Salmon V Salmon

Topics: Corporation, Limited liability company, Legal entities Pages: 8 (3105 words) Published: June 19, 2011

30.The decision of the House of Lords in Salomon v Salomon & Co Ltd [1] evinces the accuracy of Gooley's observation that the separate legal entity doctrine was a "two-edged sword".[2] At a general level, it was a good decision. By establishing that corporations are separate legal entities, Salomon's case endowed the company with all the requisite attributes with which to become the powerhouse of capitalism. At a particular level, however, it was a bad decision. By extending the benefits of incorporation to small private enterprises, Salomon's case has promoted fraud and the evasion of legal obligations. Nonetheless, this article will argue that the overall balance is positive. Salomon v Salomon
 31.At its most general level, the decision of the House of Lords in Salomon v Salomon & Co Ltd was a good decision. Salomon's case is universally recognised as authority for the principle that a corporation is a separate legal entity.[3] 32.The case firmly established that upon incorporation, a new and separate artificial entity comes into existence. At law, a corporation is a distinct person with its own personality separate from and independent of the persons who formed it, who invest money in it, and who direct and manage its operations.[4] It follows that the rights and duties of a corporation are not the rights and duties of its directors or members who are, most of the time, obscured by a corporate veil surrounding the company.[5] 33.The recognition that a corporation is a separate legal entity in its own right is the foundation of modern corporate law: MacLaine Watson & Co Ltd v Department of Trade and Industry.[6] Indeed "[e]very system of law that has attained a certain degree of maturity seems compelled by the ever increasing complexity of human affairs to create persons who are not men...".[7] Consistent with this observation, Arnold states that "[o]ne of the essential and central notions which give our industrial feudalism logical symmetry is the personification of great industrial enterprise."[8] 34.Support for the principle of the separateness of legal personality, shared amongst academic commentators, has been unbroken in legislative and judicial circles. Notably, this principle is enshrined in section 124 of the Corporations Act. Similarly, the judiciary has, with minor exceptions, consistently reaffirmed the need to treat this legal doctrine seriously.[9] Subsequent English and Australian judicial decisions have upheld the Salomon principle.[10] In other words, since the decision in Salomon's case, the complete separation of the company and its members has never been doubted.[11] The ruling has, with few exceptions, stood the test of time.[12] But, why? 35.From a theoretical perspective, the answer is straightforward. All theories of the corporate entity agree on the practical need for the artificial personality with which the legal system invests corporations. Concession theorists, for example, regard corporate personality as a privilege granted by the state "for legal and business convenience".[13] Similarly, the contractarian school argues that "[c]orporation law reduces transaction costs by implying in every corporate charter the normal rights on which shareholders could be expected to insist", such as separate legal status.[14] This principle, the essence of corporate law, is said to operate as a default provision that facilitates corporate activity.[15] In many ways, this is the view taken by aggregate theorists who praise the role of the Salomon principle in assisting the formation of contractual relationships that constitute the backbone of voluntary aggregations of individuals that the law otherwise identifies as corporations.[16] Natural entity theorists' claims are not much different: advocates explain that the separate legal entity principle is important in giving legal effect to the natural fact that the corporation, as a consequence of human interaction and initiative, has...
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