Good Aspects of the Case of the House of Lords within Salomon versus Salomon - Essay Example

The rule in Salomon v Salomon & CO [1897] AC 22 By Presented to Introduction The case of the House of Lords within Salomon v Salomon & Co Ltd envisages accuracy of the observation by Gooley that separated legal entity doctrines through "two-edged swords". From the general perspective, the option derives good justice principles. The establishment that corporations should be treated as separate legal entities shows that Salomons case equipped the company with the requisite attributes for becoming a powerhouse of capitalism. However, at various levels, it had detrimental effects on judicial decision making. The extension of benefits for incorporation within small private enterprises allowed the Salomons case to have a promotion of fraud as well as legal obligations evasion. However, this paper argues that such balance has positive implications. Salomon v Salomon The House of Lords decision in the case was good. At various general levels, Salomons case had universal recognition of the authority and principle where corporations were separate legal entities. Cases of this nature had firm establishment of incorporation, and new as well as separate artificial entities came to existence. From a legal perspective, corporations are distinct persons that have their personality independent of and distinct from the persons forming it, invested money in it, and directed and managed the operations (Mäntysaari, 2006, p 34). The identity that corporations are separate legal entities in their right forms grounds for modern corporate law such as in Department of Trade and Industry v MacLaine Watson & Co Ltd. Every legal system that attains various levels of maturity appears to enjoy compulsion by the increasing complexities of human affairs and creation of persons without human characteristics. Consistency with such observation illustrates that various central and essential notions that give logical symmetry in industrial feudalism are personification of industrial enterprises. The support awarded to principles of legal personality separateness is shared among academic commentators and are unbroken into judicial and legislative circles (Ferran & Ho, 2014, p 312). The principle has enshrined depictions in section 124 in Corporations Act. The judiciary has consistent reaffirmations of the need of treating the legal doctrine with few exceptions. Subsequent Australian and English decisions of the court uphold the Salomon principle. Since Salomons case had the decision, the entire separation of company and members is rather evident. The ruling stands the test of time even with few exceptions (Routledge. 2010, p 352). In theory, the application of the principle is straightforward. Most theories in the corporate entity are in agreement of the practical essence of artificial personalities that legal systems invest in corporations. All concession theorists regard corporate personality to be privileges the state grants for business and legal convenience. In addition, the contractarian school of thought insists that corporation law offers a reduced component of transaction costs through the implication of every corporate charter as normal rights where shareholders are expected to focus on including separate legal status. The principle is based on corporate law and operates as a default provision in facilitating corporate activity (Mäntysaari, 2006, p 125). The view is taken by the aggregate theorists in praising the Salomon principle roles in assisting contractual formation of relationships constituting a backbone of exclusive aggregations for individuals where the law distinguishes as corporations. The human initiative and interaction consequence is that it owns the capacity and will for action. It appears that there are theoretical unanimities on practical requirements for principles for corporation and legal entities of entirely different elements of its members (Bourne, 2013, p 162). However, the major issue is that this is an entitlement of the Salomon principle against robust judicial systems. From practical perspectives, the approach to implementation of above demands has close attention on detail. Separate legal personalities for corporations are the reasons why corporations are favored for conducting social organization or commercial enterprise. The argument is that Companies show desirable elements when such arrangements are aimed at pivoting them on convenient and realistic grounds to erect direct individual human beings. Individual human beings are short-lived, fickle, and hard to organize into larger-scale political and economic associations through permanent and sustainable systems (Routledge. 2010, p 298). The illustration means that many commercial enterprises should be managed and owned by corporate bodies as compared to its human owners in person and directly. There are possibilities for the recognition of Salomons case to incorporate the achievements of legal person interposition between natural persons owning and controlling it against the business activities being undertaken. Corporations are artificial persons comprising of natural persons and are legal artifice that the company has a metaphysical form as compared to the physical narration. The difficulties of the system imply that overcoming virtues of subsections on the Corporations Act is almost impossible (Mäntysaari, 2009, p 172). The Act states that the corporation will have the opportunity of developing legal capacities of natural persons. Salomons case decision ensured that registered companies were capable of undertaking the body corporate functions as in subsection 124(1). As separate legal persons, registered companies are capable of being sued and suing such as in the case of Foss v Harbottle. Corporations have perpetual succession as evidenced in Regal Ltd v Gulliver and corporations can engage in contractual arrangements in their names. Corporation has the power of acquiring, holding and disposing of property such as in Macaura v Northern Assurance Ltd. On the contrary, the statutory attributes are not