Page
  1. 1
    1
  2. 2
    2
  3. 3
    3
  4. 4
    4
  5. 5
    5
  6. 6
    6
  7. 7
    7

To what extent is the rule contained in the Salomon v. Salomon & Co. Ltd judgement open to abuse?

Extracts from this essay...

Introduction

To what extent is the rule contained in the Salomon v. Salomon & Co. Ltd judgement open to abuse? The company as a separate legal personality from that of its members as defined by the Companies Act 1862 was established in common law by the House of Lords in 1879 when they delivered their judgement in the case of Salomon v. Salomon & Co. Ltd. Indeed, this case is now seminal, with both practitioners and students of the law referring to it as the foundation upon which modern company law is based. However, although the outcome of Salomon v Salomon & Co. Ltd is now firmly embedded that is not to say it has not been prone to the effects of the occasional tremor. Since this ruling and some might argue prior to this ruling by the House of Lords questions relating to the interpretation of the act and its scope have been hotly debated. While some see this ruling as clearly interpreting the 1862 act at common law others contend that such an interpretation is too rigid and clearly open to abuse. It would be argued that a separate legal personality in conjunction with limited liability offered the nineteenth century entrepreneur the protection they desperately needed if their business ventures were to grow and expand beyond their personal resources. Others would contend that this ruling was to the detriment of the company's creditors, allowing the unscrupulous individual or individuals to set up a limited company at little expense and little or no risk to themselves. Indeed, some detractors of the outcome of the Salomon v. Salomon & Co Ltd ruling have referred to such companies as a "sham", "a screen" and "a mere fraud". These, and a plethora of similar terms illustrates perfectly, as Murray A. Pickering states, "the degree of uncertainty on the part of the courts on some occasions when dealing with the separate existence of the company" (1).

Middle

It was held that the appeal be allowed, and the counter-claim of the company dismissed with costs (both in this hearing and below). Both Vaughan Williams J and the court of Appeal saw it as the duty of the court to look behind the incorporation of the company. Each, for different reasons, felt that Mr Salomon was manipulating "the machinery of the Companies Act, 1862 for a purpose for which it was never intended". (11) However, the House of Lords judgment firmly pulled down the veil of incorporation around the company and its members. It is telling, when Lord MacNaghten referring to Vaughan Williams J. comments on the case stated "Leave out the words 'contrary' to the true intent and meaning of the Companies Act, 1862"(12) It is clear that Lord MacNaghten and his colleagues held that their role was merely to apply and not to interpret the Companies Act, 1862 and that any such interpretation by the courts was out with their jurisdiction. Nevertheless, later courts have found it necessary to lift the veil of incorporation and over the years there has been a number of exceptions to the principle laid down by the Salomon case that the corporation is a separate legal entity. Gonzalo Villalta Puig contends that the verdict reached by the House of Lords in the case of Salomon v. Salomon Co. Ltd created a double-edged sword. While the verdict helped to drive capitalism by established the company as a separate legal entity with limited liability and allowed it (the company) to enter into contracts in its own name it also helped promoted the evasion of legal obligations by allowing these benefits to be harnessed by small private enterprises. Goulding agrees with Puig but goes further by suggesting that individuals are encouraged to seek limited liability by becoming a limited company even when such a step is not necessary in their particular circumstances.

