Law of Business Organisation Case Study 2022

Law of business organisation
238CLS
4/19/2020
Student’s Name

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Contents
Section A.........................................................................................................................................2
Section B..........................................................................................................................................5
References........................................................................................................................................8

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Section A
A corporation has many features that make this business structure different form all. The unique
feature of it is a distinct legal entity, which has been given in the case of “Salomon v A Salomon
& Co Ltd [1896] UKHL 1, [1897] AC 22”. To understand the logic behind separate legal entity
doctrine, the facts, and decision of this case seems important to know here. In this case, the
person named Salomon was a leather merchant. He incorporated a limited company with the
intention to take over his existing business. In this company his four sons, wife and daughter
taken one share each and rest all shares were owned by Salomon himself (Herszberg, 2017). It
means he was the majority of the shareholders. He also grants a loan to this company and
received debentures in return that was secured through a floating charge on the assets of the
company. Later on, the company could not work well and went into liquidation. The main issue
of the case started on this point where Salomon has asked his shares before the secured creditor
of the company as he was secured, the creditor. Other creditors have raised their points that
Salomon and company were the same and therefore he has no entitled to claim his money in the
capacity of debenture holder as he was actually the company itself and not a third party (Gibson
& Fraser, 2013).
The decision of this case is highly relevant in the area of corporate law where the ‘House of
Lords’ decided that the company is a distinct and separate legal person. Creditors were aware of
the fact that they were dealing with a company that was formed by Salomon. Further, Salomon
has incorporated the company without having any wrongful or fraudulent intention. Salomon had
a distinct legal personality and therefore he was entitled to take his debt to repay first before the
secured and other creditors of the company.

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The principle of separate legal personality has further been confirmed in the case of “Lee v Lee’s
Air Farming Ltd (1961) AC 12”. In this case, a person was the owner and managing director of
the company and was also working as an employee of the same. Later on, he died while
performing his duty as a pilot and his wife asked compensation. The court provided the fact that
shareholder was behind the corporate veil was irrelevant as the company has separate legal
personality. The claim of the deceased's wife has been allowed (Bartsch, 2018).
Corporate veil: - The decision of Salomon case provided that there is an artificial veil between
the company and its directors, officers and shareholders. Due to this veil, only a company may
be held liable for all the transactions that have been done in its name, no matter which director
has entered into on behalf of the company.
Lifting of the corporate veil: - Directors and shareholders have declared free from their personal
liability in many of the cases where court established separate legal status of a company. At
many times managers and shareholders of the business started taking unfair benefits of the
doctrine of the corporate veil. To prevent such a situation, another principle has been developed
namely lifting the corporate veil. There are some situations where the court can lift the veil of
incorporation and treat the businesses as they were operating by its individuals or directors. Such
lifting may be authorized through legislation or by a court. Courts have lifted the corporate veil
in many cases where it was seen that directors or shareholders have used the separate entity
doctrine for personal benefit or to avoid existing liabilities. The court has lifted corporate veil in
the case of “Jones v Lipman [1962] 1 WLR 832”, as it has been used to avoid specific
performance under a contract.

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However, in the case of “Petrodel Resources Ltd v Prest (2013)”, the Supreme court has
provided that the court has the power to lift the corporate veil in very limited circumstances
where doing the same becomes necessary and the court has no other remedies to provide. The
separate legal status of a company can only be challenged where a person deliberately evades
his/her obligation using a company that is under his/her control. In many of the cases, courts
have refused to lift the subjective veil. There have been many attempts to persuade English and
Scottish courts that the scope of circumstance where corporate veil can be lifted should be
broadened. “Trustor AB v Smallbone (No 2) [2001] EWHC 703 (Ch)” is one such case where the
managing director of the company transferred the company's money to another company that
was owned by him. Sir Andrew Morritt VC argued that the veil could be uplift even in non-listed
circumstances if the court feels necessary to do so. However, the arguments raised in the case
suggested that the courts adopts a very strict approach while lifting the corporate veil and will
not tolerate any further exception of the basic rule given in Salomon's decision. In the case of
“Woolfson v Strathclyde Regional Council [1978] UKHL 5”, the court held that separate legal
personality is a real thing and corporate veil can only be lifted in cases of fraud or limited
circumstances. However, it seemed necessary to held the people involved in the case personally
liable as they have purchased shares in group companies in mutual which further resulted in an
ultimate loss to the company.
Due to this limited application of the doctrine of the lifting of the corporate veil, many scholars
criticize the doctrine of separate entities given in the Salomon case. If it is applied inflexibly then
it can protect parties unreasonably. It is also said that while giving decision in Salomon case, the
‘House of Lords’ prioritized the separate identity of a company and focused only on this
forgetting the economic reality of "one Person Company” (c). Although the doctrine of the

