Law Of Saloman V Saloman & Co Ltd Essay

Question:

Discuss about the Corporations Law of Saloman v Saloman & Co Ltd.

Answer:

Introduction

There are various forms of businesses which can be initiated in Australia, but amongst the most opted forms is the company. There are various characteristics of choosing a company form of business structure which includes perpetual succession, ability to raise funds from the public, separate legal entity and the different tax related benefits (Lipton, Herzberg & Welsh, 2013). The key characteristics in this is the status of separate legal entity as a result of which the company is deemed as a separate artificial legal entity from the ones who run the business of the company. So, the company has separate rights, responsibilities and liabilities, for which the individuals running the company cannot be held responsible (French et al. 2016). Though, there are instances where this separate legal entity status is kept aside. Salomon v A Salomon And Co Ltd [1897] AC 22 saw the birth of this concept. In the Corporations Act, 2001 (Cth), which presides over the affairs of the company as a guide and statutory act also covers the provisions where this separate legal entity status of the company is upheld (Cook et al. 2011). This discussion focuses on this very characteristic of the companies, particularly in the Australian context.

Separate Legal Entity

At the very start of this discussion, it had been stated that the company is deemed as a separate legal entity, where it is deemed as an artificial person and is separate from the ones who run its affairs. And this features leads to the company being chosen as the preferred business structure in not only Australia, but across the globe (Abbott, Pendlebury & Wardman, 2007). This concept results in the company being treated as a different being in terms of law, particularly from its management and members. This is the reason why the names of the two companies cannot be similar, so as to avoid the liabilities of one being attracted to the others; and also so that the company can make a case against others by using its own name (Latimer, 2012).

The company being an artificial person attains a perpetual existence, apart from being a different legal person. This means that upon the death of the management of the company, or its director, or even the entire population of the company, the company would still continue as it is a separate person in the eyes of law and continues to be in existence (Kerr, 2014). This does not mean that a company does not come to an end; it can be ended by winding up, court order or liquidation process (Hanrahan, Ramsay & Stapledon, 2013). Again, the separate status of the company helps the shareholders in not being held liable for the debts of the company. And the shareholders can only be asked to contribute the amount which is unpaid on their shares, that too in the event of winding up. So, the person assets of the shareholders cannot be attached and continue to be safe from the debts of the company (Gibson & Fraser, 2014).


The House of Lords in Salomon v A Salomon And Co Ltd gave a landmark decision, which continues to shape the company form of business structure in every part of the world, due to the concept of separate legal entity given through it. In this matter, the company had been provided with a corporate personality and the court held that the creditors of this insolvent company did not have the right to initiate legal action against the company’s shareholders and be successful in the same, with regards to the payment of outstanding debts against the company. This case saw Salomon incorporating a limited company which was formed after he transformed his personal business of shoe manufacturing into the business of this newly formed company. And this was done when the shares of the company were held by Salomon had held, along with the debentures which he got upon incorporating this company by transferring his former business (Kershaw, 2012).

Once the company failed completely, an action was initiated by the company’s liquidators whereby they stated that there was no need to honour the floating charges and also stated that there was a need to make Salomon personally liable for the undertaken debts of the company. When this allegation was made, Salomon sued the liquidator of the company. It was held by the court that the incorporation of the company had taken place as per the law and there was no need on part of the court to make speculations regarding the motives and the exorbitances regarding the incorporation of the company. Merely because a single person held the majority of the company, did not cancel out the fact that the company was not a separate person as per the law or that it was not different from the people directing the mind and will of the company. This led to the company stating that only in an extraordinary case could the corporate veil of the company and if that is not established, the company would continue to enjoy its separate legal entity status (Swarb, 2017).

There have been numerous cases where this characteristic of the company has been upheld by the courts (Butt & Hamer, 2011). For instance, in the case of Lee v Lee's Air Farming [1961] AC 12 the Privy Council provided that the company had to be deemed as a separate legal entity in this case, which meant that the shareholders or the directors who entered into the contract for the company has to be considered as the employee of such a company. In this case, the entire issued capital was held by Lee, save for a single share which was held by the solicitor of Lee. So, effectively the control and the affairs of the company were in hands of Lee. While he was undergoing a particular task for the company, he was killed which led to his widow making a claim for the worker compensation deeming Lee as a worker of the company. Though, the court rejected these claims of the widow and stated that even though the effective control of the company was in hands of Lee, he could not be considered as an employee of the company. From this decision, Lee’s widow made an appeal in Privy Council where the decision was given in favour of the widow (Bourne, 2016).


