The Rationale and Impact of the Decision on Company Law - Essay Example

The Rationale and Impact of the Decision on Company Law Table of Contents Introduction 3 Case Overview: Salomon v Salomon & Co [1897] AC 22 4 Rationale for the Alignment of Salomon v Salomon & Co [1897] AC 22 with the Company Law of UK 6 The influence of Salomon v Salomon & Co [1897] AC 22 on Company Law of UK 7 Conclusion 10 References 11 Introduction In the present business context, the purview of transparent business conducts and ethical concerns in company formation has gained considerable importance in the global business environment, which is already affected due to aggressive competitive challenges (Mallin, 2013). In order to maintain adequate transparency and sustainability, organizations today need to conduct their business operations with due adherence to the legal and ethical policies of the local government or any other authority of the targeted business market. Likewise, in the UK, Company Law tends to govern the approaches of the companies to bind their operational initiatives within a legal and ethical boundary (Morse, 2010). The law includes policies that encourage companies to ensure fair operations within the business and contribute positive results to the stakeholders (Drukker Solicitors, 2014). Correspondingly, this discussion will focus on highlighting the policies of the UK Company Law in alignment with the landmark case of Salomon v Salomon & Co [1897] AC 22. With this particular aim, the essay will focus on presenting facts that can provide an elaborative understanding with regard to the influence of the outcomes of Salomon v Salomon & Co on the regulations underlying the UK Company Law. Notably, some of the aspects of the Salomon v Salomon & Co case, such as a separate legal entity, partnership norms and corporate social responsibility, are often argued to have reflection upon the policies of the Company Law of UK (Hannigan, 2012). Likewise, with the use of secondary sources, including peer-reviewed articles and academic journals, this study will provide a critical assessment concerning the influence of the landmark case on the contemporary provisions of the UK Company Law (McLaughlin, 2014). Case Overview: Salomon v Salomon & Co [1897] AC 22 As widely accepted, legal policies are framed mainly with the intention to govern a particular sector to ensure fair and ethical operations. Any piece of legislation developed by the government of any region is largely intended towards promoting the well-being of people, within the society overall. Likewise, the Company Law of the UK has also been observed as keen on controlling the approach of the business units operating within the country towards a positive direction, so that the corporate entity is bound to contribute towards the welfare of its stakeholders and the entire society in an appreciative manner (Drukker Solicitors, 2014). It is in this context that the case of Salomon v Salomon & Co has contributed largely towards the formation of some of the integral policies of the UK Company law, being focused on transparency related issues in context of company formation and ownership structure. It is evident in this regard that while determining a particular or a set of policies, concerned authorities often tend to consider the past case results (both positive and negative aspects), so that a better set of policies and legal norms can be included in alignment with the interests of the people, who perhaps may probably get impacted from the same. The Company Law of the UK can be regarded as an example of such piece of legislation that has utmost resemblance with the past case results, including that of the landmark case of Salomon v Salomon & Co. The case included several new legal prospects that were found absent in other past cases and hence, their consideration in the future policies was quite justified and evident to say the least. The case, i.e. Salomon v Salomon & Co, was later considered as a particular litigation of the Companies Act of UK that had its intent towards determining prominent results, which were further subjected to immense criticisms and debates. As per the case background, the issue highlighted in this particular event centered on Aron Salomon, who launched a small business of making leather shoes. His business was growing at a rapid pace since the products delivered by him were in considerable demand amid the buyers. With its continuous growth in the market, Salomon was encouraged to expand his business scale and structure, which further reflected in his decision of making the business public. Later, he established a legal company with the name Salomon & Co Ltd with his son, as a potential partner (Law Teacher, 2014a). Other members of the family, comprising his children and spouse were also among the potential partners or stakeholders of the firm. A large percentage of the share of the business was correspondingly acquired by Salomon himself and subsequently, he acquired the entire business under his ownership. Thus, holding a large proportion of shares, Salomon gained the opportunity to enjoy a large percentage of the profits earned by the business along with the responsibility to keep the interests of the stakeholders and investors intact. A large percentage of the company’s debenture was also acquired by Aron Salomon, which made him liable to enjoy a considerable percentage of business profit. However, with the changing business environment and along with the rapid increase in the competitive trends of the market, the performance of Salomon & Co Ltd declined comprehensibly, which reflected through its declining sales. Such an aspect further augmented the risk for the creditors