as exhaustive as there are others (Mäntysaari, 2009, p 132). Corporations can contract using the controlling member such as in Lee v Lees Air Farming Ltd making it a creditor, debtor or surety for member (Salomons case). In addition, corporation shares can be transferred and transmitted. Corporations continue benefiting from tax minimization based on income splitting as encouraged through dividend imputation such as in Hobart Bridge Ltd v FCT (Mäntysaari, 2009, p the 162). Corporations are empowered to enter into negotiated financing arrangements through the creation of floating charges. The liabilities of limited companies are limited such as in Salomons case. Companies are exclusively liable for all obligations incurred. Commercial enterprises that have limited liabilities characterize most of the developed legal systems. The experiences since Salomons case decision demonstrate that there are no grounds necessitating the benefits of limited liability to apply to business entrepreneurs only (Mäntysaari, 2009, p 222). Various forms of limited liability are critical essential in continuation and maintenance of the private enterprise system as practiced and advanced through industrial capitalist societies. Limited liability reduces costs involved in separation of control and ownership. Limited liability lowers the essence of monitoring management as well as other shareholders. Limited liability coupled with free share-transfer involves arguable links that facilitate markets for control. The actions form incentives towards managing and performance of efficient categories. Limited liability permits shareholders to continue diversifying their holdings. The legal concept facilitates decisions on optimal investment as positive attitudes towards risk taking are ensured (Routledge. 2010, p 122). Discussion The principle of Salomon continues to fight against retrogressive judicial practices because is aimed at developing practical utility among corporations. The approach also encroaches on separation of legal entities subjected to limited liability under the definition of perpetual existence, specialized management, share transferability, flexible financing methods, consequences of incorporation or majority rule and other attributes. Corporations have various socially beneficial economic functions (Kershaw, 2012, p 178). Corporations enable investments in the public sector to share within profits of enterprises without making involvements in management. The principle enables single traders or small partnerships to operate businesses. Corporation provides structures for joint venture through fund management, holding family assets, corporatized government enterprise, continuing trusteeship, and property co-enjoyment. Marshaling participants across large commercial enterprises enable enactment of nominees of holding legal titles to various assets and other important functions (Hannigan, 2012, p 36). The basic level involves the decisions made by House of Lords from the case of Salomon v Salomon & Co as a bad decision. Critics observe that Salomons case ensured the independence of corporate existence within registered companies that was a principle based on importance of company law. However, applied inflexibility led to shielding parties unreasonably to the disadvantage of persons working with companies. Limited liability is a source of attraction for small traders to venture into incorporation forms (Bourne, 2013, p 26). The reason is not that it represents effective devices that raise capital but that it awards them increased access for avenues that they were able to escape the unlimited liability tyranny. Criticisms from limited liability can be addressed through impacts on creditors as well as society. The principle observes the essence of having creditors of the limited company look into the capital, and limited fund only. Limited liability also discourages the shareholders from controlling and monitoring commercial ventures of the company. The creditors of the company absorb all burdens for risks inherent and dealership of limited liability companies. The issue refers to the right of limited liabilities in operations and restricting size of the capital in the company (Ferran & Ho, 2014, p 62). Various creditors have various capacities of protecting themselves from such risks. Banks and financial creditors can overcome the risks even though trade creditors, tort creditors and employees have difficulties in attaching meaning. Trade creditors have rare insistence on security prior supplying goods on credit as well as bearing considerable risks for corporate insolvency. Employees face more precarious position. Employees do not have the liberty of obtaining securitizing or diversifying the risk from the corporate employers insolvency as compared to trade and finance creditors (Padhi, 2012, p 172). Sections of employees have minimal information regarding the financial standing of the employer as stipulated in the Corporations Act. Even as contract creditors embrace certain levels of risk in dealing with limited liability companies, they enter in contractual agreements by will and do not have influence on the companys tort creditors. Tort victims against a company bear uncompensated risks for elements that such companys insolvency takes place. The economic benefits developed by limited liability remain absent based on the close relationships held by private companies and the technical perspectives. Reduction of monitoring costs is irrelevant as managers and owners are similar (Hannigan, 2012, p 72). The benefit realized from the fostered efficient markets for the shares are based on limited liabilities and do not apply in areas where no market is presented for shares of related companies. Limited liability illustrates that companies take excessive risks based on the directors of companies with personalized gains. The focus is to shift risks from commercial collapse while advancing interests of corporate creditors and not those of public companies directors (Mäntysaari, 2009, p 321). Corporate personality has an essential contribution to the metaphorical application