Salomon V A Salomon And Co Ltd [1897] AC 22 Case: Essay On Explanation, Legal Basis, Future.

1.Explain the Salomon v A Salomon And Co Ltd [1897] AC 22 case. How is this case embedded in the statue?

2.Discuss the legal basis of the statement using a corporate entity as an example.

3.Explain the future of the legal principle detailed in Salomon’s case and whether you think changes are necessary in the current law
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Separate legal entity

The recognition that a corporation is a separate legal entity in its own right is the foundation of modern corporate law is a statement which has two aspects, firstly, as how the corporation was considered as a separate legal entity in law and secondly, how the said principle is regarded as the foundation of the modern corporate law.

The firstly question requires an analysis of the leading case law of Salomon v A Salomon And Co Ltd [1897] which is considered as the foundation of recognizing that a corporation is the entity which has its own existence and has a separate legal personality in law. The second question is analyzed by looking into case laws that are decided by the courts post Salomon v A Salomon And Co Ltd,  which are decided by taking the decison of saloman as its precedent and thus is considered as the foundation of the modern corporate law. (Gobson and Fraser 2013)

Before evaluating the facts and the decisions that took place in Salomon v A Salomon And Co Ltd  [1897], it is first important to understand the basic meaning of Separte legal entity in law.

The concept of Separate legal entity in simple words submits that the corporation which is registered as per the law of the land has a distinct personality in the law in the sense that the act that are taken by the officers on behalf of the corporation are in the name of the corporation only and the officers are not held to be personally liable for the same. This distinction that is bought amid the corporation itself and the officers of the company including shareholders is mainly because of the shield/veil that is present and which is one of the significant features that are attained by the entity upon incorporation of the business. (Latimer 2012) 

Hence, a corporation is an entity which has its own existence and has the significant feature of separate legal entity. It is now relevant that a brief understanung on the legal case of Salomon v A Salomon And Co Ltd  [1897] must be taken.

The leading case of Salomon v A Salomon And Co Ltd  [1897], is the foundation stone which has laid down the significant principle of separte legal entity in law. It has established that once a company is registered and incorporated, it is then considered as the separat legal person in law and has the capacity to carry out all the acts of a natural person and thus is capable to enter into contracts, hold property, etc. But, this is the principle which has suffered much controversy on its existence in modern world. However, it is first important ti understand the factual scenarios of the leading case. (Bottomley 2016)

Salomon v A Salomon and Co Ltd [1897] AC 22

The Relevant facts

Salomon was a sole proprietor and is carrying on the trade of boot manufacturing. A company is incorporated by him in the name of Salomon And Co Ltd  and he transferred his buisness to the company. The shares of the company are held by him, his sons and wife. Saloman  is also holding debentures adnd shares in the company which were secured in nature against the company assets. When the company went into liquidation, the secured creditors are paid leaving the unsecured crediors with nothing to pay.  (Bottomley 2016)

The Relevant Issue

The main issue that was raised was whether the company was nothing but is formulated to cheat the unsecured creditors. Whether the company and Salomon to be treated as one or distinct in nature?

Judgment

It was held by the court that upon incorporation, a corporation is nothing but an artificial person in law and thus Salomon and  the comoany (Salomon And Co Ltd ) are two ditinct personalitis in law. Upon incorporation the company has acquired the feature of a separte legal entity which makes it distinct and is not at all assocaited in any maner with its officers or the shareholders. Thus, Saloman has not indulged in any deceptive activity by incorporating a company nor the company is a sham.

This ruling of Salomon v A Salomon And Co Ltd  [1897] is part of section 124 of the Corpoartaion Act 2001 which empahsis that a company has a separate legal existnace in law.  

As per section 124 of the Corporation Act 2001, a company which is incorporated as per the law of the land has a separate legal existence in law and is an artificial being which has all the powers which is normally possessed by a natural person. The powers include issuing shares, to hold property, to enter into contracts, to sue or be sued and the scope of these powers is rightly evaluated in Gas Lightning Improvement Co Ltd v IRC (1923). (Adams 2002)

This legal ruling and the foundation principle that every corporation has a separate legal existence in law is later highlighted in several leading cases.

