Business Law

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Business Law

“The doctrine laid down in Salomon v Salomon & Co Ltd [1897] AC 22 has to be watched very carefully. It has often been supposed to cast a veil on the personality of a limited company through which the courts cannot see. But that is not true. The courts can, and often do, draw aside the veil. They can, and often do, pull off the mark. They look to see what really lies behind” - Lord Denning in Littlewoods Mail Order Stores v Inland revenue Commissioners [1969] 3 All ER 422.

Introduction
“Law is order, and good law is good order” - Aristotle 343 BC Incorporation is the act of a business achieving a separate corporate personality from that of its owners. When a company is a separate legal identity to its owners it is said to be ‘incorporated’ The essay will discuss the problems that may arise with cases related to the business’ corporate personality and how its not always the most simple of cases when trying to follow the doctrine laid down in Salomon v Salomon & Co Ltd [1897] AC 22. This is a case which set a precedent for the concept of corporate personality and highlights the issues that are faced during the trial of such cases. In contrast to this case is another well known case, Littlewoods Mail Order Stores v Inland Revenue Commissioners [1969] 3 All ER 422. This case shows the contradictory outcomes that can occur when the courts, ‘draw aside the veil’ , which is a matter of importance mentioned by Lord Denning. The case represented the value of distinguishing ownership so as to ascertain culpability. The essay will cover the cases mentioned, as well as citing other cases which have been effected by the doctrine. It will highlight the importance of incorporation and corporate personality of companies by explaining the issues that have arisen for the legal authorities involved in the cases and take a more in depth look at two of the more well known ones. This will give a full and valuable insight into a specific area of business law by defining, discussing and evaluating all of the legal issues previously mentioned with consistently engaging and relevant information.

Incorporation and Corporate Personality

Incorporation is the act of a company gaining a separate identity to its owners, also known as a corporate personality. This means that any obligations and rights for the company are a separate entity altogether. The assets and debts that the company may hold belong solely to the company, and the owners cannot be held legally responsible. This then means that the company can purchase assets under the company name and sue and be sued. The ‘veil of incorporation’ is the definition given to the limited liabilities that are achieved by the owners of the company once it gains a corporate personality. In the 100 years since the Salomon v Salomon & Co Ltd [1897] AC 22 case, the legislature and the courts have not been unaware of the possibilities of abuse, and on occasion, have responded in various ways to remove the advantages from the owners of forming a company or of hiding behind one. These occasions are generally described as ‘lifting the veil’. (Goulding, 1999, P.66)

Salomon v Salomon & Co Ltd [1897] AC 22

Salomon v Salomon & Co Ltd [1897] AC 22 is a famous case which defined the way corporate personality is looked at today. It is the first example of the problems that arise from defining the legal personality of a company. The case involved Mr A. Salomon who owned a company which manufactured boots. He and the six members of his family all had one share each. He then transferred his business to the company, which ‘paid’ him by issuing him a further 20,000 shares plus secured debentures for a further £10,000. This legally made him a secured creditor for the company, as well as its main shareholder. The company became insolvent. Salomon’s shares became worthless, but he himself was not liable for the company’s debts as he and the company were separate persons,...
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