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failure intercultural business business success depends on analysing business culture study mejor purpose solving installment
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Salomon v Salomon: Relevance to modern Company Law

 HYPERLINK "https://www.linkedin.com/in/oladotun-gbolagunte-acarb-8633627b"  HYPERLINK "https://www.linkedin.com/in/oladotun-gbolagunte-acarb-8633627b" Oladotun Gbolagunte 2016

ABSTRACT

The ‘rigid construct’ of company law, Salomon v Salomon, established a century-old principle, that is, the separate juristic personality of a corporation, out of which ‘the legal structure of modern business’ was born; and, the so called corporate veil remains unchallenged. This unyielding rock protects shareholders’ private assets and provides a method of limitation of liability which is acceptable by company law in order to facilitate business development and international trade. A rigid application of the principle, however, may sometimes cause damage to the rights of parties who deal with the corporate because its controllers may be using the corporate structure as a façade to perpetrate wrongdoing.

Thus the court provided various exceptions to the rule, which allow for the ‘lifting of the veil’ of the rigid construct as provided for in Salomon v. Salomon. These exceptions have been a basis for continuous debate amongst legal scholars as to whether they render the century-old principle out of place and relevance in modern company law.

This paper critically addresses this debate, clearly stating that the principle as enunciated in Salomon v. Salomon is still relevant in modern company law, as it examines the case in discussion (both the Court of Appeal decision and House of Lords decision), examines the principle of Corporate Personality, examines the advantages and disadvantages of Corporate personality and limited liability and examines the concept of ‘lifting the veil of incorporation’.

INTRODUCTION

The general rule in relation to companies is that a company is an artificial person, separate and distinct from its directors and shareholders, and neither the directors nor shareholders are personally liable for the defaults of the company (save in special narrowly defined circumstances, which form specific exceptions to the general rule). The general rule dates back more than a century and was clearly set out in the celebrated English case of Salomon v Salomon.  HYPERLINK "http://www.linkedin.com/post/" \l "_ftn1" \t "_blank" [1]

FACTS OF THE CASE

Mr Salomon carried on a business as a leather merchant. In 1892, he formed the company “Salomon and Company Ltd”. Mr. Salomon, his wife, and five of his children held one share each in the company. The members of the family held the shares for Mr Salomon because the Companies Act required at that time that there be seven shareholders. Mr Salomon was also managing director of the company. The newly incorporated company purchased the sole trading leather business.

Therefore, Mr Salomon’s personal liability for the debt of the business had changed completely from unlimited liability to limited liability. Not only was Mr Salomon no longer liable personally for the debt of the company, but he had also as managing director of the company granted himself a secured charge over all the company’s assets. Thus, if the company failed, not only would Mr Salomon have no personal liability for the debts of the company, but whatsoever assets were left, would be claimed by him to pay off the company’s debt to him.

Things however did not go well for the leather business, and within a year, Mr Salomon had to sell his debenture to save the business. This did not have the desired effect, and the company was placed in insolvent liquidation. The liquidator on behalf of the unsecured creditors alleged that the company was a mere “alias” or agent for Mr Salomon, and that Mr Salomon was therefore personally liable for the debt of the company.

JUDGMENT OF THE COURT OF APPEAL

In the circumstances of the case, the trial judge Vaughan Williams, J. and a strong Court of Appeal including Lindley LJ held that the whole transaction was contrary to the true intent of the Companies Act and the company was a mere sham, and an “alias”, simulacrum, agent, trustee of the nominee Salomon who remained the real proprietor of the business. As such, Salomon was liable to indemnify the company against its trading debts.

JUDGMENT OF THE HOUSE OF LORDS

Famously and quite seminally, the House of Lords disagreed with the judgment of the Court of Appeal. It found that the fact that some of the shareholders only held shares as a technicality was irrelevant; the machinery of the Companies Act could be used by an individual to carry out what is in economic reality for his or her business.

It also emphasized that a company formed in compliance with the regulation of the Companies Act is a separate person and not per se the agent of its controller. The decision also affirmed that the use of debentures instead of shares can further protect investors.

The House of Lords unanimously overturned this decision, rejecting the arguments from agency and fraud.

Salomon followed the required procedures to set the company; shares and debentures were issued. The House of Lords held that the company has been validly formed since the Act merely required 7 members holding at least one share each.