of language clothing and formalization of groups based on single legal identities and analogy of the natural person. However, the Berkey v Third Avenue Rly (1926) illustrated that the metaphors of law are narrowly focused on and start as devices of liberating thoughts and often end in enslaving the subjects (Bourne, 2013, p 271). Stressing independence and autonomy of corporate personality followed the legitimization of the House of Lords in using corporate forms for small partnerships and individual traders (Padhi, 2012, p 287). The private enterprises do not raise capital within public elements even though there is anxiety in interposing entities across individuals and the creditors. Law Lords illustrated that immediately a company is registered as per the Act, the firm forms new legal entities that have ultimate separation from shareholders. The concept of separation is also applicable to bare compliance with the Act’s provisions where all of the issued shares for the company are in the hands of one person. The Court observed that there was a possibility that traders were not limited by their liability to capitalize on their investments in the firm. Actions and repercussions alluded to various risks of subscribing to debentures as compared to shares (Goulding, 2013, p 721). Salomons case went past individual limits to address dry construction points. House of Lords sanctioned changes in the ideology of the company’s standing and focus for use and application of varied company elements. The House gave priority to separation of identity through legal formation and essential ignorance of economic realities of an individualized company. The drive to such criticism on Salomons case refers to various dimensions (Kershaw, 2012, p 71). The decision illustrated honesty of the incorporators in developing benefit for limited liabilities and circumstances and order of encouraging initiative to trade did not affect business. The opportunities afforded by the decision to unscrupulous promoters from private companies include abuse of the advantages given by the Corporations Act in achieving clear incorporation for undercapitalized company (McLaughlin, 2014, p 712). The colloquial "$2 Company" is a notable illustration of corporate fraud. In most cases, the rip-off involves situations where a group of person’s sets establish limited liability companies that are under-capitalized. Such owners cause the corporation to accrue large debts under its individualized name based on prospective abilities of repaying such loans. When the creditors of the company seek for repayment of debts, owners argue that the company was legally separated from the owners and hence it owed the debt itself. In the end, none of the directors and members would be liable (Hannigan, 2012, p 618). From the time that the decision by House of Lords was handed down on Salomons case, the legal doctrine regarding corporations as separate legal entities has been upheld. The Salomon principle presents ideal platforms for fraud coupled with consequent limited liability attributes. The fact that facility malleability protected members and directors against claims of creditors, the corporate form was responsible for developing different anti-social or fraudulent activities. Fraud in such contexts is not a precise definition of tangible illustrations elucidating the concept (Mäntysaari, 2009, p 122). The other instance for corporate fraud includes the harbor bottom schemes. All assets of a given corporation about to incur huge income tax liabilities are transferred to a new corporation incorporated under such convenience. The transfer channels resources through confusing transactions that involve other corporations, as well as overseas corporate havens (Kershaw, 2012, p 612). In the case investigators are in a position of tracing the shell corporations, they find that impersonated men were appointed to replace the original directors. New corporations have riches in assets and are operated to fund alternate schemes for individuals forming it. The activities include varied elements that granting interest-free loans without security by corporations to directors and companies that they are interested in. The application of corporate capital among personal living expenses for directors and major shareholders involves payment of astronomical charges and payments for managerial services (Ferran & Ho, 2014, p 62). Conclusion The paper addresses the issue of whether good aspects of Salomons case decision outweigh the negative ones. The application of the decision is based on the view of the principle as an advocate of separated legal entity as established within the Salomons case. However, there is an instrumental component in developing modern capitalism as well as immense economic and social wealth is generated in different scenarios. The house of Lords based the principle in coverage of all small private enterprises. The move had various negative consequences in the long run. On the contrary, it is true that such elements are largely neutralized through joint judicial and legislative action. The legislature is in a position of forging fundamental policies to identify and bring to book all corporate shells. Even without the assistance from statutory organizations, the courts are normally ready to continue drawing the veil while imposing legal liability for directors and members that apply Salomon principle strictly. The application can lead to injustice, damage or inconvenience to government finances. It is worth mentioning that, Salomons case led to all Australian jurisdictions transpiring the desire of ameliorating legal facilities among small commercial enterprises, as well as an introduction of provisions in private companies and corporate law. References Hannigan, B. 2012. Company Law. New York: Oxford University Press. Kershaw, D. 2012. Company Law in Context: Text and Materials. New York: Oxford University Press. Ferran, E., & Ho, L. C. 2014. Principles of Corporate Finance Law. New York: Oxford University Press. Bourne, N. 2013. Bourne on Company Law. 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