The Impact of Salomon v Salomon & Co upon English Company Law - Essay Example

The Impact of Salomon v Salomon & Co upon English Company Law The Law Lords decision in Salomon v Salomon & Co Ltd established the doctrine of separate legal entity or corporate personality. Accordingly, the company was deemed to be separate from its shareholders. This decision deemed companies as distinct legal entities. In addition, this decision had made it possible to transfer legal obligations from individual shareholders to the company. However, the subsequent case law has shown that the courts have frequently ignored this doctrine and pierced the corporate veil (Nyombi & Bakibinga, 2014, p. 94). The Salomon case ruling declared that a new legal entity has come into existence upon the incorporation of a company. This entity is deemed to be distinct from its shareholders. Some of the major outcomes of this ruling have been described below. First, it established the rule that whenever a company acts, it does so in its own right and name. The company does not constitute an agent or proxy for its owners. Thus, the court held in Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners that the law interposes the company between the undertaking and the investor. The business conducted is solely that of the company, the capital utilised is that of the company and not that of the shareholders (Forji, 2007). Second, this ruling established that the common law does not render shareholders liable for the debts of their company, over and above their initial capital investment. Moreover, it established that shareholders did not have a proprietary interest in the company’s property. Thus, the company was held to be distinct from its shareholders. The latter were not liable to the company’s creditors for the debts of the company (Forji, 2007). Company Law has traditionally been subjected to considerable statutory regulation. All the same, this area of the law, has been intrinsically founded upon the common law principles of contract and fiduciary obligations in equity. Their Lordships’ decision in Salomon & Salomon & Co Ltd, can be rightly regarded as path-breaking. With this decision, it was made very clear that a company constituted an entity that was distinct from its members (Reynolds, 2009, p. 708). Prior to this decision, the legal view was that a contract that was outside the objectives of a company, was ultra vires and therefore unenforceable. This doctrine, established by the Law Lords, was aimed at protecting shareholders from the use of the company’s assets for purposes other than those for which they had invested in the company. The performance of this doctrine was less than satisfactory, and as a consequence, generated considerable difficulty, due to its interference with the common law principle of agency (Reynolds, 2009, p. 708). In addition, the indoor management rule came to the fore, in the year 1855. This tenet was aimed at safeguarding third parties dealing with the company in good faith. This principle became intertwined with the ideas of notice and the agency principles. As such, prior to the ruling in Salomon v Salomon & Co Ltd, the House of Lords had endeavoured to safeguard the capital of the company by precluding it from purchasing its own shares (Reynolds, 2009, p. 708). Moreover, the attribution of a corporate persona to companies has produced the following outcomes. First, companies can, in their own name, sue and be sued. Second, companies have acquired unending succession. Third, property can be held by companies, and its members do not possess any property interest, in such property. This was the gist of the ruling in Macaura v Northern Assurance Co Ltd (Cassidy, 2006, p. 43). As such, the property of a company is owned by the company as a separate entity. It is not owned by the members of the company. This important distinction has been established with the decision in Macaura v Northern Assurance Co Ltd. In this case, the timber estate owner had sold the entire timber to a company whose shares were wholly owned by him. Moreover, he was that company’s largest creditor. The timber was insured against fire by several insurance policies that had been taken in his name (French, et al., 2008, p. 121). After the destruction of the timber in a fire, he sued the insurance company, when it refused to honour his policies with it. The House of Lords ruled that in the absence of an insurable interest in the property, the concerned individual should possess a legal or equitable interest in the property. In this manner, the plaintiff’s claim was rejected. The reason for this was stated by Wrenbury LJ, who held that the corporator was not the corporation, even if he held the entire lot of the shares (French, et al., 2008, p. 121). Moreover, it is permissible for a company to employ its member under a service contract. Thus, in Lee v Lee’s Air Farming Ltd, Lee was employed by the company. He owned all of the shares of the company, save for a single share that was owned by some other person. He was its sole director, and had been appointed the governing director for life. Whilst working for the company, Lee expired at that place (French, et al., 2008, p. 122). It was contended by the insurers of the company that in the absence of a contract for service, a claim could not be made that rendered the employer liable to pay compensation for the death or accidental injury undergone by employees at the workplace. As such, the insurers stated that Lee, as the director of the company, could not make a contract with himself, on behalf of the company. This was rejected by Morris LJ, who held that a single individual could function under dual capacities (French, et al., 2008, p. 122). In addition, in Jennings v Crown Prosecution Service, four individuals, including Jennings were convicted of conspiracy to commit fraud. These individuals convinced people to pay advance fees for procuring loans from a company. However, no loans were being disbursed by that company. Jennings was merely an employee of the company. Subsequent to his being charged, the Crown procured an order that restrained him for disposing of the property that he had allegedly purchased from the fraudulent acts. Jennings contested this order on the grounds that it was an illegitimate piercing of the corporate veil (French, et al., 2008, p. 125). This was rejected by the House of Lords. Subsequently, the courts pierced the veil of incorporation of company, when the individual controlling the company had utilised the corporate form to circumvent liability for his wrongdoing to conceal such wrongdoing (French, et al., 2013, p. 135). As such, when a company constitutes a façade for avoiding existing obligations, the courts may pierce the corporate veil. However, it is not incumbent upon the courts to do so, in situations, wherein the corporate structure is assumed, with a view to restrict the liability of its shareholders for the debts of the business. The employment of incorporation to limit future legal liability, is regarded as being integral to company law (Ferran & Ho, 2014, p. 15). Contemporary case law has suggested that in the absence of statutory provision for the situation on hand, the court should not pierce the corporate veil, just because it believes that such act would be equitable towards society or an individual. This important condition was established by the Court of Appeal in Adams v Cape