The law laid down in Soloman v. Soloman and Co. is often considered the source on the basis of which the jurisprudence of corporate personality has been written world over. However, the history of corporate-commercial litigation has witnessed situations where in the Courts have gone beyond the corporate cloak and analyzed the working and the motives of the members or directors of the company: In doing the same, the Courts have evolved the concept of lifting or piercing the corporate veil. Required
Critically discuss this statement citing the relevant case law.
Over the years the courts have used the concept of lifting the veil against the doctrine of cooperate personality which is key in the case Salomon v. Salomon & co. ltd., the concept of corporate personality has led the courts to specify under what circumstances the veil should be lifted. Corporate (legal) personality arose from the activities of organizations such as religious orders and local authorities who were granted rights by the government to hold property and sue and be sued. Over time the concept began to be applied to commercial ventures with a public interest element such as rail building ventures and colonial trading businesses. However, modern company law only began in the mid- nineteenth century when a series of Companies Acts were passed which allowed ordinary individuals to form registered companies with limited liability. The case of Salomon v. Salomon & co. ltd., (1897) A.C. 22., is an early example of the doctrine of separate or corporate personality. This case strengthened the fundamental concept that a company has a legal personality or identity separate from its members. A company is thus a legal 'person'. It has its own rights, duties and assets which are different and distinct from those of its members. In addition, a company can sue and be sued in its own name, hold its own property and crucially be liable for its own debts. It is this concept that enables limited liability for shareholders to occur as the debts belong to the legal entity of the company and not to the shareholders in that company. There are many types of businesses such as sole proprietorships and partnerships all of which can be turned into corporations Mr. Salomon was a successful leather merchant who specialized in manufacturing leather boots, he conducted his business as a sole trader and later incorporated. Upon incorporation, a company becomes a separate legal entity, distinct from its members. Many owners incorporate their business because of its advantages such as limited liability. At that time, continuing the case, the legal requirement for incorporation was for at least seven persons subscribe as members (shareholders) of a company. Therefore, the members of Salomon and Co. Ltd were Mr. Salomon himself, his wife and their five children. He held most of the shares, as the other six members held a share each, and sold his previous business to it. Hence he became the company’s principal shareholder and its principal creditor. When the company went into liquidation, it was argued that Salomon and the company were the same, and that the debentures used by Mr. Salomon as security for the debt were invalid, on the grounds of fraud. Although previous courts had ruled against Solomon, the House of Lords unanimously overturned this decision. The House of Lords found no form of fraud or any deliberate abuse of the corporation. They also believed that the corporation was properly formed and that it was in law a distant legal person, completely separate from Solomon. Solomon was not held liable for the company's debt. This next case is another example of corporate personality and how the Courts rule based on this doctrine. In the case Macaura v Northern Assurance Co Ltd (1925) A.C.619, Macaura created a company and sold his land of timber to the corporation. Although Macaura had transferred the land to his company, he failed to...
References: David Kelly et al., Business Law (2011), page 152-153
C.F Butler & Associates. 2009. http://www.cfbutlerandassociates.com/liftingtheveilofincorporation2.html
Sadhu, A., (n.d.) Lifting the Corporate Veil. [online] Available at http://www.legalserviceindia.com/articles/corporate.htm
Ganguly, A, (n.d) Lifting the Corporate Veil. [online] Available at http://www.lawteacher.net/business-law/essays/article-on-lifting-of-the-law-essays.php
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