Being an identified business structure, a company has several characteristics. The separate Legal entity is one of the significant features of a company. According to this feature, a company has it is different identification from it is members as well as directors. Directors or members of a company can not be considered a company. A company can run business and also can enter into various business transactions by it is own name. This is the reason that directors and members of the company started taking unfair advantage of this feature. In the history of corporate law, many of the cases have been reported where the separate entity rule did not hold legal and decision of such cases developed into law further. These are the decisions which became the basis of modern law.
In general, every company is a separate legal personality in the eyes of law. The lead reason behind this rule is that a company can do all the acts like a natural person in the course of business. As a company is an artificial person, therefore the same cannot conduct and behave. Director in the company is the person who acts on behalf of the company but cannot be held liable for such acts. The company only will be held responsible for all the conducts that directors do on behalf of the company and in the name of the company. However, this is necessary to mention that court respect this separate entity rule until directors will not take unethical advantage of the same. In the history of corporate law, many of the cases have reported in which court denies to consider this rule and pierced the virtual corporate veil. Salomon v A Salomon And Co Ltd [1897] AC 22 is a very significant case in this area.
In the aforementioned case, the person whose name was Salomon has transferred his current business to a company and becomes a member of this company along with his other family members. In exchange for such transfer, he has received secured debentures of the company as a consideration. When this company was going into liquidation, then Salomon has made his claim in the assets of the company as he had the secured debentures of the company (Law Explorer, 2015). He has made an argument that he has preferential right in the assets of the company in comparison to others because of his claim his secured one. When the matter went into the court it was held that although a company has different identification from it is members yet in this case, the member will be considered the company (swarb.co.uk, 2017). The reason behind such decision was that sole ownership of the company names Salomon Ltd. was with Salomon and his family members. Such a decision has given in this case in order to provide security to separate legal entity rule.
As mentioned earlier that this case if a very huge importance in the Corporation Law, this is to state that decision of this case becomes base of some of the provisions of the Corporations Act, 2001 (Cth). Section 198A of the act requires a director of the company to act within the given powers. According to this section, a director cannot use the powers that are expected to perform with the permission of members of the company in general meeting and those powers that are outside of the scope of the company (austlii, 2018). In interpretation, this can be stated that these sections reflect the provisions of the decision given in the case of Salomon v A Salomon And Co Ltd. These sections also provide that company will be treated separated from director till the directors do act within the provided powers.
The statement that a company is a separate legal personality in it is own right is the base of modern corporate law is correct somewhere. In many of the cases, it has accepted that a company has it is a different identity from it is members and directors. Modern law i.e. the Corporations Act, 2001 also define the same. According to the provisions of this act, a company is a separate legal personality. There are many of the exits that a company can do by it is own name and the same proves the separate identity of the company. It was held in the case of Lee v Lee’s Air Farming Ltd [1960] UKPC 33 that a company can enter into a contract even with it is members because a company has it is separate legal personality. In this case, Mr. Lee was the sole members and owner of the company. In addition to this, he was also employed as a chief pilot in the company Mr. Lee was killed in a plane crash. Afterward, his wife came to the company and asked for the compensation being the wife of an employee. As on the company provisions of the Workers’ Compensation Act 1922 were applicable, therefore Mrs. Lee wanted her entitlement under this act (Bourne, 2016). At the first instance, it was held that she could not ask for any compensation as Mr. Lee either could be the owner or employee of the company (Business law, 2010). Later on, it was held by the Privy Council that Mrs. Lee is entitled to receive this compensation as the said two officers were different (Pier law, 2018).
A company cannot be understood as director and visa versa. The company has it is own separate legal identity and therefore the same can enter into contract alike a person even with it is members and directors.
The separate entity rues become base on modern law further. In corporations Act, 2001, many of the provisions are there by which it can be assumed that a company has different identification.
Firstly, one needs to understand that what are the legal principles that the case Salomon v A Salomon And Co Ltd has provided. This is to state that as studied in the aforesaid part, this case provides the principle of Piercing of Corporate Veil. Piercing of corporate veil is a situation in which the court denies to allow a company using the separate entity rule. Mainly the courts do so in those cases, where a member, director, or officer of the company unfairly takes advantage of this rule. Although many of the cases have reported in the area of corporation law in which court did not consider this rule, although the studied case is the lead case.
In the present scenario, the number of companies are increasing rapidly. In such a situation, there are chances of unethical use of this rule; therefore, the principle provided under Salomon v A Salomon And Co Ltd has it is of great significance. According to this principle, whenever a court thinks that a director or member of a company used this separate entity rule in an adverse manner then the same can pierce the corporate veil. When a court pierces the corporate veil in a case, the director and members of the company personally held liable for their acts and deeds. Division 1 of part 2D of Corporations Act, 2001 consists of duties of directors of the company (Australia, 2011). These duties require a director to act in the best interest of the company and within the limit of granted powers.
Future of the principle is far important. As number of corporations are increasing fastly and getting vast in size, this is expected that cases of misuse of separate legal entity rule will also rise in future. In order to prevent such cases, the principle of Piercing of Corporate Veil is highly significant. At present in the Corporations Act, 2001 no such direct provisions are there in which this principle is mentioned. Some changes are required in the current law. Direct provisions related to Piercing of Corporate Veil must be there along with penalty provisions thereof. At present while using this principle courts cites legal precedent, and therefore a separated well-defined set of rules is highly required in this areas. Duties of a director are mentioned in current law but many of the times it has observed that director and officers of the company do not follow them as they think that they can avail the benefit of separate legal entity rule, hence exceptions of this rule must be included in the current law.
Conclusion
In conclusion, this can be stated that in general companies are a separate legal entity and directors of the same cannot be held liable for any of it is tasks. However, in order to prevent misuse of this exclusive feature of corporations, a principle named “Piercing of corporate veil” is there. Corporations Act, 2001 is the legislation that provides rules related to companies in Australia. The Courts cite legal precedents while using this principle, therefore there is a requirement to insert the relevant provisions in the act itself.
References
Austlii. (2018) CORPORATIONS ACT 2001 – SECT 198A. [online] Available from: https://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s198a.html [Accessed on 10/08/2018]
Australia. (2011) Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related regulations. Australia: CCH Australia Limited.
Bourne, N. (2016) Bourne on Company Law. oxon: Routledge.
Business law. (2010) Lee v Lee’s Air Farming. [online] Available from: https://kennie-businesslaw.blogspot.com/2010/04/lee-v-lees-air-farming.html [Accessed on 10/08/2018]
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 10/08/2018]
Lee v Lee’s Air Farming Ltd [1960] UKPC 33
Pier law. (2018) The corporate Veil. [online] Available from: https://www.pierlaw.co.nz/the-corporate-veil/ [Accessed on 10/08/2018]
Salomon v A Salomon And Co Ltd [1897] AC 22
swarb.co.uk. (2017) Salomon V A Salomon And Company Ltd: HL 16 NOV 1896. [online] Available from: https://swarb.co.uk/salomon-v-a-salomon-and-company-ltd-hl-16-nov-1896/ [Accessed on 10/08/2018]s
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