Conclusion

The Continental Tyre company was incorporated in England, but all of its directors resided in Germany and all of its shares except one were held by those directors. The secretary held the remaining share, resided in England and was a British subject. The lower court held that the company was incorporated under the Companies Act and was therefore an English company despite its directors being German and an English company cannot cease being an English company because a state of war exists between England and the country in which that company's directors reside. The House of Lords however reversed this decision on the grounds that the secretary was not authorised to commence the action. More importantly it held that the company though incorporated in England was capable of acquiring an enemy character. This decision blurs the distinction between politics and the law and while the exceptions to the Salomon ruling are there to improve the quality of law handed down in terms of equity and fairness it can be argued that House of Lords abused the Salomon ruling by offering a political solution rather than legal ruling to a current dilemma. On matters of tax the courts are, on occasions, prepared to lift the corporate veil and disregard the separate legal personality of companies as was the case in Firestone Tyre and Rubber Co v Llewellin (Inspector of Taxes) [1975]. Reasons for lifting the corporate veil might include companies seeking to evade tax or where they are operating over liberal schemes for the avoidance of taxes. Since the Salomon ruling in 1879 companies have become more and more sophisticated and while the various Companies Acts have in some respect failed to keep up with this growing sophistication it has been left up to the courts to set the guidelines. Companies are no longer the single entities they were one hundred plus years ago. Today, the group of companies exist and with that a whole new set of problems have emerged. 1

The above preview is unformatted text

Found what you're looking for?

  • Start learning 29% faster today
  • Over 150,000 essays available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Over 180,000 student essays
  • Every subject and level covered
  • Thousands of essays marked by teachers

See related essaysSee related essays

Related University Degree Commercial Law essays

  1. Limited Liability, and effect on contract and tort creditors.

    The James Hardie case shows how they placed the needs of the shareholders of the company in front of the tort victims because they created a subsidiary to refrain from being liable. Hence making holding companies liable would mean the tort victim's needs are placed before the needs of the shareholders.

  2. The doctrine laid down in Salomon v Salomon & Co Ltd has be watched ...

    S had paid for his shares in full (by transferring the business to the company), and so his liability to creditors was exhausted; the full nominal value had been paid. Thus, the Salomon case established that, in the absence of fraud, legal personality would be recognised even when one shareholder

  1. Incorporation. Upon incorporation a company comes into existence and thereby assumes legal personality ...

    that directors of a parent company have no duties to protect the interests of its subsidiaries where the subsidiaries have independent boards while in Smith, Stone & Knight Limited Birmingham Corporation, the court allowed the parent company to claim compensation on behalf of the subsidiary.

  2. Memorandum of association

    That is where the doctrine of ultra vires comes into play in relation to joint stock companies." ultra" means beyond, "vires" means powers. An action outside the memorandum is ultra vires the company.

  1. Company Law Assignment. I will identify the theory of a corporate personality, demonstrate ...

    be a mere facade to enable illegal activities; Marc Moore (Professional legal writer) within the Journal of Business law, in his journal âA temple built on faulty foundations": piercing the corporate veil and the legacy of Salomon v Salomonâ, he provides a statement that clearly provides what many people think

  2. Coporate Law and Limited Liability. There are certain circumstances in which courts will have ...

    legal entity, a company or corporation can only act through human agents that compose it. As a result, there are two main ways through which a company becomes liable in company or corporate law to wit: through direct liability (for direct infringement)

  1. Piercing the Corporate Veil. The concept of the separate legal personality, which regards a ...

    For example, under Insolvency Act 1986 s. 213 (Fraudulent Trading), when a company is in liquidation, the court may make anyone, who was intentionally party to the fraud, liable to contribute to the company's assets. Unfortunately, fraudulent requires evidence of dishonest intent, which is hard to prove.

  2. Corporations in law. A corporation under Company law or corporate law is specifically ...

    an effective device with which to raise capital, but because it gives them access to an avenue via which to escape the "tyranny of unlimited liability". Criticisms of limited liability are addressed at its impact on creditors and on society at large.

  • Over 180,000 essays
    written by students
  • Annotated by
    experienced teachers
  • Ideas and feedback to write
    your own great essays

Marked by a teacher

This essay has been marked by one of our great teachers. You can read the full teachers notes when you download the essay.

Peer reviewed

This essay has been reviewed by one of our specialist student essay reviewing squad. Read the full review on the essay page.

Peer reviewed

This essay has been reviewed by one of our specialist student essay reviewing squad. Read the full review under the essay preview on this page.