Company Law Essay

2100 words - 9 pages

Company Law Essay

Duha Al-Wakeel

‘Salomon v Salomon is an outdated case with little relevance to modern company law.’
Discuss.

Salomon v Salomon[1] served to establish the principle of corporate personality that ‘forms the cornerstone of company law.’[2] It is my contention that despite various attempts by both the legislature and the judiciary to circumvent the principle, this ‘cornerstone’ has not been eroded, rather, it forms the very foundations of modern company law.

Salomon v Salomon was and still is a landmark case. By confirming the legitimacy of Mr Salomon’s company the House of Lords put forward the concept of separate corporate personality and limited liability. ...view middle of the document...

The idea of a separate legal person has been pushed to its limits, and despite a corporation being capable of some crime - whereby the mental state of a person who is ‘the directing mind and will’ of a corporation is attached to the corporation itself[9] - it cannot logically be capable of committing personal offences such as rape nor can it be imprisoned. Thus there remain notable differences between corporate personality and independent personality in the human sense of the word as we know it. The difference forms one of the main reasons why exceptions to the separate entity principle exist. For instance in order to establish the nationality of a company the courts look to its directors and members not merely where the company was incorporated.[10] This in fact serves two differing purposes: for the ascribing of a nationality to a corporation serves to highlight its independent personality, yet simultaneously a nationality cannot be ascribed without looking to outside factors such as the nationality of directors and as such it becomes apparent that this identity is not purely independent. The other main reason as according to Pickering[11] is that to do with potential abuse of the corporate form.

The fact that Mr Salomon paid off existing creditors before incorporating his business is of imperative importance. Due to this it was accepted that his intentions for incorporation were neither fraudulent nor intended to avoid existing legal obligations. Yet inherent within the separate entity and limited liability principles is potential for abuse by shrewd entrepreneurs. It becomes possible to use the corporate vehicle as a means for avoiding liabilities and duties. In a modern age whereby the corporate group is in existence, it also becomes possible for a parent company to set up a subsidiary company in order to transfer its liabilities, and then declare the subsidiary company bankrupt thereby leaving creditors out in the cold. It is this potential for injustice and abuse of the corporate form that has led to the mitigation of the Salomon principle by what has become known as ‘lifting the corporate veil.’

A flood of case law permeates this area of company law. Academics such as Farrar argue that lifting the veil of incorporation has not been done in any sort of systematic way; and that despite there being broad policy reasons for refusing to recognise some companies as separate entities there is no one unifying principle underlying all of this. Whereas Gallagher and Zeigler (1990) argue that all interventionist judgements that lift the corporate veil are in actual fact based on the courts perception of justice and its refusal to allow injustice occur by adoption of the corporate form. The Salomon principle was (as mentioned earlier) based on good faith, and thus it is not logically possible that the House of Lords intended to establish a means for legal fraud. Thereby it is of no surprise that the veil has been lifted in...

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