The Case Salomon V Salomon & Co Ltd

•The Limited Liability Act was subsequently passed in 1855. This introduced the concept of general limited liability for shareholders i.e.their liability for the company’s debts, if it became bankrupt, was limited to the amount of share capital which they had invested. It was felt important that the company’s creditors should be aware of the limited liability status of the company, and the requirement for companies to have “limited” or “ltd” in their name dates from this time.

This essay will explain the concepts of separate personality and limited liability and their significance in company law. The principle of separate personality is defined in the Companies Act 2006(CA) ; “subscribers to the memorandum, together with such other persons as may from time to time become members of the company are a body corporate by the name contained in memorandum.” This essentially means that a company is a separate legal personality to its members and therefore can itself be sued and enter into contracts. This theory was birthed into company law through the case of Salomon v Salomon and Co LTD 1872. This case involved a company entering liquidation and the unsecured creditors not being able to claim assets to compensate them. The issue in this case was whether Mr Salomon owed the money or the company did. In the end, the House of Lords held that the company was not an agent of Mr Salomon and so the debts were that of the company thus creating the “corporate Veil” .

The concept of forming of corporations by registration and restricted liability of stake holders of corporations dates back to mid nineteenth century. The concept in its very basic sense means that a company is a separate legal entity, in other words, it is a juristic person.

Woodward, S., Bird, H. & Sievers, S. (2005). Corporations Law in Principle 7th ed. Pyrmont, NSW: Lawbook Co.

The Corporate personhood, a universal legal model, grants corporations genuine rights and responsibilities similar to those of individual citizens. This concept proved useful in American jurisprudence in that it simplified one’s interactions with huge conglomerates. Citing the Fourteenth Amendment of the constitution, the term corporate personhood served to consider corporations similar to individuals. In that vane, corporate entities like individuals could join contracts as a single unit, corporate entities like individuals could be named in civil lawsuits as a single group and corporate entities like individuals could make decisions that would hold the enterprise responsible as a single entity even though the decisions were

In case of a company, by incorporation it gains a corporate personality which is separate or distinct from the members who compose it. The property of the company belongs to it and not its members; it may sue or be sued in its own name ; it may enter into contracts with third parties independently and even the members themselves can enter into contract with the company According to Section 34(2) of the Companies Act , upon issue of the certificate of incorporation , the subscribers to the memorandum and other persons , who may from time , be the members of the company, shall be a body corporate, which is capable of exercising all the functions of an incorporated company and having perpetual succession and a common seal. Thus the company becomes a body corporate which is capable immediately of functioning as an incorporated individual. With the incorporation, the entity of the company becomes institutionalized. This principle of the independent corporate existence and the principle of corporate personality of a company were recognized in the case of Saloman v. Saloman & Co . In this case Salomon was a boot and shoe manufacturer. He incorporated a company named Salomon & Co Ltd, for the purpose of taking over and carrying on his business. The seven subscribers to the memorandum were Salomon, his wife, his daughter and four sons and they remained the only members of the company. The company went into liquidation within a year. The unsecured

This made the corporation a separate legal person acting in its own rights under the law, this

There are exceptions to the principle in Salomon’s case, where the veil is lifted, or pierced, and the law disregards the corporate entity and pays regard instead to the economic realities behind the disguise. Exceptions can be classified into those expressly provided by statute (such as in section 214 of the Insolvency Act 1986 which makes directors liable for wrongful trading10) and those under judicial interpretation11. To ‘lift the veil of incorporation’ simply means to ignore or set aside the separate legal personality of a company.

Salomon v Salomon and Co. Ltd (1897) AC 22 - when Aron Salomon sold his business to Salomon and Co. Ltd. Company, where he was still the major shareholder and some of his family was also a member. He also received a debenture as part of the payment for a secured term. But when the company has gone into liquidation during the 1890’s some argued that his

For the purposes of this assignment the relevant law is the Corporations Act 2001 (Cth) (either as the “Act” of the “CA”). From now on I will refer to it as the Act (Hinchy, McDermott 2008).

The concept of a company being a separate legal entity is the most striking illustration in separating the company from its owners. A paramount principle of corporate law is that no shareholder or member of a company is made liable for the obligations incurred by such incorporations A company is different from its members in the eyes of law. In continuations to this the opposite also holds true in the sense that neither can the company be held liable for the acts of its members. It is a fundamental distinction that a company is distinct from its members.

There is no clear framework of the rules that would cover the contingencies of a ruling to pierce the corporate veil Idoport Pty Ltd v National Australia Bank Ltd. The corporate Veil usually protects owners and shareholders from being held liable for corporate duties. Yet again a decision made by the court to lift that veil and would place the liability on shareholders, owners, administrators, executives and officers of the company without ownership interest. The purpose of this essay is to conduct an analysis on the concept of lifting the corporate veil and to review the different views on its fairness and equitability to present a better understanding of the notion, the methods used was throughout researching the numerous scholars views on the subject, case law and statutes examples, and the evidence provided by the empirical study of Ramsay & Noakes. When we discuss the lifting the corporate veil the first case that pops out is the case of Salomon V A. Salomon & Co Ltd, since the decisions of applying the corporate veil were first formed as a consequence of this case. The idea covers all of company law and distinguishes that a company is a separate legal entity from its members and directors. Furthermore, spencer (2012); have indicated that one of the core principles that followed the decision in Salomon v Salomon was the wide acceptance one man company’s. However In order to form a

‘Lifting the corporate veil’ has been the topic of interest for the legal profession. This principle mentions to the possibility of considering towards the company structureor the company’s separate personality to make the members liable towards their company’s debt. In respect of a limited liability company , this has been the most favoured business form for investors.Being a shareholder means that individuals obtain unlimited corporation’s profit whereas they are liable for company’s debts not over value of their shares. With a company limited by shares, a member is not liable for the company’s debts beyond the amount remaining unpaid on his or her shares. As a result, the company’s creditors cannot seek compensation from the shareholders although the company has inadequate funds to pay its own liabilities in full.

This doctrine has been seen as a “two- edged sword,” reason being that at a general level while it was seen as a good decision in that by establishing that corporations are separate legal entities, Salomon 's case endowed the company with the entire requisite attributes with which to become the powerhouse of capitalism. At a particular level, however, it was a bad decision. By extending the benefits of incorporation to small private enterprises, Salomon 's case has promoted fraud and the evasion of legal obligations.

Corporation origin from the Latin word Corpus which means body. It is formed by a group of people and has separate rights and liability from those individual. In any means, corporation exists independently from its owner and this principle is called the doctrine of separate personality. Doctrine of separate personality is the basic and fundamental principle in a Company Law. This principle outline the legal relationship between company and its members. Company’s assets belong to the company not the shareholders as assets are the equity for creditors. Company must use up all its assets to pay off the creditors if it became insolvent. The same applies to the corporation’s debts. For limited liabilities company, the shareholder liability is limited which means that the shareholder is restricted to the number of shares they paid and not personally liable for the corporation’s debts. If the company does not have enough equity to pay off debts, the creditors cannot come after the shareholders. However, limited liability company can be very powerful when in hands who do fraud and on defeating creditors’ claims. Courts then can ignore the doctrine for exception cases and lifting the corporate veil. Lifting the corporate veil is a situation where courts put aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s debts.