Module Title: Company Law
Company Law Assignment – Question A
In this assignment, I will identify the theory of a corporate personality, demonstrate why companies exist autonomously from their promoters or owners, introduce the concept of a company having a corporate veil, and finally to identify why there is such controversy around the notion of a court lifting the corporate veil, with a focus on ‘sham’ companies. The theory of a company having a separate legal personality comes from the introduction of incorporation. Incorporation of a company is established when the company submits all of the relevant documents to the registrar, which, if approved; will result in the issue of an incorporation certificate, acting as conclusive evidence of its incorporation. The requirement for a company to have a separate legal entity is forever scrutinized by certain legal professionals, however this is an essential factor to ensure all of the legal liability a company can create is not directly connected to its members or shareholders. As a result, companies can own property, employ people to work in a desired role, incur their own debts and initiate contracts. Incorporated companies exist independently autonomous from its original promoters and the people who are in directorship. The independent legal status associated with incorporated companies is said to have created the idea of casting a veil between the company and its’ members/owners/share holders, which is known amongst the legal profession as the corporate veil. As a result, this has caused various arguments against whether this separation should exist and if the so called corporate veil should be permanently lifted or just lifted at the courts discretion. The function of preventing all legal liability falling on its’ owners/members was a required characteristic and the fundamental reason why Parliament wanted to find a way of rectifying the problem and stop owners/members being subject to high amounts of liability. The landmark case that began the concept of a company becoming a separate entity and having a separate corporate personality; came from the case of Salomon v Salomon; this case laid the foundations for what has become the principle in which a court will follow, in times where a company’s separate legal personality is questioned. The first case that began the eventual principle was held in the High Court with the case of Broderip v Salomon (1893). The facts were not of vital significance, however it led to the eventual House of Lords outcome that laid the foundations on what to adopt when an incorporated company’s rights are questioned. The case involved Aron Salomon who began as a solvent leather merchant who desired incorporation of his small business, to negate any liability from himself, if the company experienced financial difficulties. To achieve this, A. Salomon forwarded the necessary documents to the registrar and incorporated his business, including himself and his family as the other members within the memorandum of association (acting as proof). The facts became complicated from this point, with the involvement of the claimant Mr Broderip, by a loan that he gave to the company to help with the financial trouble that it was under. In return, A. Salomon promised a return with interest to Mr Broderip, which was not carried through and so the company due to economic trouble was forced into liquidation and A. Salomon taken to court by Mr Broderip, on the ground that the company was only incorporated as a way of getting around all of the debts that he had incurred while trading. The case was heard within the High court where Vaughan, Williams J. came to the decision that the Defendant A. Salomon did in fact create the business as a mere agent or facade in negating his liabilities, which he believed was contrary to the intentional meaning of the Companies Act, 1862, he stated: (see appendix 1) for judgement. This judgement was again controversial...
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