LAW 202 : Company Law PDF

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Contents
Essay...........................................................................................................................................................2
“The recognition that a corporation is a separate legal entity in its own right is the foundation of modern
corporate law”.............................................................................................................................................2
Introduction.................................................................................................................................................2
Separtae legal entity....................................................................................................................................2
Salomon v A Salomon and Co Ltd [1897] AC 22.......................................................................................2
The Relevant facts...................................................................................................................................2
The Relevant Issue..................................................................................................................................2
Judgment.................................................................................................................................................3
Scope of section 124 – Separate legal existence..........................................................................................3
Lee v Lee's Air Farming Limited 1961 AC 12........................................................................................3
Farrar v Farrars Ltd., (1888) 40 ChD 395................................................................................................3
Lifting the corporate veil of the corporation................................................................................................3
Salmon case – Future of the foundational rule.............................................................................................4
Variation to the current law.........................................................................................................................4
Bibliography................................................................................................................................................5

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Essay
“The recognition that a corporation is a separate legal entity in its own right is the foundation of
modern corporate law”
Introduction
The recognition that a corporation is a separate legal entity in its own right is the foundation of
modern corporate law is a statement which has two aspects, firstly, as how the corporation was
considered as a separate legal entity in law and secondly, how the said principle is regarded as
the foundation of the modern corporate law.
The firstly question requires an analysis of the leading case law of Salomon v A Salomon And Co
Ltd [1897] which is considered as the foundation of recognizing that a corporation is the entity
which has its own existence and has a separate legal personality in law. The second question is
analyzed by looking into case laws that are decided by the courts post Salomon v A Salomon And
Co Ltd, which are decided by taking the decison of saloman as its precedent and thus is
considered as the foundation of the modern corporate law. (Gobson and Fraser 2013)
Before evaluating the facts and the decisions that took place in Salomon v A Salomon And Co Ltd
[1897], it is first important to understand the basic meaning of Separte legal entity in law.
Separtae legal entity
The concept of Separate legal entity in simple words submits that the corporation which is
registered as per the law of the land has a distinct personality in the law in the sense that the act
that are taken by the officers on behalf of the corporation are in the name of the corporation only
and the officers are not held to be personally liable for the same. This distinction that is bought
amid the corporation itself and the officers of the company including shareholders is mainly
because of the shield/veil that is present and which is one of the significant features that are
attained by the entity upon incorporation of the business. (Latimer 2012)
Hence, a corporation is an entity which has its own existence and has the significant feature of
separate legal entity. It is now relevant that a brief understanung on the legal case of Salomon v A
Salomon And Co Ltd [1897] must be taken.
Salomon v A Salomon and Co Ltd [1897] AC 22
The leading case of Salomon v A Salomon And Co Ltd [1897], is the foundation stone which has
laid down the significant principle of separte legal entity in law. It has established that once a
company is registered and incorporated, it is then considered as the separat legal person in law
and has the capacity to carry out all the acts of a natural person and thus is capable to enter into
contracts, hold property, etc. But, this is the principle which has suffered much controversy on its
existence in modern world. However, it is first important ti understand the factual scenarios of
the leading case. (Bottomley 2016)
The Relevant facts
Salomon was a sole proprietor and is carrying on the trade of boot manufacturing. A company is
incorporated by him in the name of Salomon And Co Ltd and he transferred his buisness to the
company. The shares of the company are held by him, his sons and wife. Saloman is also
holding debentures adnd shares in the company which were secured in nature against the
company assets. When the company went into liquidation, the secured creditors are paid leaving
the unsecured crediors with nothing to pay. (Bottomley 2016)
The Relevant Issue
The main issue that was raised was whether the company was nothing but is formulated to cheat
the unsecured creditors. Whether the company and Salomon to be treated as one or distinct in
nature?

