Salomon v A Salomon and Co Ltd (Salomon) has created an impressive case in English Law history. The decision of the House of Lords in Salomon has reaffirmed the separate legal personality of a company. A separate legal personality is also known as the corporate personality. It is one of the consequences of the Company Act 2006 which incorporated a sole trader company to a limited company. When a company has undergone incorporation, it simply means that the shareholders of the company are separated from the company. Therefore, the shareholders have limited liability. In an incorporated company, shareholders get a benefit of having limited liability. The assets of the company do not belong to its members and the company can only sue or be sued under its own name only. On the other hand, there are particular circumstances whereby the court is trying to abstain the principle of separate legal personality and limited liability to pinpoint the fact behind incorporation – it is called “the lifting or corporate veil”. From my point of view, I strongly agree with the decision made by Lord Macnaghten in House of Lords in the Salomon case because he alleged a true and fair view on the case. Mr Salomon had successfully appealed to the House of Lords and Mr Salomon managed to acquire his rights, which is to obtain a separate legal personality; he was only liable to the amount of company debts on the shares that he owned. In this essay, the doctrine and incorporation of the case of Salamon v A Salomon and Co Ltd and the lifting of corporate veil is critically discussed.
A promoter is a person who knows of the idea on how to incorporate a company and carries on with the procedures and registration to convert a sole proprietorship company to a limited company. Cockburn J. in Twycross v. Grant has enounced that a promoter is defined as a person who undertakes all the procedures of a project to achieve the objective of the project. In Salomon v A Salomon Co Ltd (Salomon), Mr Salomon seemed to be the promoter of his own company. However, when the company runs into liquidation, the High Court and Court of Appeal decided against Mr Salomon, and said that he should be treated as if the company was his agent or trustee. The main intention of Mr Salomon incorporating the company to a limited company was because the family wanted to be part of the company. According to the Companies Act 1862, in order to register as a limited company, a company needs at least 7 shareholders. Mr Salomon has allotted each £1 share for his 5 children and his wife; he himself was holding 20,000 £1 shares. It is hard to argue that Mr Salomon formed the company intending to defraud the company creditors because Mr Salomon had already gone through all the necessary procedures to incorporate the company. Smith v Hancock demonstrated a situation whereby a covenant was not broken despite some violations in the agreement. Lindley LJ mentioned that a promise is said to be broken if the purpose of setting up the company was to be a “mere cloak”. Relating this situation to the discussed Salomon case above, the Salomon case showed a genuine intention of forming the company even though that does not totally determine if relief should be granted to the creditors. Therefore, in determining corporate responsibility, the motives of setting up a company is less significant.
Doctrine of Incorporation
(i) Separate Legal Personality
In Salomon, Lord Magnaghten emphasized that once a company is incorporated, the company’s doings are thus being conducted by a separate person from the company. According to the provisions of the Companies Act 2006, a separate legal personality is an elementary characteristic in a company. When a company has been incorporated, it’s members are separated from the company, which means that when a sole trader incorporates his company, the assets of the company will not belong to the members anymore as an incorporate company owns its own assets....
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