Ltd) that included himself and his family as the members of the company. Salomon received the price for such transfer as shares and debentures with a security against debt on the company assets. Later, when the company failed and liquidated, the right of Salomon to claim for recovering securities against the debentures became a priority for the creditors who were unsecured and would not have received anything from the proceeds of the liquidation. In order to avert such undue exclusion, the liquidator alleged on behalf of the unsecured creditors that the company was a fraud (Schall 2016). He stated that the company was an agent of Salomon who was personally liable for its debt being the principal. In other words, the liquidator did not consider that Salomon Ltd has different identity from its member Salomon only to make Salomon personally liable for the company debt as if he carried on the business as a sole trader persistently.
Issue
This case dealt with the issue whether a controller/shareholder be liable for its debt irrespective of the separate legal identity of the company higher than the capital contribution to subject such person to unlimited personal liability.
Ruling
The House of Lords held that since the company was incorporated, it may be considered as an independent artificial person having its own liabilities and rights. It is irrelevant to consider the motives of those who took part in the promotion of the company regarding the rights and liabilities. Thus, the decision in the Salomon’s case created a legal fiction of ‘corporate veil’ between the owners or controller and their companies.
Principle enunciated in the case
The decision of the House of Lords given in the Salomon’s case gives rise to two essential principles- the doctrine of limited liability and the doctrine of separate legal personality o corporate personality. The rule of separate legal entity established in the Salomon’s case has been observed in cases like Lee v Lee’s Air Farming Limited and Macaura v Northern Assurance’s cases. In the legal parlance, a corporation is considered as a distinct or separate person with its own personality that is independent of the persons forming such company, investing money into the company and managing the operations of such company. It is established from the decision that the rights and duties of the corporation shall not be considered as the rights and duties of the directors or the members of the corporation that are ambiguous pertaining to the corporate veil that is surrounding the company (Hannigan 2015).
According to the decision in the Salomon’s case, the legal consequences that follow from such decision ar5e as follows. Firstly, a registered company as a separate legal person is capable of suing or being sued as was observed in Foss v Harbottle. Secondly, incorporation of a company enables perpetual succession where company operations are not affected due to the death of any director or member of the company. Thirdly, the distinct identity of a company permits it to enter into contracts in its own name. Fourthly, a business corporation becomes empowered to hold, acquire and dispose of any property as was observed in Macaura v Northern Assurance Co Ltd.
Further, the other attributes that a company acquires after being incorporated and becoming a separate legal entity includes its power to contract with its controlling member and can be the creditor, debtor or a surety of the member as was ruled in Salomon’s case followed by the decision in Lee v Lee’s Air Farming Ltd. The decision in Salomon’s case established that lawfulness of a one-man company and established that incorporation was available for large public company from sole trader and small private partnership.
It also established that it was possible for a trader to limit the amount of money he invests into the company but also avert serious risks to the significant amount of that capital by subscribing to debentures instead of shares. In Lee v lee’s Farming Ltd, Lee held one of the shares of the company and was governing director of the company who dies in air crash. It was argued that his widow shall not be compensated as Lee and the company was the same person. The rule of Salmon’s case was applied and company was held to have distinct identity from Lee. Thus, this decision establishes separate personality of a company and gives it a judicial recognition.
The fundamental advantage of incorporation from which the other legal consequences follow is, the distinct legal entity of a company. Therefore, it may happen that the corporate personality of the company is used to perform illegal acts or frauds (Jackson 2015). Since, it is no possible for the artificial person to commit such illegal conducts or frauds, it becomes important to remove the pretense of corporate personality in order to recognize the persons guilty of committing such illegal acts or frauds. This process is known as lifting the corporate veil. The circumstances under which courts can lift the corporate veil are as follows:
Lifting the corporate veil by statute
The advantages of ‘separate entity’ and ‘limited liability’ may not be permitted under certain circumstances. Firstly, when the number of members is lower than the statutory minimum and the company carries on with its operations, the court may lift the corporate veil and hold persons behind the company liable (Macey and Mitts 2014). Secondly, misrepresentation in prospectus may hold the director , promoter and every person liable for misrepresentation liable. Thirdly, while winding up the company, it appears that the business operations were carried on to defraud the creditors; the court may hold such persons personally liable for commission of fraud.
Lifting the corporate veil by courts
The raising of corporate veil by courts often put the judiciary in dilemma, as the courts cannot disregard the principle of Salomon’s case. However, over the years, judiciary has transferred from applying the Salomon’s approach in a more interventional manner under difficult circumstances in order to achieve justice under such difficult situation. The only exception to maintaining corporate veil is that there must be ambiguity in any document or statute that would prevent the court from treating the company as a distinct entity from its members (Schall 2016). Secondly, when the court deems the company as fraud, hence, establishing an abuse of the corporate form; thirdly, when it is proved that the company is an authorized representative of its members or controllers.
It can be said that following the decision in the Salomon’s case, the Australian jurisdictions have incorporated provisions for private companies into their corporate law to ensure that the benefits arising from limited liability is not restricted to group of business entrepreneurs. This is evident from the fact that Corporations Act sanctions the registrations of one-person companies (Macey and Mitts 2014).
The ‘rigid construct’ of company law as is evident from the decision given in the Salomon v Salomon case, that established the century-old doctrine of separate legal entity of companies from their members. This juristic personality of a corporation has given rise to the legal structure of modern business and the doctrine of corporate veil remains uncontested.
The doctrine established in Salomon’s case has built a strong foundation of company law, which safeguards the private assets of shareholders and provides a method of limited liability that is acceptable by company law for facilitating international trade and business development. In order to prevent controllers from misusing the corporate structure, the courts have provided several exceptions to the rule of corporate veil thus, addressing relevant issues.
It can be stated that the basic principles of the judgment in Salomon’s case remain to be unaltered in the contemporary era that is, a limited liability company is an artificial legal person that is separate from its members and directors. This principle is still relevant in the modern company law. To sum up, it can be said that the doctrine of ‘separate legal entity’ is an effective and justified rule that have been followed and shall be followed in the coming years.
There is no need for the courts to raise the corporate veil with the objective to enforce liability on a shareholder for the business debts. The courts do not disregard the principle of limited liability held in the Salomon’s case solely to impose liability on the shareholders of the company for its debts. Therefore, the principles enunciated from the decisions remains intact enhancing the efficiency of business activities
Reference list
Ayotte, K. and Hansmann, H., 2015. A nexus of contracts theory of legal entities. International Review of Law and Economics, 42, pp.1-12.
Bainbridge, S., 2015. Corporate Law. West Academic.
Corporations Act 2001 (Cth)
Foss v Harbottle (1843) 67 ER 189
Hannigan, B., 2015. Company law. Oxford University Press, USA.
Jackson, K., 2015. Behind the Corporate Veil. ReVista (Cambridge), 15(1), p.50.
Lee v Lee’s Air Farming Limited [1960] UKPC 33
Macaura v Northern Assurance Co Ltd [1925] AC 619.
Macey, J. and Mitts, J., 2014. Finding order in the morass: The three real justifications for piercing the corporate veil. Cornell L. Rev., 100, p.99.
Salomon v A. Salomon & Co Ltd [1897] AC 22
Schall, A., 2016. The New Law of Piercing the Corporate Veil in the UK. European Company and Financial Law Review, 13(4), pp.549-574
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download