Under the Corporations Act, 2001, this separate legal entity status can be found in different sections (Hall & Macken, 2012). Section 119 of this act provides that when the company gets registered as a body corporate, it comes into existence. And once the company is formed, it is to be considered as a separate person carrying on its operations and undertaking different contractual obligations and related work (Federal Register of Legislation, 2017). Under section 198A(1) of the Corporations Act, the business of the company is required to be managed based on the directions which are given by the directors. Subsection (2) of this section provides that the directors can exercise the powers which are related to the company (WIPO, 2015). So, the directors have been given to run the affairs of the company on behalf of the different stakeholders, instead of running it as their personal business. So, even though the affairs of the company are operated on the basis of the mind and will of the top management, but these have to be undertaken on the basis of the company’s objectives only (Cassidy, 2006).

It has already been stated that the Australian companies are embedded with the separate legal entity status, as is the case with the companies across the globe, but this concept has seen a lot of changes and has grown since Salomon v A Salomon And Co Ltd. A particular reference here has to be made to the task of identifying the place where the company’s affairs as being undertaken or were undertaken in a manner which would require the court to uphold the separate legal entity status of the company or to go ahead with the piercing of the corporate veil of such company. Piercing the corporate veil refers to setting aside the separate legal entity status of the company and holding the people who are running affairs of the company, liable for the acts undertaken by them (Bonomelli, 2014). For instance, Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254 saw the courts giving the order to set aside the separate legal entity status held by the company and to pierce the corporate veil to deduce the legal personality of the controllers who actually were responsible (Ramsay & Noakes, 2001).


With the passage of time and the growing number of cases in this regard, certain individuals have identified the manner in which they could manipulate the separate legal entity status of the company and avoid the corporate veil of the company from being pierced. Such manipulation of the cunning minds makes it obligatory to use this concept in an effective manner, so that it does not become a costly affair for the company’s diverse stakeholder groups. The misuse of this concept can also be denoted by the different case laws which highlights the use of this characteristic in an unfair manner.

This is with particular reference to all the cases revolving around the James Hardie scandal. To quote just two cases of this scandal would include the cases of Peter James Shafron v Australian Securities and Investments Commission (2012) HCA 18; 286 ALR 612 and ASIC v Macdonald (No. 11) [2009] NSWSC 287 (Norton Rose Fulbright, 2012). The cases associated with this scandal saw the company secretary, general counsel, directors and the other key members of the management, including the officers of the company, being penalized and disqualification orders being passed for different number of years. Even though a number of people were punished in this scandal, it does show that magnitude and the time period of this scandal, along with the time which is spent in bringing the wrongdoer to face the consequences of their actions.

Hence, for the future, the law has to be moulded in a manner that the people avoid the misuse of the separate legal status of the company to do their own wrong work, if not fear the same. In this regard, there is a need to take the relevant steps, which could be in form of increasing the maximum penalties which can be imposed on such breaching parties and misusing parties, which would make the prospective of punishment such a costly affair that it would effectively outweigh the possible benefits from misusing the separate legal entity status. There is a need to include the provisions of making it a criminal liability where such a case is established against the directors and also to decrease the time duration which takes in brining the responsible parties liable. But, this does not mean that there is a need to abolish the separate legal entity status of the company as it is a crucial feature for the companies, without which the companies would lose their sheen.

Conclusion

From the discussion carried on in the previous segments, it becomes clear that the company form of business structure has a separate legal entity status whereby the company is deemed as a separate entity from the top management which runs its affairs. This principle was born through the case of Salomon v A Salomon And Co Ltd where the court held that only in extraordinary cases could the corporate veil of the company be pierced. And for this, there have to be compelling reasons before the court. The Corporations Act also covers the provisions where the companies are given a separate status in the nation. The concept of separate legal entity has evolved since it had been created. And with time, its misuse is being increased, which makes it necessary to bring safeguards against its misuse. But, this does not in any sense means, that there is a need to eradicate this feature of the companies, as without which a company cannot be deemed as a company.

References

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