Importance of Salomon V A Salomon-Free-Samples for Students

Question: Discuss the legal basis of the statement Explain the Salomon v A Salomon And Co Ltd [1897] AC 22 case. How is this case incorporated in the Corporations Act 2001 (Cth)? Answer: Introduction A corporation is considered as an artificial person in the eyes of the law means it has several rights and liability including the right to own property, sue or being sued, enter into a contract and issues shares to raise capital. A company has separate legal entity from its owners and directors meaning they cannot be held liable for the actions of the organisation. The concept of an independent entity was introduced in Salomon v A Salomon And Co Ltd case. This report will focus on analysing the legal basis of the provision of the different legal entity in the corporations law. The importance of Salomon v A Salomon And Co Ltd case will be discussed in the report as well. Further, the future and necessity of separate legal entity act will be addressed in the report. Artificial Legal Person Artificial legal person means an entity which is not a human being, who is recognised by the law as legitimate being and has a separate identity, character, rights, and duties. As per Banerjee (2008), a company is considered as an artificial legal person as per Corporations Act 2001; it has several rights and liabilities which can be enforced by the court. An enterprise is regarded as unnatural because it did not have physical parts or brain to function as a natural person, therefore the business is operated by directors and members. The identity of an organisation is different from those people who run its operations. A company is liable for its actions rather than the persons who operate its operation (Archer and Karim 2009). The rights and liability of corporations are originated from the law, right after its incorporation. For incorporating organisations, it is necessary that the company is registered under the Corporation Act 2001, which provides provision regarding various rights and duties of an enterprise. As per section 112, the companies are divided into two parts by the act, public and proprietary. The public corporations are divided into two parts: Limited by Shares Unlimited with share capital There are four types of proprietary companies: No Liability Limited by Shares Limited by Guarantee Unlimited with share capital Legal Basis of Separate Entity The separate legal entity is a concept regarding corporations which is globally applicable over companies. This principle provides that an enterprise is considered as independent being from its members. According to Ramsay and Noakes (2001), a separate existence meaning corporation can buy or sell the property, enter into a legal contract, sue or be sued, and raise investment under its name. The peoples, who operate and decide for the companys transactions, cannot be held liable towards the actions of an enterprise. Being an artificial person, the various principle of natural human being did not apply to corporations, for example, a company cannot die, and therefore it has perpetual succession. The entity of corporate cannot be altered by a change in its management, even after the death of each member, the existence of corporation remains the same in the eyes of the law. As per Rose (2013), in Macaura v Northern Assurance Co Ltd [1925] AC 619 case, the insurance claim of a person was rejected by six insurers because the property was under the name of corporations. The court provided that even if a person holds all the shares in businesses, he still cannot be considered as the corporations because the company has a separate entity from its owners and members. This case proves the principle that an organisation can hold a property under its name and all the rights of such property shall be the companys rights (Noussia 2008). The companys right to enter into a legal agreement was provided in Lee v Lees Air Farming Ltd [1960] UKPC 33 case, in which Lee formed the corporations, and he was also the director and principal shareholder of such organisation. The companies enter into a contract with farmers to provide the service of aerial topdressing. Lee died while performing the work and his wife file for workers compensation because Lee works in his company as an employee (Baragwanath 2012). The insurance companies denied the claim by stating that Lee was the director of such corporation. The court provided that never assume an enterprise to be a scam; a company has its own identity which cannot be changed merely because Lee was the director of such business. This case also provides the right of the company to employ worker under its name (Barrett 2016). These examples show the importance of separate legal entity principle in the corporation law. Salomon v A Salomon And Co Ltd The provision of the separate legal entity was first introduced in R v Arnaud (1846) 9 QB 806 case, in which the court provided that a corporation has an independent body which cannot be mix with the existence of its owners (Kouo 2016). But, Salomon v A Salomon And Co Ltd [1897] AC 22 was considered as the landmark case in establishing the principle of separate legal entity worldwide. The fact of this case is: Salomon sold his shoe business to another company which was founded by him. The shareholders of the company include his family members and Salomon himself. Salomon transferred the debentures of 10,000 of the company to another party. The business of organisation did not perform well, and it went into insolvent liquidation (Amaeshi, Osuji and Nnodim 2008). The liquidator provided that Mr. Salomon was liable towards the creditors because he conducted fraud and take all their money. The court of appeal provided a similar judgement by holding Mr. Salomon personally accountable for corporations debts. The House of Lord gave a unanimous decision that Mr. Salomon was neither liable towards company nor the creditors (Ping and Wing 2011). The debentures issued by Salomon were valid, and he tried his best to avoid the liquidation of the company. The court decided that the corporation has separate entity from Mr. Salomon, and he cannot be held liable towards the debt of the creditors. As per Anderson (2009), the Salomon v A Salomon And Co Ltd case has significant influence over the Corporations Act 2001 because it introduced the policy of corporate veil which protects companys members from being personally liable. Future of Corporation Law The provision of separate legal entity is a century old principle which is applicable globally over corporations. The ridged provision of corporate veil is still relevant to the enterprises. With the popularity of globalisation, the number of companies has grown substantially along with competition. Many corporations use this principle to conduct fraud in the organisation to gain an unfair advantage. Due to the rigidity of this rule, many people suffer loss from actions of enterprises. To avoid this issue, the doctrine of Piercing of corporate veil has been provided by the law. This principle enables the court to pierce or lift the corporate veil and hold the directors liable for their acts (OSullivan, Percy and Stewart 2008). Many experts believe that the concept of separate entity should be dismissed because the directors take all the decision for a company. Thus, they should be held liable for its illegal actions. But in the future, the doctrine of separate identity will not vanish because due to this principle a company has various benefits. Due to the independent legal entity, a corporation has perpetual succession which is necessary the growth of the business. People prefer to invest in firms because they do not help personally liable for its actions, for the growth of companies in the future, the doctrine of separate legal entity is necessary. Requirement of Changes Due to globalisation and modernisation in a business environment, there is a requirement of changing in regulations regarding the corporate veil. In the present scenario, the role of the doctrine of corporate veil is crucial to protect the interest of the public. This principle restrains corporations from misusing the provision of corporate veil and takes unfair advantage of the public interest. In the swiftly changing business environment, the requirement of strict regulations is necessary to protect the benefit of the public. The doctrine of corporate veil is essential for the growth of corporations, but better laws are in need to control the illegal transaction of the firms. The government should change the rules and bring more strictness in the existing rules regarding corporate veil. The directors should be stopped from taking the wrongful assistance of various provision to save society from misleading practices (Matheson 2008). Conclusion In conclusion, the separate existence principle is a century old rule which is still necessary for the growth of the modern organisation. This law assists companies to perform their actions as a different legal person from its members, and it also provides perpetual succession to a corporation. Many enterprises misuse this doctrine to gain an unfair advantage from the society. The policy of piercing of corporate veil assists the court in checking the person liable for companys actions and held him personally accountable for his acts. 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