and investors to suffer a loss on their investment in Salomon & Co Ltd. Accordingly, the company was sued wherein the plaintiffs (the company directors) held Mr. Aron Salomon as liable to repay the loans taken by creditors and the investors (Law Teacher, 2014b). Creditors claimed that Mr. Aron Salomon was responsible for putting the business of Salomon & Co Ltd at risk and hence, was liable to pay back the debt for the same. Under the Companies Act 1862, Mr. Aron Salomon was charged for fraudulent approach towards the creditors and was affirmed that he would be legally liable to pay back the debt of the creditors. However, the decisions of the court were reverted when the litigation was heard by the House of Lords. Judges thus revealed that the approach taken by Mr. Aron Salomon was legally sound and was in accordance with the Company Law of the UK. Therefore, based on the policies of Companies Act 1862 it was stated that Salomon & Co Ltd and Aron Salomon had separate legal identifications and therefore, were separate legal entities, holding different rights as well as obligations. This particular provision thus signified that Salomon & Co Ltd would be liable to repay all the debts to the creditors and investors (Law Teacher, 2014b). This decision was taken with less consideration of the past cases and was considered as a landmark decision for numerous reasons. Rationale for the Alignment of Salomon v Salomon & Co [1897] AC 22 with the Company Law of UK Apparently, it has been described in the above context that the provisions included in the Company Law of the UK changed its direction under the strong influence of the decision made in Salomon v Salomon & Co owing to certain key rules that have emerged from the case. Notably, the eventual decision in the case of Salomon v Salomon & Co was taken largely based on the facts and policies of the Companies Act 1862. Past cases’ results were thereby considered as little significance in the case of Salomon v Salomon & Co and the process of its decision making. This particular assertion can be justified by the fact that the case and the scenario presented seemed irrelevant with other past cases and thus, the legal bodies or authorities were required to take diverse decisions unlike what was followed conventionally. As the case helped change the direction of the conventional Company Law provisions followed within the UK, it is often regarded as landmark litigation under the Companies Act 1862. One of the vital rules that have emerged from the case was relevant to the concept of corporate personality (Karasz, 2014). As per this particular rule, for any defunct or insolvent company, the creditors or the investors will not be liable to sue or claim for their losses from the shareholders or owners of the business; rather they can make their claim to the company itself (Common Law Society, 2014). The rules and principles of the case have been quite positive for the creditors of companies dealing with a decline in performances. In the present day context, it is quite evident that companies wind up owing to continuously declining performances. In such a scenario, the rules and principles of Salomon v Salomon & Co is deemed vital, since it provides a legal right for the creditors to obtain their unpaid debts directly from the company, which is legally separate from that of the owners. The consideration of separate legal entity decided in the Salomon v Salomon & Co further gives rise to the obligation of lifting of corporate veil. Lifting the corporate veil is a legal concept that is deemed highly crucial for the well-being of the investors and creditors of a particular corporation. Observably, when companies, as a separate legal entity, fail to repay the debt of the business to the creditors, legal authorities lift the corporate after which, the shareholders and the business becomes liable to pay the borrowings of the company. Some of the cases, such as Bank of Tokyo v. Karoon [1987] AC 45N and Adams v. Cape Industries PLC [1990] BCC 786, hold resemblance with such principles (Common Law Society, 2014; Law Teacher, 2013c). Thus, the alignment of the Salomon v Salomon & Co with the Company Law of the UK is indeed quite apparent with its impacts detailed hereunder (Hicks & Goo, 2008). The influence of Salomon v Salomon & Co [1897] AC 22 on Company Law of UK Since the affirmation of the decision made by the court on the Salomon v Salomon & Co case, the principles and rules emerged from the same were not argued. There were several key policies of the Company Law of the UK, including partnership, separate legal entity and corporate veil, with direct resemblance to the case of Salomon v Salomon & Co. However, the aspect of separate legal entity in the corporate units operating in the UK is deemed to be one of the prime in this context. It is believed that though the principles of separate legal entity prevailed within the Companies Act 1862 of the UK, its use and implication mainly came into prevalence from the decision of the case of Salomon v Salomon & Co. Likewise, the contemporary Company Law of the UK has emerged with policies that apparently highlights the prominence of separate legal personality for the companies operating in the country (Kershaw, 2012). As per the legal structure of the Company Law of UK, companies (both private and public) operating within the nation will be regarded as a separate legal entity and likewise, its responsibilities will differ from the responsibilities of the business owners and shareholders (Law Teacher, 2013c). This refers to the fact that when a particular company face extreme loss or become the victim of corporate frauds, the overall business might be influenced to an extent