Similar to any other business entity, a corporation is also a legal structure of business (Ukiahchamber.Com, 2018). A corporation has many of the unique features that make this business form different form another. One of such feature is a separate legal entity of a corporation (Translegal.com, 2018). A company is a separate legal person and this is the reason that the same can run a business by it is own name. Along with being a separate legal person, a company is also an artificial person and thus required some natural person to act on behalf of the same (Amoolya, 2015). These people are known as director and officers of the company. This feature of the business structure started becoming a problem as directors and officers of the companies starting using the spate position of the company in an unfair mode. Many of the cases has happened there in the law, where the separate legal personality of the companies have identified, and the decision of such cases further developed into modern law. One of such cases is discussed below.
A company cannot be understood as it is director and officers. They all are a different cause of separate legal personality rule of a company. In general, because of separate legal entity rule, directors and officers cannot be held liable for anything that they do on behalf of the company (Casenotes, 2008). Salomon v A Salomon And Co Ltd is one of the significant cases in the field of Corporation Law. The issue of the case was a tactic of a person named Salomon. This person has transferred his existing business to a company that is “Salomon. Ltd”. In this company, the whole ownership and management were controlled with Salomon and his other family members (Talbot, 2015). In consideration of business transfer, Salomon received the debentures of the company. At the time of liquidation of the company, Salomon took his share in the assets of the company first and in the reasoning, he stated that he was eligible to do so being a secured creditor. At the time of hearing and proceedings of the case, the court has denied respecting separate entity of the company because of sole membership of Salomon (Law Explorer, 2015). Court has provided the decision in order to prevent misuse of separate legal entity rule. As stated earlier that the case has it is huge significant, the same developed some major changes in the modern corporation law. Corporations Act 2001 (Cth) (hereinafter mentioned as “act”) is the lead legislation that governs the companies in Australia. Many of the provisions of this act are influenced by the decision of the case. For instance, section 198A of the act requires a director to act within the prescribed powers (Legislation.gov.au, 2018). On the other side, the principle of Piercing of Corporate Veil is another principle that this case has provided. According to this principle, the court can avoid separate personality of a company in cases where directors and officers take unfair advantage of this rule and can held them personally liable (Bellassociates.co.nz, 2017). In the modern corporate law i.e. Corporation Act 2001, separate legal identity rule is recognized but along with the same duties of directors are also mentioned. Breach of such duties gives powers to the court to pierce the corporate veil in cases of fraud. Section 588G of the act states the provision related to personal liability of directors and officers of the company (Austlii, 2018). This would not be wrongful to state that in the development of the act, references of the subjective case has been taken.
The statement is stated correctly, as the same is true. The recognition of separate legal entity rule has carved the modern corporate law. According to this rule, a company has a separate legal entity and cannot be held liable for the acts of it are directors, officers, and members. Similarly, these people also cannot be held liable for the acts of the company. According to the principle of this rule, the company can do following acts by it is own:
This is an important principle as the same provided liberty to directors and officers to perform the actions on behalf of the company. The rule is one of the most significant features of the company as it is the basis of another feature which is the limited liability of directors/officers and members. Under modern corporate law, this rule keeps an important place. Nevertheless, this is to mention many of the shortcomings are also there of this rule. Where on one side, the rule limits the liability of management of the company and makes a difference between company and others, on the different side, it leads many of the unethical dealings. As directors and officers are well aware of the fact that they will not be held personally liable, they can use misuse the separate identity of the company. Imagine a corporate entity where directors are members also or their interest is involved in the affairs of the company; chance is there that directors can use their position for personal benefits. In such a situation, directors know that company will be held liable for the deeds that they will do in the name of the company and because of this, they started taking benefits of this rule for their personal interests. However, in the act, many of the provisions have been made to control such dealings, yet some shortcomings are there. In a company where one or more directors take, a share in addition to public, possibilities of loss for the public is always there. In conclusion, this is to state that separate legal entity rule has it is advantages as well as many disadvantages too and these shortcomings are still problematic.
The principle of separate legal entity has been detailed in the subjective case. In order to check the future of this principle, this is to mention that companies are increasing fastly and becoming big in sizes. In such a scenario, it is the possibility of misuse of this principle. Companies are facing heavy competition and to achieve the goals and targets, management of the company often misuses the separate identity of the companies. Future of this principle seems to be in danger. On daily basis, many of the cases are reporting there in which the issue of misuse of this principle is being an important part. Directors and officers of the companies are using the doctrine of separate legal identity as a weapon against their fraudulent dealings. Although provisions are there in the law to prevent such dealing but the same are not enough and in this mode, this doctrine can lead to several serious consequences in the future.
As mentioned above, that future of the doctrine of Separate legal identity as well as of Corporations Act 2001 is in dark, some changes are required in the current law to prevent such negative issues that can be there in future. Many of the positive provisions are already there in the law, yet some more are required to be welcome. For instance, the section 180 to 184 of the act prescribes the duties of a director in respect to the company. Many of the times, it is interpreted as a shareholder and for the reason, directors set aside the interest of other stakeholders. These sections need a clarification in order to prevent the activities of mismanagement. In addition to this, the liability of directors towards society is also required to be a part of the act. Penalties are there for the specific type of breach and the same regulates the behavior of directors, but in addition to this, some other restrictions must also be there to govern the conduct of such people. Therefore this to say that yes, changes are required in the current corporate law.
Conclusion
The presented report summarized the legal principle that has been stated in the Salomon case. In addition to the summary of the subjective doctrine, the case also has been briefed. The doctrine is necessary to make the directors enable working on behalf of the company but misuse of this doctrine is being a concern these days. In many of the cases, directors have reported using the doctrine for their personal benefits, which is illegal and unethical as well. To prevent such issues, certain ore changes are required in the current law. These changes are expected to remove the shortcoming of the doctrine of the separate legal identity of a company.
References
Amoolya. (2015) The Concept of Separate Legal Entity in light of Corporations. [online] Available from: https://www.lawctopus.com/academike/concept-separate-legal-entity-light-corporations/ [Accessed on 08/12/2018]
Austlii. (2018) Corporations Act 2001 NO. 50, 2001 – Sect 588G [online] Available from: https://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s588g.html [Accessed on 08/12/2018]
Bellassociates.co.nz. (2017) The Corporate Veil. [online] Available from: https://www.bellassociates.co.nz/latest-news/2017/8/8/6kg3sz5pjl6pmnrr600i3ktkqk34sq [Accessed on 08/12/2018]
Casenotes. (2008) Business Organizations (6th ed.). USA: Aspen Publishers Online.
Corporations Act 2001 (Cth)
Law Explorer. (2015) The Salomon principle and the corporate veil. [online] Available from: https://lawexplores.com/the-salomon-principle-and-the-corporate-veil/ [Accessed on 08/12/2018]
Legislation.gov.au. (2018) Corporations Act 2001. [online] Available from: https://www.legislation.gov.au/Details/C2017C00328 [Accessed on 08/12/2018]
Salomon v A Salomon And Co Ltd [1897] AC 22
Talbot, L. (2015) Critical Company Law. Oxon: Routledge.
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