The company did not perform well so Mr. Salomon had to sell his debentures and shortly later the company went into liquidation. The liquidator accused Mr. Salomon of fraud and he argued that Mr. Salomon should be liable for the debts to the unsecured creditors as he was the principle and the company his agent.
The Courts of Appeal agreed with the liquidator and stated that the company was a myth and a fiction and said that incorporating the company was a way for Mr. Salomon to carry on with his business as before but with limited liability.
The House of Lord rejected the argument of fraud and agency relationship and held that there was no offence committed by Mr. Salomon and clarified the fact that the debt of the company were its own and not of those of the members.
The outcome of this case and of other cases such as Adams V Cape Industries Plc and Lee V Lee’s Air Farming that supports the Salomon principle of Corporate Separate Personality, that is, something that the company owns is in fact the belongings to the company and not the members or shareholders. In other words the company has legal personality, but unlike real or natural legal person it has limitations, such as the company can’t get married and usually cannot vote or hold public offence and if the legal entity dies (goes into liquidation) then they do not pass their property by a will.
There are many advantages of incorporation and it is generally thought that the advantages outweigh the disadvantages, I will mention the main points below:
Separate person
The House of Lords recognises that a company’s business is conducted by the company as a separate person that owns its property and enters into contracts. The member cannot claim to be the owner of the company’s property, or claim compensation for damage done to the company’s property, as illustrated in Maccaura V Northern Assurance Co Ltd.
As the company is recognised as a separate person it can sue or be sued, the company can even sue its members as the company is separate from its members. However the company cannot be awarded aggravated damages as this requires injury to feeling and the company has no feelings.
Limited liability
Due to the fact that the company is a separate person, its members are not liable for its debts. If a member had invested in a company and soon later the company goes into liquidation, the member will lose the amount he had invested and not more than that amount as to pay the company’s debt, hence his liability is limited to the amount he had invested. Limited liability also applies to obligations and not just debts. As for managers or directors limited liability is not as limited, this is because they are involved in making decision for the company that they may somehow be personally liable to third parties.
Perpetual succession
Unlike a natural person the company’s business continue despite the retirement, bankruptcy, mental disorder or death of its owner or shareholder. Member may change from time to time but this does not affect the life of the company. A company does not die unless it goes into liquidation.
Transferring of Shares
Shares in a company are freely transferable. Once the process of transfer is complete the transferee steps into the shoes of the transferor and acquires all his rights. This also means that when the owner of the company dies his shares are transmitted to his personal representative, this way the company can grow and increase its investments and capital.
Disadvantages
There is more complexity and expense in forming a corporation. The expenses of the company will rise due to the fact that now once you’ve incorporated, certain law will apply to the company such as disclosure of company ‘s finance or holding share holders meeting and the cost of compulsory audit. There are also other affects of this other than expense such as loss of privacy and record keeping requirements or regularities.
Veil of incorporation
Separate personality of a company is also called veil of incorporation. Members could take advantage of this separate personality and use the company to obtain funds dishonestly, perpetrate fraud or as a mere façade concealing the true facts and not be liable for repayments, amongst the most famous case is the Adam V Cape industries Ltd. In exception to the Salomon principle, the courts have intervened where there is possible risk of unjust consequences and have implemented case by case basis or by statue.
Conclusion
Corporate personality has had a significant affect in forming company law over the last centuries, and the Salomon case has been a crucial benchmark to company law and is still being used in courts today. However, there is a need for more clear definition in key concept and a solid framework, where as when to lift the veil or who should be liable and what is mere façade etc.
Or would the future of company law revolutionise and abandon the Salomon theory?
References
Derek Frence, Stephen Mayson, & Christopher Ryan 24th edition 2007-2008
Lecture 2 notes, Dr Adolfo Paolini
Mohsin Vaid
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