where the business can get defunct or insolvent. In such a scenario, the creditors and the investors of the business will be at high risk to lose the amount they invested in the operations of the business. Contextually, the prominence of separate legal entity came into prevalence. Under this policy of the Company Law in the UK, creditors will get the legal right to claim their unpaid debt directly from the company and its preserved assets but not from the owners or the stakeholders. This particular policy resembles the rules of the Salomon v Salomon & Co directly and provides a relief to the creditors, as their chances of receiving the un-repaid debt increases significantly. This particular policy will be applicable for companies that are established based on the norms of the Companies Act 1862 in the UK (Law Teacher, 2014b). The policy of separate legal entity that emerged from the case of Aron Salomon can be regarded as highly beneficial for being implemented extensively within the Company Law in the UK. This can be justified by the fact that an after-effect of the case, investors have become more trusting towards companies while investing their money in the operations of the business units in the UK. This is largely because of the fact that separate legal entity of companies has made the operations of the business units legally bound, where the chances of them to cheat the investors or the creditors become minimal. Thus, the rules of Salomon v Salomon & Co and its impact upon the Company Law of the UK can be regarded as quite prominent for the foundation of the modern day corporate law. The policy of separate legal entity was further enhanced and strengthened with the emergence of the concept of lifting the corporate. It has therefore been learnt that the concept of separate legal entity can be considered beneficial for both the business owners as well as investors at the time (Hannigan, 2012). Since separate legal entity make business owners segregated from most of the responsibilities of the business, they can misuse the same for their personal benefits as well. Thus, the policy of lifting corporate veil came into existence. As per this particular policy under the Company Law of the UK, business owners that are involved with corporate frauds and other illegal activities will not be able to shed their inappropriate conduct behind the policy of separate legal entity and thus, the court holds the rights to lift the benefits of corporate responsibility for business owners at any point of time. Hence, from the overall depiction of the influence of the Salomon v Salomon & Co on Company Law, it can be determined that the impact of the case upon the present day legal corporate structure is indeed is noteworthy (Hannigan, 2012). However, like in any other policy consideration, the rules of the Salomon v Salomon & Co also subject to certain criticisms owing to some of its key limitations that can harm the effectiveness of the Company Law of UK. Likewise, aspects such as limited liabilities of the owners and shareholders, the scope of the use of unfair means by the owners under a separate legal entity and the increase in fraudulent activities after the emergence of the rule, can certainly be regarded as major loopholes of the principles of Salomon v Salomon & Co that influenced the Company Law of UK (Law Teacher, 2014a). Conclusion Analysis conducted above suggested that the UK Company Law has seen a transformation over the years and its policies has developed considerably, which further provided a legal relief for the investors and creditors of business units in the UK. Contextually, it must be mentioned that many of the policies of the contemporary law for companies have resemblance and reflection of the policies emerging from the Salomon v Salomon & Co. This can be justified by the existence of the policies of separate legal entity and lifting of corporate veil within the regulations of the UK Company Law. Companies in the UK have a separate legal personality wherein their roles, responsibilities and liabilities will differ from that of the business owners and shareholders. However, it has been observed that this particular norm provides owners with the scope for conducting unfair business activities as a part of limitation of the separate entity policy. Contextually, the prospect of lifting the corporate veil had come into existence that can limit the unfair practices of the business owners. Hence, to conclude the study, it can be depicted that the rules of the case of Salomon v Salomon & Co have a major impact on the principal policies of the UK Company Law. References Bourne, N., 2013. Bourne on Company Law. Routledge. Common Law Society, 2014. Lifting the Corporate Veil: Limited Liability of the Company Decision-Makers Undermined? Analysis of English,U.S., German, Czech and Polish Approach. Home. [Online] Available at: http://www.commonlawreview.cz/lifting-the-corporate-veil-limited-liability-of-the-company-decision-makers-undermined-analysis-of-englishus-german-czech-and-polish-approach [Accessed November 09, 2014]. Drukker Solicitors, 2014. Separate Legal Entity. Home. [Online] Available at: http://www.drukker.co.uk/publications/reference/separate-legal-entity/#.VFnaScmUe15 [Accessed November 09, 2014]. Hicks, A. & Goo, S. H., 2008. Cases and Materials on Company Law. OUP Oxford. Hannigan, B., 2012. Company Law. Oxford University Press. Kershaw, D., 2012. Company Law in Context: Text and Materials. Oxford University Press. Karasz, A., 2014. Corporate World Today: Courts Respond To Limited Liability And Boards Decision Making — A Fight For A Justice Or Rather Prosperity At Stake? Home. 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