Industries Plc (Kárász , 2009, p. 25). In addition, in Prest v Petrodel Resources Ltd, The UK Supreme Court opined that English law had a limited principle. The latter applied to an individual who was under an existing legal obligation, liability, or legal restriction, which he intentionally eluded, or whose circumstances he purposefully thwarted by interpolating a company that was under his power (Ferran & Ho, 2014, p. 14). In this regard, the Insolvency Act 1986, provides at Section 213 that if it becomes apparent, during the winding up of a company that the latter had conducted some of its business for fraudulent purposes, then the court can render liable the person who had knowledge regarding such fraud (Kárász , 2009, p. 26). In addition, Section 214 of the Insolvency Act 1986 relates to wrongful trading. This Section provides that the court, in response to an application made to it by a liquidator, can declare an existing or past director of a company that has gone into liquidation, liable to contribute to the assets of the company, to the extent deemed fit by it (Kárász , 2009, p. 26). This transpires, whenever the director had known or should have come to the conclusion that the company was heading towards liquidation. In addition, such director should have failed to adopt the measures that could have mitigated the potential loss to the creditors of the company (Kárász , 2009, p. 26). As such, the corporate form is deemed to have been misused, when the legal structure is utilised for circumventing legal responsibilities or for some illegal purpose. In Woolfson v Strathclyde Regional Council, the court held that the separate corporate identity could be set aside, only when the circumstances indicated that the corporate entity was a mere façade that obscured the facts. With this ruling, façade emerged as the principal exception to the doctrine of separate entity. All the same, the courts have pierced the corporate veil in situations where justice demanded such lifting of the veil (Nyombi & Bakibinga, 2014, p. 94). In Tate Access Floors Inc v Boswell, the court held that individuals who decided to conduct their affairs through corporations were benefitting from the legal principle that corporations constituted separate legal entities. The actions and property of these corporations were not attributable to their controlling shareholders or incorporators (Durston, 2011, p. 571). Under the companies’ legislation, Section 399 of the Companies Act 2006 mandates the preparation of consolidated accounts by a group of related companies. The officers concerned could be held personally liable for failure to employ the full name of the company or for failure to make the required disclosures enjoined by the regulations made by the Secretary of State. This constitutes the subject matter of Sections 82 to 85 of the Companies Act 2006. In addition, Section 213 of the Insolvency Act 1986 renders entities personally liable for fraudulent trading. Personal liability for wrongful trading is provided for under Section 214 of this Act (Kelly, et al., 2011, p. 152). The common law perspective, with regard to lifting the corporate veil, is that in the majority of the areas of law that are determined by the application of policy decisions, it becomes an onerous task to determine when the courts will disregard the separate personality of a company. All the same, it can be declared with certainty that the courts will not countenance the employment of the corporate form for perpetrating fraudulent acts or for the circumvention of a legal duty. In such cases, the courts pierce the corporate veil and fix responsibility upon the erring company director or officer (Kelly, et al., 2011, p. 152). Consequently, Section 172 of the Companies Act 2006, imposes several duties upon the directors of a company. These include, the duty to act in a manner that the director considers to be in good faith and which would promote the company’s best interests, thereby benefitting the members of the company, in their entirety. This requires company directors to act, among other things, with regard for the possible outcome, in the long run, of any decision; interests of the employees of the company; and the impact of the operations of the company upon the environment and community (legislation.gov.uk, n.d.). Several of the common law jurisdictions have codified their laws relating to company directors, on the basis of the UK’s initiatives in this area. However, the UK failed to codify their law relating to the duties of company directors (Keay, 2013, p. 87). A measure of transparency was introduced to the corporate veil, with the ruling in DHN Food Distributors Ltd. v. London Borough of Tower Hamlets, by the Court of Appeal. Subsequent to the Salomon decision, the courts have been regularly extending the circumstances under which the corporate veil could be pierced. This lifting of the corporate veil had been extended beyond the occurrence of fraud and the demands of public policy (Powles, 1977, p. 339). Furthermore, legislation has not lagged behind the courts, and has extended the lifting of the corporate veil to situations beyond that of non-compliance with statutory obligations. Essentially, the courts have been investigating the circumstances of a company, and the piercing of the corporate veil has been applied for ascertaining the status of a parent company and its subsidiary (Powles, 1977, p. 339). The importance of the decision in Salomon was that it served to establish the distinct identity of a company from that of its members. This system of separate identities or veil of incorporation constitutes the basis of the intricate structures developed by a parent company with several subsidiary companies. In such cases, the parent company controls its subsidiaries, while remaining legally distinct from them. The benefit to the parent company, is that it can evade the liability emerging from the acts of its subsidiary (Spencer, 2004). The law has been undergoing change that prefers to render the directors of a company, responsible to a greater extent, with respect to the decisions that they take. Thus, the directors of a company have to conduct themselves in a manner that they consider to be in good faith and which would in all probability promote the success of the company. In addition, the directors of a company have to act with regard for the outcomes of their decisions. One of these being the effect of their decisions upon promoting the business relationship of the company with the latter’s suppliers and customers (Lifting the Veil of Incorporation, 2011). The impact of the House of Lords decision in Salomon was that an individual who had formed a company could conduct his business, and any resulting liability would be attributed to the company. Moreover, a company that had been constituted in compliance with the provisions of the legislation relating to companies was a distinct legal entity, and as such it could not be rendered the agent of its controller (Dignam & Lowry, 2014, p. 21). As such, under certain circumstances, the doctrine of separate personality is discarded. This is described as the piercing or lifting of the corporate veil, which separates a company from its members. Piercing of the corporate veil reveals the members of the company, which makes it possible to hold them responsible for the company’s actions. 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