Salomon v A Salomon and Co Ltd ( Salomon ) has created an impressive instance in English Law history. The determination of the House of Lords in Salomon has reaffirmed the separate legal personality of a company. A separate legal personality is besides known as the corporate personality. It is one of the effects of the Company Act 2006 which incorporated a exclusive bargainer company to a limited company. When a company has undergone incorporation. it merely means that the stockholders of the company are separated from the company. Therefore. the stockholders have limited liability. In an integrated company. stockholders get a benefit of holding limited liability. The assets of the company do non belong to its members and the company can merely action or be sued under its ain name merely. On the other manus. there are peculiar fortunes whereby the tribunal is seeking to abstain the rule of separate legal personality and limited liability to nail the fact behind incorporation – it is called “the lifting or corporate veil” .
From my point of position. I strongly agree with the determination made by Lord Macnaghten in House of Lords in the Salomon instance because he alleged a true and just position on the instance. Mr Salomon had successfully appealed to the House of Lords and Mr Salomon managed to get his rights. which is to obtain a separate legal personality ; he was merely apt to the sum of company debts on the portions that he owned. In this essay. the philosophy and incorporation of the instance of Salamon v A Salomon and Co Ltd and the lifting of corporate head covering is critically discussed.
A booster is a individual who knows of the thought on how to integrate a company and carries on with the processs and enrollment to change over a exclusive proprietary company to a limited company. Cockburn J. in Twycross v. Grant has enounced that a booster is defined as a individual who undertakes all the processs of a undertaking to accomplish the aim of the undertaking. In Salomon v A Salomon Co Ltd ( Salomon ) . Mr Salomon seemed to be the booster of his ain company. However. when the company runs into settlement. the High Court and Court of Appeal decided against Mr Salomon. and said that he should be treated as if the company was his agent or legal guardian. The chief purpose of Mr Salomon integrating the company to a limited company was because the household wanted to be portion of the company. Harmonizing to the Companies Act 1862. in order to register as a limited company. a company needs at least 7 stockholders.
Mr Salomon has allotted each ?1 portion for his 5 kids and his married woman ; he himself was keeping 20. 000 ?1 portions. It is difficult to reason that Mr Salomon formed the company meaning to victimize the company creditors because Mr Salomon had already gone through all the necessary processs to integrate the company. Smith V Hancock demonstrated a state of affairs whereby a compact was non broken despite some misdemeanors in the understanding. Lindley LJ mentioned that a promise is said to be broken if the intent of puting up the company was to be a “mere cloak” . Associating this state of affairs to the discussed Salomon instance above. the Salomon instance showed a echt purpose of organizing the company even though that does non wholly find if alleviation should be granted to the creditors. Therefore. in finding corporate duty. the motivations of puting up a company is less important.
Doctrine of Incorporation
( I ) Separate Legal Personality
In Salomon. Lord Magnaghten emphasized that one time a company is incorporated. the company’s behaviors are therefore being conducted by a separate individual from the company. Harmonizing to the commissariats of the Companies Act 2006. a separate legal personality is an simple feature in a company. When a company has been incorporated. it’s members are separated from the company. which means that when a exclusive bargainer incorporates his company. the assets of the company will non belong to the members any longer as an integrated company owns its ain assets. Furthermore. stockholders of the company have limited liability. and hence they are apt on the debts of the sum they have invested in the company and the company will be apt for its ain debts. Separate legal personality and limited liability are known as the most of import facets in an incorporation company. Macaura 5 Nothern Assurance Co ( Macaura ) is one of the best illustrations to back up the instance of Salomon. Mr Macaura sold the lumber to the company in returned issued capital assets. which belongs to the company. and non himself. In consequence. he was non able to claim the insurance for the lumber that was covered by the insurance under his ain name because the assets did non belong to him any longer. Additionally. in Macaura. it clearly illustrated that stockholders personal assets were a
divider from the company.
