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Separate Legal Entity of Corporation : Essay

   

Added on  2020-03-16

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Essay: Companies are said to be an artificial legal personDiscuss the legal basis of the statement: The doctrine of separate identity of the corporations isa basic tenet of the corporations’ law. It provides the foundation regarding the existence and thefunctioning of a company. Therefore it is believed to be the most steady and profound rulepresent in corporate jurisprudence. Although the doctrine of separate legal identity of thecompanies has faced a lot of opposition in the past, and it is also among the most litigatedaspects, however, this doctrine, which was provided by the court in Salomon v Salomon is stillbeing followed. As a result, in case of Australia also, this doctrine has been incorporated in theprovisions of Corporations Act, 2001 (Cth).Explain the Salomon v A Salomon case. How is this case incorporated in the CorporationsAct 2001 (Cth)?: Before proceeding further, it becomes important to briefly discuss the facts ofSalomon v Salomon case. In this case, Salomon had transferred his business of boot making. Inthe beginning, the business was being conducted in the form of a sole trader-ship. However, lateron, a company named Salomon Ltd was incorporated which comprised Salomon, and his familymembers. The value for this transfer was given to Salomon as the shares and debentures having afloating charge over the assets belonging to the corporation. Afterward the business of thecompany failed. As a result, the company went into liquidation. The right of recovery ofSalomon, which was secured by a floating charge on the debentures stood before the claims ofunsecured creditors, who would therefore not be able to recover out of the liquidationproceedings. It was alleged that such exclusion would be unjust. As a result, on behalf of theunsecured creditors, it was alleged by the liquidated that the corporation was a sham, and it wasmerely the agent of Salomon. As a result, Salomon needs to be treated as the principal and

therefore, liable for this debt. In other words, it was claimed by the liquidated that the distinctlegal personality of Salomon Ltd. should be ignored by the court, being distinct from its member,Salomon. Under these circumstances, the court was requested to make Salomon personally liableregarding the debts of the company as if the business was still being conducted as a sole traderby Salomon.Issue: In this way, the case was related with the claims made by some unsecured creditors duringthe liquidation process of Salomon Ltd. Salomon was the main shareholder in this company. Itwas wanted that Salomon was personally liable regarding the debts of the corporation. Thereforethe issue present before the court in this case was if,, irrespective of the notion of separate legalidentity of a company, the shareholder and controller of a corporation can be held liable for thedebts of the company over and above the contribution of capital and in this way, expose themember of the company to unlimited personal liability. It was decided by the court of appeals that in the present case, the company was a myth. In theopinion of the Court, the company was incorporated by Salomon against the real intention of thethen applicable Companies Act, 1862. It was held that the company was carrying on business asan agent of Salomon. Therefore, Salomon needs to be considered as being liable for the debtsthat have been incurred by the company in the course of agency. An appeal was made to theHouse of Lords and the verdict was upturned. It was unanimously held that in view of the factthat the company had been incorporated duly, it has emerged as an independent person. It has itsown rights and liabilities. House of Lords stated that the motives of the persons taking part in thepromotion of the company are not relevant while dealing with these rights and liabilities.Therefore, it was firmly established that there is a corporate veil present between the companyand its owners or controllers.

Starting with the judgment delivered in Salomon's case, the doctrine of special legal identity of acorporation has been pursued in several cases like Lee v Lee's Air Farming Limited, Macaura vNorthern Assurance Co and in Farrar case. In this way, the related to the presence of a corporateveil between a company and its members was established. This shows how the legal personalityof a company is distinct from that of its members. Therefore any rights or obligations of thecompany are to be treated as being different from that of its shareholders, where the shareholdersare only liable to the extent of the capital contributed by them. This is known as the limitedliability of the members of the company. This category fiction has been involved to allow thegroup of individuals to follow economic purpose as a single unit and at the same time withoutexposing themselves to the risk or liabilities, personally. Hence, the law allows the company toown property in its own name. Similarly, a company can enter into contracts in its own name andassume other rights and obligations that are independent from its members. In the same way, thelaw allows the company to sue and be sued in its own name. Another consequence of the distinctlegal identity of a corporation is that the company survives even if the members of the companyhave died. This rule has also been included in the Corporations Act, 2001 (Cth). Therefore, it has beenmentioned in section 124 of the Act that a company has its own legal capacity and it enjoys thepowers of an individual. The meaning of this legal provision is that most of their legal entities inbusiness are considered by the law as being distinct from other business or individuals.The future of company law: Although it appeared that the rule provided by the court inSalomon's case has eroded significantly, but now, a reversal can be seen in the approach adoptedby the judiciary, which started with the judgment provided in Adam's case (Adams v Cape

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