Law of Business Organisation Case Study 2022

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

238CLS 1
Contents
Section A.........................................................................................................................................2
Section B..........................................................................................................................................5
References........................................................................................................................................8

238CLS 2
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.