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lifting of corporate veil is there courts only see it is a hard-core exception and does not actually
lift the veil in every case of doubt. In this manner, the wider application of Salomon gives the
opportunity to promoters of private companies where they can abuse the advantage of the distinct
legal status of the company easily for their personal benefits. The decision of Salomon case soon
turned into an active form of fraud where directors and shareholder believes that in most of the
cases they can skip their liabilities and can commit fraud behind the protection of corporate veil.
There is no clear evidence to prove the fact that there are more negative of Salomon's decision
than the positives, nevertheless from the above-mentioned discussion, it is clear that in those
cases where are unwilling to lift the corporate veil, there are high chances that justice may
remain unserved.
Section B
Minority shareholder often remains at risk of unfair treatment as well as mismanagement at the
part of directors hence they are granted protection under the law. Section 260 to 264 of the
“Companies Act 2006” outlines one of such protection according to that a shareholder is entitled
to bring a statutory derivative claim if actual or proposed action of a director or omission
involves a breach of duty or negligence or breach of trust. This is the first resort that companies
act offers to minority shareholders. The derivative action refers to the right of the company to
sue. Here it is to inform that shareholders may bring such action against the director as well
against a former or shadow director. The important thing to notice here is that the action may
also bring against a director who was not been personally benefited from a breach. It is not
required that the director who breaches their duty or trust must have control of the majority
shares. In case of a successful claim, the company is entitled to receive the compensation and not

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the shareholder personally who has initiated the action. However, he/she can recover the legal
cost out of this compensation amount. The protection of the derivative claim consists of two
stages of permission. Firstly the shareholder needs to get permission from court whether the
same can bring the matter in action and at the second stage it is the court that decides whether to
let the case continue or not after hearing arguments of both the parties. Shareholders may bring
an action in those cases where they find that the directors are not acting in the good faith of the
company or breaching their statutory or fiduciary duties. In the case of “Stainer v Lee & Ors |
[2010] EWHC 1539 (Ch)”, a shareholder brings an action against the company's directors who
have allowed to grant interest-free loans to another company which was owned by one of such
directors. The court allowed this claim stating the fact that the directors breached their fiduciary
duty where their conduct company has suffered a loss of interest over a long period of ‘nine
years’.
Another protection to minority shareholders is given in section 994 of the ‘Companies Act’. As
per this section, shareholders also have an option to make an application (petition) to the court
for seeking an order that the company is carrying or carried out its functions in a way that proves
unfairly prejudicial for its members or a particular member (legislation.gov.uk, 2020). Not
similar to the derivative actions, compensation may be awarded to the shareholder and not the
company under section 994 of the act. The court checks the circumstance of each case in order to
determine whether the conduct reported was unfair prejudicial or not. Here to state that for a
successful claim under section 994 of the act, it is necessary that the conduct of directors must be
prejudicial as well as unfair to the minority shareholders or a particular group of shareholders in
which he involves, however, the action need not be illegal in nature. In addition to this, it is also
not necessary that directors have acted in bad faith or in a negligent manner. Some conducts are

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identified there which can be treated as ‘unfair’ and ‘prejudicial’ to the minority shareholders.
Few of such conduct include those where directors use assets of the company for his/her personal
benefit or the diversion of the business to another company owned by him/her.
If the court believes that unfair prejudicial conduct is there then the court may provide different
remedies, which includes amendment in the article of the company, take over the future
management of the company, requiring the company to take prior permission of the court before
altering its articles and so on. The most common remedy that courts often choose is buying
shares of controlling shareholders at a fair value. The logic behind the same is that it ends the
relationship of those shareholders with the company and prohibits the happening of similar
events in the future.
In the case of “Rodliffe (Simon) v Rodliffe (Guy) and Home & Office Fire-Extinguishers Ltd
(2012)”, the court decided to compulsory purchase of one of the director' shares who has
attacked the other director with a hammer when such other director resisted to pay advance
salary to the liable one. The court considered the action of the liable director as unfair
prejudicial and believed that it was no longer possible to run the company with these directors
and shareholders.
The last resort to minority shareholders seems to be granted under section 122 of the Insolvency
Act 1986. This section outlines some of the situations where a shareholder can make a petition to
the court for winding up of the company on equitable or just grounds (Jones, 2019). As this
petition and any decision in favor of the same may end the future of the company hence court
often looks after and consider the alternative remedies in those cases where the company is a
successful one.

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References
Bartsch, R. (2018). International Aviation Law: A Practical Guide. Oxon: Routledge.
Companies Act 2006
Gibson, A., & Fraser, D. (2013). Business Law 2014. Australia: Pearson Higher Education AU.
Herszberg, D. (2017). Salomon V Salomon: Have the Liquidator’s Arguments Been Buried with
Time?. Enterprise Governance eJournal, 1(1), 6934.
Insolvency Act 1986
Jones v Lipman [1962] 1 WLR 832
Jones, L. (2019). Introduction to Business Law. UK: Oxford University Press.
lawyersnjurists.com. (2020). To what extent have the courts recognized that the principle in
salomon v a salomon may be unfairly exploited? explain & illustrate. Retrieved From:
https://www.lawyersnjurists.com/article/to-what-extent-have-the-courts-recognized-that-the-
principle-in-salomon-v-a-salomon-may-be-unfairly-exploited-explain-illustrate%E2%80%A6/
Lee v Lee’s Air Farming Ltd (1961) AC 12
legislation.gov.uk. (2020). Petition by company member. Retrieved from:
http://www.legislation.gov.uk/ukpga/2006/46/section/994
Rodliffe (Simon) v Rodliffe (Guy) and Home & Office Fire-Extinguishers Ltd (2012)
Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22)
Stainer v Lee & Ors | [2010] EWHC 1539 (Ch)

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Trustor AB v Smallbone (No 2) [2001] EWHC 703 (Ch)
Woolfson v Strathclyde Regional Council [1978] UKHL 5