There was no fraud as the company was a genuine creature of the Companies Act as there was compliance and it was in line with the requirements of the Registrar of Companies.

In the words of Lord Macnaghten

“The company is at law a different person altogether from the subscribers. …, and though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not at law the agent of the subscribers, or trustee for them. Nor are the subscribers, as members liable, in any shape or form except to the extent and in the manner provided by the Act”

THE PRINCIPLE ENUNCIATED IN THE CASE

From the decision of the House of Lords in the case of Salomon v. Salomon, the doctrines of corporate personality and limited liability have emerged.

These two doctrines are recognized as the twin pillars on which modern company law rests, and the courts have largely been keen to maintain and sustain it despite an overwhelming number of attacks on it.

The fundamental attribute of corporate personality from which all the consequences flow is that the corporation is a legal entity distinct from its members. Hence, it is capable of enjoying rights and of being subject to duties which are not the same as those enjoyed or borne by its members. In other words, it has legal personality and is often described as an artificial person in contrast with a human being or natural person. HYPERLINK "http://www.linkedin.com/post/" \l "_ftn2" \t "_blank" [2]Therefore, a corporation or company registered under the Companies Act is an entity distinct from the persons who compose it or the corporators, a situation which Otto Kahn Freund however described as ‘calamitous.’ HYPERLINK "http://www.linkedin.com/post/" \l "_ftn3" \t "_blank" [3] Thus, once the formalities of the Act have been complied with, the registered company exists as a legal entity distinct in law from those persons who from time to time are its members. It also means that once incorporated, a company becomes a body corporate by virtue of the Companies Act, with the key features of incorporation namely, separate corporate personality, perpetual succession and limited liability.

The effect of the provision is to make it clear that the members who form a company may cease, from the moment of incorporation, to be a mere collection or aggregation of individuals as in the case of a partnership.

The decision in Salomon v. Salomon, according to Gower, opened up new vistas to company lawyers and the world of commerce. Not only did it finally establish the legality of the one-man company and showed that incorporation was as readily available to the small private partnership and sole trader as to the large public company, but it also revealed that it was possible for a trader not merely to limit his liability to the money which he put into the enterprise but even to avoid serious risk to the major part of that by subscribing for debentures rather than shares.

In Lee v Lee’s Air Farming Ltd. HYPERLINK "http://www.linkedin.com/post/" \l "_ftn4" \t "_blank" [4] Lee held all but one of the shares in the company and was appointed the governing director and chief pilot of the company on a salary. Lee was killed in an air crash while working for the company. His widow claimed compensation, it was argued that no compensation was payable because Lee and Lee’s Air Farming Ltd. were the same person. The Privy Council in applying Salomon’s case held that Lee was a separate person from the company he formed and compensation was payable. Thus, the separate personality of a company was established and given judicial recognition.

DIFFERENCES BETWEEN CORPORATE PERSONALITY AND LIMITED LIABILITY

In light of having established corporate personality and limited liability as the twin pillars upon which modern company law rests, it is trite to distinguish between the two concepts as they are not one and the same thing.

Limited liability is the logical consequence of the existence of a separate personality. It is a corollary of corporate personality. It is important to appreciate the fact that as human beings can have restrictions imposed on their legal personality, so also can a company have legal personality without limited liability if that is how it is conferred by the statute. That is, a company may be registered as an unlimited company, without having the benefit of limited liability. This is however rare.

The logic of corporate personality and limited liability was not tested to its full extent until the late 19th century as some notable cases demonstrate and exemplify. As a result of this, limited liability is available both to small scale and large scale businesses.

LEGAL CONSEQUENCES OF INCORPORATION

 As has been established, once a company has complied with the provisions of the Companies Act, it will be incorporated. The incorporation of the company leads to the company becoming an artificial person in law, a legal person distinct from the shareholders. The following attendant legal consequences will follow;

1.     Perpetual Succession and Existence

Since a company is an artificial person, it is not susceptible to the vicissitudes of the flesh. It cannot become incapacitated by illness, mental or physical, and does not have an allotted span of life. It has perpetual succession or existence regardless of any changes that may take place in the membership as a result of death, retirement or any other reason whatsoever. Therefore,

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