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Judgment
It was held by the court that upon incorporation, a corporation is nothing but an artificial person
in law and thus Salomon and the comoany (Salomon And Co Ltd ) are two ditinct personalitis in
law. Upon incorporation the company has acquired the feature of a separte legal entity which
makes it distinct and is not at all assocaited in any maner with its officers or the shareholders.
Thus, Saloman has not indulged in any deceptive activity by incorporating a company nor the
company is a sham.
This ruling of Salomon v A Salomon And Co Ltd [1897] is part of section 124 of the
Corpoartaion Act 2001 which empahsis that a company has a separate legal existnace in law.
Scope of section 124 – Separate legal existence
As per section 124 of the Corporation Act 2001, a company which is incorporated as per the law
of the land has a separate legal existence in law and is an artificial being which has all the
powers which is normally possessed by a natural person. The powers include issuing shares, to
hold property, to enter into contracts, to sue or be sued and the scope of these powers is rightly
evaluated in Gas Lightning Improvement Co Ltd v IRC (1923). (Adams 2002)
This legal ruling and the foundation principle that every corporation has a separate legal
existence in law is later highlighted in several leading cases.
Series of cases highlighting the precedent laid down in Salomon v A Salomon And Co Ltd
Lee v Lee's Air Farming Limited 1961 AC 12
The crop business is operated by Lee. Later the business is transformed into a corporation. In the
said company, Mr Lee was the shareholder as well as the employee. While carrying in his
employment duties, Mr Lee dies. The wife of Mr Lee submitted that since Mr Lee is the
employee of the company, thus, compensation must be provided. The court held that the
corporation incorporated by Mr Lee is distinct from Lee himself and the acts of the company are
separate from Lee. Lee being the employee of the company is distinct from the company and
hence compensation should be provided to Mr Lee. (Gerbic and Miller 2010)
Thus, the rule laid down in Salomon v A Salomon And Co Ltd was reinstanted in the Lees air
farming case which authenticates that a corporation is ditinct from its officers and is an artificial
person in law.
Farrar v Farrars Ltd., (1888) 40 ChD 395
Farrar v Farrars Ltd (1888) is yet another case which proves that a corporation is a distinct
personality in law. the court established that a sale and purchase amid a comoany and the person
is valid and a comoany is capable to enter into such transcation on its own account. (Gerbic and
Miller 2010)
Thus, the basic feature that is attribited by a corporation is the separte legal persoianlty of a
comrporation, but, thus basic feature is not stataic and there are situtaion when this foundatuional
proncipal can be negated by lifting the veil of the company.
Lifting the corporate veil of the corporation
Lifting of the corporate veil signifies that there are instances when the veil of the company which
brings a distinction amid the company and its officers should be pierced and lifted so as to bring
justice, then, in such cases the veil if pierced or lifted and the acts of the officers of the
corporation are not considered as the acts of the corporation but are considered as their personal
acts and are held personally liable for the same and is held in Adams v Cape Industries (1900).
The instances can be sham or fraud by the company or injustice, unfairness or agency or group
enterprise etc. (Larimer 2012)

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At this stage it is submitted that the legal principle of the corporate law that was laid down in
Salmon case was very important as it provides one of the significant features of the corporate law
but at the same time this foundational principle is not static and was held to be molded and at
time s disregarded by the courts in number of instances in order to bring justice.
Salmon case – Future of the foundational rule
The rule in Salmon case was profound but was not static and is not recognized by the courts in
order to bring justice to the parties. But, does it mean that there is no relevance to the rule laid
down in Salmon case. The answer is no, and the rule still holds well as in Bank of Tokyo v
Karoon (1983), the court did not lift the veil of the company and submitted that the separate legal
personality of the company can only be avoided on important grounds. The SLE principle must
only be avoided in cases of extreme necessity and is held in VTB Capital Plc v Nutritek
International Corporation (2013). There must be some legal justification before the corporate
veil oif the comoany must be lifted.
It is now important to undersyand whethet there are varitaion which are required in the given
law.
Variation to the current law
The foundation principle that was laid down in Salomon case, was of extreme importance and
there are instances when this principle was disregarded. There are numerous changes that are
brought in the old law which is now transformed into the new law, still the ruling of Salomon
case is of extreme importance and cannot be negated at any cost. Upon incorporation the
company is considered to be distinct from its members and has the power to act like a normal
human being.

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Bibliography
Books/Articles/Journals
Adams, M. (2002) Essential corporate law. Cavendish Australia.
Bottomley, S. (2016). The Constitutional Corporation: Rethinking Corporate Governance.
Routledge.
Gerbic, P and Miller, L. (2010) Understanidng Commercial Law. LexisNexis NZ.
Gibson, A and Fraser, D. (013). Business Law 2014. Pearson Higher Education AU.
Latimer, P. (2012) Australian Business Law 2012. CCH Australia Limited.
Case laws
Adams v Cape Industries (1900).
Bank of Tokyo v Karoon (1983).
Farrar v Farrars Ltd., (1888) 40 ChD 395
Gas Lightning Improvement Co Ltd v IRC (1923).
Lee v Lee's Air Farming Limited 1961 AC 12
Salomon v A Salomon And Co Ltd [1897].
VTB Capital Plc v Nutritek International Corporation (2013).