The incorporation of a company is an unreal individual which exists as a separate legal personality. This separate personality means that the company is separate and distinguishable from its participants. The company needs to be treated like “any other independent person” with rights and liabilities. even if it is owned and managed by one adult male. It is capable of keeping its ain belongings and may action or being sued in its ain name. The company has ageless sequence which implies that it is able to transport on populating regardless of decease. insolvency or dissension of a stockholder.
The instance of Salomon v Salomon & A ; Co Ltd [ 1897 ] had important impact in Company jurisprudence. as it steadfastly established the rule of “Separate legal personality” . In this instance the Court of Appeal ab initio considered the company was merely an agent of Salomon. in order to let him continue like before but with limited liability. This was contrary to the significance of the Companies Act 1862. and so he should be apt for its debts. However. the House of Lords subsequently overturned this determination. They held that the company was to the full registered and constituted. Lord MacNaghten stated that “Though after incorporation the concern may be the same as it was before. and the same individuals are directors. and the same custodies receive the net incomes. the company is non in jurisprudence the agent of the endorsers or legal guardian for them. Nor are the endorsers as members apt. in any form or signifier. except to the extent and in the mode provided by the act. ” Therefore Mr. Salomon was wholly separate from the company and as a consequence was entitled to be paid before other creditors as he held unsecured bonds. By compared to other debt. his secured debt had higher precedence. Hence Mr. Salomon got to paid foremost.
At its most general degree. the determination of the Salomon instance seems to be a good one as it is benefit to both economic and society. The Salomon rule protects shareholder’s personal assets and reduces the exposure to personal liability. therefore it stimulates more people to spread out their concern or investing. For case one company is legitimately formed and is accused by another company. and lost case. stockholders of the suspect company will non necessitate to pay the debts themselves. This is due to the position of separate legal entity. it is the company which conducts concern and hence any determinations will non travel against its stockholders as persons. The stockholders are merely apt on the sum of investing they have contributed to the concern. Another benefit generates from the Salomon rule is that it makes trade easier when it contains complex organisations. Since company can make contracts in its ain name. besides net incomes can be shared without being involved in direction and this is much simpler.
However. there are still some unfavorable judgments about the Salomon’s instance as it seems unjust and immoral on occasion. First of all since Salomon’s personal assets is protected. he may pay less attending to cover reasonably and candidly with 3rd parties. Other stockholders may believe the same as they do non necessitate to confront great hazards of lose personal assets. Ultimately the full economic system may stop up questionable. Second in theory company is an unreal organic structure that can do independent determinations and investings. which if it is failed will take to expiration of a company’s being. So in pattern it is really the stockholders and managers who make these determinations. It is the pull offing managers who are obtained unneeded loans. It is the managers who suggested the stockholders about unsuccessful investings. Therefore by contrasting the two. the application of separate legal personality may look unjust and immoral. Because the incorrect actors. i. e. managers and stockholders are acquire to walk off free from their liability.
Although the rule of separate legal personality may look favourable to the company’s stockholder and against its creditors. but in certain state of affairss. the tribunal does look beyond the rule. and this is called lifting or piercing the corporate head covering. One of the outlooks is where on the facts. an bureau relationship does be between a company and its stockholders. Smith. Stone & A ; Knight Ltd V Birmingham Corporation [ 1939 ] gives a good illustration. In this instance. the tribunal recognizes that it is possible for a company to hold bureau relationship between their stockholders and therefore lifted the head covering. This happens because the subordinate company works as agent for its parent’s company. There are few relevant factors to be considered in order to find this issue. There are the net income of the subordinate company should travel into their parent’s company. The director manager for subordinate company should be appointed by their parent’s company. And the parent’s company should be in changeless and effectual control of the subordinate company etc.
Second state of affairs where the tribunal will disregard the rule of separate legal personality is that the corporate construction is a mere facade hiding the true facts. In the instance of James v. Lipman [ 1962 ] . Mr. Lipman regretted the contract he entered earlier for the sale of land. so he sold the land to the company he freshly formed alternatively. in order to avoid his duty. This freshly formed company was simply a mask for Mr. Lipman to conceal behind. hence head covering can be pierced. Similarly in the instance of Gilford Motor Co Ltd V Horne [ 1933 ] . the company that he set up was used to enable him transport on with his concern every bit good as to avoid liability. Therefore although company can be considered as separate and distinguishable from its stockholders. but if the intent of it is to hedge responsibilities or being involved in deceitful improperness. the tribunal will be willing to raise the head covering of incorporation. But it will non be lifted merely for justness demand.
The “single economic unit” theory is another class where tribunals have been prepared to raise the head covering. The tribunal ignores the separate personalities and examines the overall concern operation as a individual entity. A really authoritative illustration is the instance of DHN Food Distribution V Tower Hamlets LBC [ 1976 ] . in this instance the subordinates histories are considered as dependant of the parent’s company. Lord Denning MR stated that “this is particularly the instance when a parent company owns all the portions of the subordinate. so much so that it can command every minute of the subordinates. ” So for this sort of circumstance where the subordinates has to follow what parent’s company says. the tribunal treats these group of companies as one concern and the will pierce the head covering.
In decision. although some determinations generates from the rule of separate legal entity may hold negative and immoral effects. but it did hold monolithic part on bettering economic and societal wealth. And it is really hard and complex to find when the tribunal is prepared to raise the head covering of incorporation or non. because it truly varies from instance to instance.
Mentions:[ 1 ] . Salomon v A Salomon & A ; Co Ltd [ 1897 ] AC 22
[ 2 ] . Brenda Hannigan. ( 2009 ) Company Law. 2nd edition. p54 3-5 [ 3 ] . Brenda Hannigan. ( 2009 ) Company Law. 2nd edition. p57 3-12 [ 4 ] . Smith Stone & A ; Knight Ltd V Birmingham Corporation [ 1939 ] 4 All ER 116 [ 5 ] . Brenda Hannigan. ( 2009 ) Company Law. 2nd edition. p57 3-12 [ 6 ] . Jones v Lipman [ 1962 ] 1 WLR 832 [ 7 ] . Gilford Motor Co Ltd V Horne [ 1933 ] Ch 935
[ 8 ] . DHN Food Distributors Ltd. v. Tower Hamlets London Borough Council ( 1976 ) 1 WLR 852 [ 9 ] . Cavendish Publication. Company Law. 4th edition. p17