Apart from that. a separate legal personality means that a company has legal right. which is separated from its members. and a company can merely action and be sued under its ain name. The company members have no right to claim any benefits by using the company’s rubric. A company militias the rights to come in into legal relationships and employment contracts with the members of the company. In Salomon. both of Mr Salomon’s boies were the managers for Salomon and Co Ltd. Lee v Lees Air Farming Ltd showed a well illustration of Salomon ; Lee was a major stockholder and was besides the manager for the company. Furthermore. a company enjoys ageless sequence. Company members come and go easy but a company will remain in sempiternity upon decease of the members or even bankruptcy. Merely by legal actions such as weaving up and traveling into settlement can convey a company to an terminal.
The most attractive rule in a separate legal personality is the limited liability. If a company is sing insolvency. the stockholders of the company are merely apt for the sum they have invested in the company. In Salomon. the murderer went against Mr Salomon because Mr Salomon was the major stockholder of the company and has the duty to retrieve the value of unsecured bond and was therefore apt for the company debts. Harmonizing to Lord Magnaghten. Mr Salomon did really set attempt to retrieve the value of unsecured bond for its company ; and as a consequence the motivation of Mr Salomon’s incorporation the company wasn’t relevant to the corporate liability. Therefore. Mr Salomon was a endorser and besides a booster to the company.
In my sentiment. I feel he should non be apt for the company’s liabilities. The House of Lord stated that since Mr Salomon ran the company as a “one-man business” . Mr Salomon owned the rights of limited liability. Thus the debt belongs to the legal entity of the company. and non him. In contrast. for an limitless liability company. stockholders are apt for a company’s debt merely when the company’s liability has been taken off without an evident ground. In fact. a limited liability is merely a logical consequence to a separate legal personality. Nevertheless. creditors’ claims can non be strongly against the shareholder’s assets as their claims are restricted to the company’s assets merely. This is due to the absence of legal relationship between portions and a company’s belongings. It is deserving observing that limited liability is merely good to the stockholders of a company.
The Lifting of Corporate Veil
Under certain fortunes. some people intend to integrate the company to mistreat or forestall the consequence of separate legal personality. which is the head covering of incorporation in order to hedge from their duties and errors. In other words. sometimes people may integrate a company to victimize the company’s liability. If the justice strictly applied separate legal personality. the cheat will so be non bear down for his action. To seek the truth and fact behind the incorporation. sometimes the tribunal will ignore the head covering of incorporation. This action is known as ‘lifting the head covering of corporation’ or in other words ‘piercing the corporate veil’ . Apparently in Salomon. there wasn’t any state of affairs screening that the endorser. Mr Salomon. of the company was personally apt for the company’s debt or seeking to victimize from its ain company. Mr Salomon incorporated the company with earnestness of purpose emmet non organizing a fake company nor seeking to mistreat the privilege of separate legal personality.
Ord v. Belhaven Pubs has well-illustrated the Salomon instance every bit good. where Mr and Mrs Ord reorganized Belhaven Pubs so it that has no farther assets left in the company. They so requested to Ascott Holding Ltds to replace Belhaven Pubs for money. The tribunal held that the new company of Mr and Mrs Ord have non been a facade for wrongdoing or seeking to hedge from any legal duties so it was held as a ‘fraud exception’ from this instance.
To seek the truth behind the incorporation. sometimes the tribunal needs to disregard the effects of incorporation. which is the separate legal personality. There is a restriction of judicial intercession and hence merely under some fortunes. a tribunal will exert its intent to pierce the head covering of incorporation. Lord Hanworth Mr stated in Gilford Motor Co Ltd V Horne ( Gilford ) that Mr Horne formed the company by utilizing his wife’s name as a device to hedge the contractual between him and Gilford Motor Co Ltd. which was his old employer. In Gilford. it clearly demonstrated that Mr Horne formed the company as a fake to get away the legal duties from the former employer. Besides that. Jones V Lipman showed a similar circumstance of fake companies’ instances. Here. Mr Lipman was supposed to sell the land to Mr Jones. nevertheless Mr Lipman formed a assumed company by reassigning the land to the company to avoid the contractual duties from originating between he and Mr Jones. In these instances. it showed the exclusions that a tribunal was forced to raise up the head covering of incorporation to seek the truth behind the incorporation. In Salomon. the House of Lords didn’t ignore the rule of incorporation because the chief purpose of Mr Salomon change overing his ain company to a limited company was with good religion instead than seeking for any equivocation of legal duty and creditors liability. That was why Mr Salomon was non apt for the company’s debt that exceeded the sum of the portions that he owned in the company.
