Salomon Principle

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The most important decision ever made by the English courts in Relation to company law is Salomon v A Salomon & Co. Ltd (1897). The vital perception to become familiar with when starting a business is the idea that the business has a legal personality in its own right, mostly when it assumes the form of a Limited Liability Company. This basically means that if someone starts a business as a Limited Liability Company, then the Company is a legal entity with separate legal personality, would be separate to that of the owners, members, or shareholders. As a separate entity, the company is different from the directors, employees and shareholders. The House of Lords in the Salomon case confirmed the legal principle that, upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders. The court did this in relation to what was essentially a one person Company, which is Mr Salomon. At a specific level, however, it was a bad decision. By extending the benefits of incorporation to small private enterprises, Salomon's case has upheld fraud and the evasion of legal obligations, (this will be looked at into depth later). The main areas this essay will be focus on are; the discussion on the Salomon’s case which will include the corporate veil {whether or not it is a legal fiction}; if the corporate veil is consistently acknowledged, look behind the veil or piecing the corporate veil and the situations of which the government expressed itself on its intention in piecing the veil, including a reasonable conclusion. The concept that prevail the Salomon’s case is nothing else but a company is separate from the shareholder, which means that the company is independent and separate from any other entities that are related to the company. In Salomon v Salomon and Co Ltd. (1897), Mr Aron Salomon has been operated his business as a sole proprietor for many years, he then decide to incorporate his business into a limited company, known as Salomon & Co. Ltd. However, for a company to be incorporate into a limited company there were certain requirement needed, (that is; the limited company should at least have seven persons to subscribe as shareholders or members. So Mr Salomon decided to honour this clause by including his family (his wife, four sons and daughter) into the business. Mr Salomon owned 20,001 of the company's 20,007 shares, the remaining six shares was then shared individually between the other six shares. He sold his business to a new corporation for almost £39,000, of which £10,000 was a debt to him. Simultaneously, he was the company's principal shareholder and its principal creditor. At the time of the company's liquidation, the debenture used by Mr Salomon as security for the debt, was argued by the liquidators as being invalid and that they were based on fraud. (Bourne, 2008) This argument was adopted by Vaughan Williams J, ruling that sine Mr Salomon had created company solely to transfer his business to it, in reality the company was his agent and as him being a major creditor was liable for debts to unsecured creditors. This was also agreed by the Lord Justice of appeal, who said that the incorporation of the business by Mr Salomon had been just a scheme to allow carrying on his business as before but with limited liability. However this judgement was cancel by the Court of Appeal, taking into account the 1862 companies Act, that there was nothing in the Act about whether the shareholders (Subscribers) should be independent of the majority shareholder. It was held that the company was in a suitable way constituted in law and it was not the position of judges to and into the statute limitations which they considered expedient. The 1862 Act, made companies with limited liability as legal person’s separate and different from the shareholder. In another word, members of a company would not automatically in their personal capacity by...
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