Series of cases highlighting the precedent laid down in Salomon v A Salomon And Co Ltd  

Lee v Lee's Air Farming Limited 1961 AC 12

The crop business is operated by Lee. Later the business is transformed into a corporation. In the said company, Mr Lee was the shareholder as well as the employee. While carrying in his employment duties, Mr Lee dies. The wife of Mr Lee submitted that since Mr Lee is the employee of the company, thus, compensation must be provided. The court held that the corporation incorporated by Mr Lee is distinct from Lee himself and the acts of the company are separate from Lee. Lee being the employee of the company is distinct from the company and hence compensation should be provided to Mr Lee. (Gerbic and Miller 2010)

Scope of section 124 – Separate legal existence

Thus, the rule laid down in Salomon v A Salomon And Co Ltd  was reinstanted in the Lees air farming case which authenticates that a corporation is ditinct from its officers and is an artificial person in law.

Farrar v Farrars Ltd., (1888) 40 ChD 395

Farrar v Farrars Ltd (1888) is yet another case which proves that a corporation is a distinct personality in law. the court established that a sale and purchase amid a comoany and the person is valid and a comoany is capable to enter into such transcation on its own account. (Gerbic and Miller 2010)

Thus, the basic feature that is attribited by a corporation is the separte legal persoianlty of a comrporation, but, thus basic feature is not stataic and there are situtaion when this foundatuional proncipal can be negated by lifting the veil of the company.

Lifting the corporate veil of the corporation 

Lifting of the corporate veil signifies that there are instances when the veil of the company which brings a distinction amid the company and its officers should be pierced and lifted so as to bring justice, then, in such cases the veil if pierced or lifted and the acts of the officers of the corporation are not considered as the acts of the corporation but are considered as their personal acts and are held personally liable for the same and is held in Adams v Cape Industries (1900). The instances can be sham or fraud by the company or injustice, unfairness or agency or group enterprise etc. (Larimer 2012)

At this stage it is submitted that the legal principle of the corporate law that was laid down in Salmon case was very important as it provides one of the significant features of the corporate law but at the same time this foundational principle is not static and was held to be molded and at time s disregarded by the courts in number of instances in order to bring justice.

The rule in Salmon case was profound but was not static and is not recognized by the courts in order to bring justice to the parties. But, does it mean that there is no relevance to the rule laid down in Salmon case. The answer is no, and the rule still holds well as in Bank of Tokyo v Karoon (1983), the court did not lift the veil of the company and submitted that the separate legal personality of the company can only be avoided on important grounds.  The SLE principle must only be avoided in cases of extreme necessity and is held in VTB Capital Plc v Nutritek International Corporation (2013). There must be some legal justification before the corporate veil oif the comoany must be lifted.

It is now important to undersyand whethet there are varitaion which are required in the given law.

Variation to the current law

The foundation principle that was laid down in Salomon case, was of extreme importance and there are instances when this principle was disregarded. There are numerous changes that are brought in the old law which is now transformed into the new law, still the ruling of Salomon case is of extreme importance and cannot be negated at any cost. Upon incorporation the company is considered to be distinct from its members and has the power to act like a normal human being.

Books/Articles/Journals

Adams, M. (2002) Essential corporate law. Cavendish Australia.

Bottomley, S. (2016).  The Constitutional Corporation: Rethinking Corporate Governance. Routledge.

Gerbic, P and Miller, L. (2010) Understanidng Commercial Law. LexisNexis NZ.

Gibson, A and Fraser, D. (013). Business Law 2014. Pearson Higher Education AU.

Latimer, P. (2012) Australian Business Law 2012. CCH Australia Limited.

Case laws

Adams v Cape Industries (1900).

Bank of Tokyo v Karoon (1983).

Farrar v Farrars Ltd., (1888) 40 ChD 395

Gas Lightning Improvement Co Ltd v IRC (1923).

Lee v Lee's Air Farming Limited 1961 AC 12

Salomon v A Salomon And Co Ltd [1897].

VTB Capital Plc v Nutritek International Corporation (2013)