Last but non least. this essay clarified the definition of separate legal personality in a limited company. As Lord Halsbury stated in the Salomon instance. “Once the company is lawfully incorporated. it must be treated like any other independent individual with rights and liabilities appropriate to it self…” . A limited company and its members of the company are wholly two different entities and they can non be bound together. There might be an bureau between the members and its company. but merely when there is an understanding or contractual between the members and its company. Concisely. merely the members of a company are apt for the company debts when a tribunal has pierced the head covering of incorporation and found that the company was formed as fake or noticed a error of its company members.
In decision. there are merely a few fortunes whereby a tribunal will pierce the incorporation to seek the truth behind. There must a equilibrating act between the effects of incorporation. which is the separate legal personality and limited liability. and besides the lifting of the head covering of corporation in order to make a just determination for the claimants and suspects.
Mentions
1. Griffin. S ( 2000 ) Company Law: Cardinal Principles. 3rd Edition. . Pearson Professional Limited 1994. 1996
2. Gallic. D. Mayson. S and Ryan. C ( 2011 ) Company Law. 28th Edition. Oxford University Press Inc. . New York.
3. “The Nature of Legal Personality” . University of London External System. [ Online ] [ Accessed on 9th of February 2012 ] hypertext transfer protocol: //www. londoninternational. Ac. uk/current_students/programme_resources/laws/subject_guides/company_law/company_law_ch3. pdf
4. Graham. T and Poole. J ( 2010 ) ‘Switching assets from one shadowy manus to another’ : piercing the head covering of company and trust. Trusts and Trustees. Vol. 16. no. 9. pp705-726 [ Online ] [ Accessed on 9th of February 2012 ] hypertext transfer protocol: //moodle. mmu. Ac. uk/file. php/2877/PIERCING_THE_VEIL_OF_COMPANY_AND_TRUST. full. pdf
5. “Lifting the head covering of incorporation” . ” . University of London External System. [ Online ] [ Accessed on 9th of February 2012 ] hypertext transfer protocol: //www. londoninternational. Ac. uk/current_students/programme_resources/laws/subject_guides/company_law/company_law_ch4. pdf
6. “Lifting the Corporate head covering: A reappraisal of the fraud exception” Cambridge Law Journal ( 1977 ) . pp284-290 [ Online ] [ Accessed on 7th of February ] hypertext transfer protocol: //moodle. mmu. Ac. uk/file. php/2877/LIFTING_THE_VEIL_REASSESSING_THE_FRAUD_EXCEPTION. pdf
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[ 1 ] . [ 1897 ] AC 22
[ 2 ] . Salomon v A Salomon Ltd [ 1897 ] AC 22 ( Lord Magnaghten ) at p 51 [ 3 ] . “The Nature of Legal Personality” . University of London External System. [ Online ] [ Accessed on 9th of February 2012 ] [ 4 ] . [ 1877 ] 2 CPD 469 at 541
[ 7 ] . [ 1925 ] AC 619
[ 8 ] . [ 1961 ] AC 12
[ 9 ] . “The Nature of Legal Personality” . University of London External System. [ Online ] [ Accessed on 9th of February 2012 ] [ 10 ] . Graham. T and Poole. J ( 2010 ) ‘Switching assets from one shadowy manus to another’ : piercing the head covering of company and trust. Trusts and Trustees. Vol. 16. no. 9. pp705-726 [ Online ] [ Accessed on 9th of February 2012 ] [ 11 ] . [ 1998 ] 2 BCLC 447 [ 12 ] . [ 1933 ] Ch 935
[ 13 ] . Gilford Motor Ltd v Horne [ 1933 ] Ch 935 ( Lord Hanworth MR ) [ 14 ] . [ 1962 ] 1 WLR 832
