Corporations Law: Artificial Legal Person, Salomon Case and Future

This report provides an overview of Corporations Law, focusing on the legal concept that companies are considered artificial legal persons. It delves into the implications of this concept, explaining how corporations, although not natural persons, can enter into contracts, own assets, and file lawsuits. The report then examines the landmark case of Salomon v A Salomon And Co Ltd [1897] AC 22, which established the principle of separate legal entity. The analysis includes the future of company law, addressing the challenges and the need for amendments in the Corporations Act 2001, particularly concerning directors' duties and corporate social responsibility. Finally, the report concludes by reiterating the key principles of company law and highlighting the need for ongoing review and updates to ensure effective corporate governance. The report emphasizes the importance of understanding the legal framework governing corporations within the context of globalization and evolving economic landscapes.

Corporations Law
Running Head: CORPORATIONS LAW 0
Student’s Name

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Contents
Introduction......................................................................................................................................2
Legal basis of the statement “Companies are said to be an artificial legal person.”.......................2
Salomon v A Salomon And Co Ltd [1897] AC 22..........................................................................3
The future of company law..............................................................................................................3
Changes that are necessary in the Current Law...............................................................................4
Conclusion.......................................................................................................................................4

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Introduction
Corporations are one of the kinds of Business structures. Alike the Sole Proprietorship Concern,
two or more persons are involved in a corporation. This is necessary to know that two kinds of
bodies are there in a company. One is the body of directors and another is shareholders. Where
directors are the part of management, shareholders present the ownership. In order to provide a
meaning or a definition of a corporation, this can be stated “A Corporation is the legal
association of people that have separated identity from it is owners (CliffsNotes, 2018). A
corporation has several characteristics that make the same different from other business
structures.
Legal basis of the statement “Companies are said to be an artificial legal
person.”
Corporations are not a natural person. It is a form of business venture that gets creates and
developed by the group of certain people that are known as promoters and directors.
Corporations come into existence by the virtue of applicable law. Further, it is to say that a is
termed as a legal person because a corporation can do all the acts and deeds similar to a legal
person. Following are the acts that a corporation can do by it is own name:-
1. Creation of a Contract (Stim, 2016).
2. Purchasing and selling of Assets.
3. Entering into business transactions
4. Filing of Suits

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A company or a corporation is able to act like a natural person as the same can do all the
aforesaid acts. However, as mentioned that the same is not a natural person in actual, it requires a
human brain to take the business decisions on behalf of this, to sign the contracts to file the suits
and to do all the other acts that are necessary to carry out a business. A corporation has no eyes,
nose or other organs but the same can run the business by it is own name with the help of
directors and officers. A company is said to be legal person due to the reason that the same has a
legal identification in the eyes of law, and the same is said to be an artificial person because it is
created via a process other than the natural birth. Law gives birth to a company and directors
develop the same with their efforts. Hence, in conclusion, this would not be wrongful to state
that “Companies are said to be an artificial legal person.”
Salomon v A Salomon And Co Ltd [1897] AC 22
The separate Legal entity is one of the features of a corporation. A Company has an independent
personality and the same cannot be misled with the directors or shareholders. Separate Legal
personality is a significant rule in the area of corporations’ law. According to this rule, a
company has it is a separate legal identity and directors will not be responsible for any act of a
company. As discussed earlier that a company is a legal person, it runs the business by its own
name and this is the reason that a company will be held responsible for every act that is done by
it is own name.
Salomon v A Salomon And Co Ltd [1897] AC 22 is a very important case in the history of
Corporation Law. In this case, a person name Salomon has transferred his current business to a
company named “Salomon Ltd.” and became a member of the same along with other members
of his family. In exchange for such transfer, Salomon has received debentures of the company

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i.e. Salomon Ltd. Later one, when the company started going into the process of liquidation, then
being a secured creditor, Salomon has asked for his claim first over and above rest of the
creditors of the company. Afterward, when this case went to the courts, and proceedings have
started, Salomon argued that his claim was genuine as he was the secured creditor of the
company. It was held in the decision of this case, that although, due to the existence of separate
legal entity rule, company has it is separate identification from it is members as well as directors,
however in this case the said will not be applicable (Law Explorer, 2015). The reason behind
such decision was that whole management of the company was with Salomon and due to the
same; his company cannot be treated as separate from him.
In order to protect the provision of Separate Legal Personality rule, this decision has given in the
cited case. The company in the subjective case was of the UK. As this case was a lead one, it
becomes base of the provisions of modern law (Inns, 2014). Under section 588G of Corporations
Act, 2001 (cth), the personal liability of directors are defined. Hence this can be stated that this
case has taken as a reference while development of Corporations Act, 2001.
The future of company law
Creation and development of every law are relevantly easy in comparison to enforcement. The
same is with Company Law. There are many issues with the same. In Australia, the Corporations
Act, 2001 is the legislation that governs all the corporations and companies in the country. As the
economy is changing and companies are opening up themselves for the global transactions, in
this scenario, the significance of the Corporations Act, 2001 becomes higher. However, this is
also necessary to understand that as many companies will be there, cases related to breaches of
duties of directors and other non-compliances will also be there accordingly. In such a situation,

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the said Act is the only guidelines that will provide the set of rules to the companies. Future of a
law depends on the number of the people to whom the said will be applicable. As mentioned
earlier that due to globalization, a number of companies are expected to increase, this can
mention here that the importance of company Laws are also expected to increase. Although, in
this situation, the other side of the coin cannot be ignored. Along with the significance, a number
of challenges will also be high in the future. Due to such a high number of challenges, the
amendment can be needed in future in Corporations Act, 2001. In addition to this, provisions
related to corporate social responsibilities are also there in the act, the cause of which this act is
expected to be the center of learning and reference. Future is uncertain and no one can predict the
same, but this can be mention that some new provisions can be introduced in Company Law by
way of amendments.
Changes that are necessary in the Current Law
Although every possible provision is covered under, Corporations act 2001 yet there are some
changes that are necessary for this area. Provisions related to duties of the director are mentioned
under section 180 to 184 of the act (Robertson and Tilbury, 2016). These sections require a
director to work in the best interest of the company instead of a specific shareholder. This is the
reason that in many cases directors do the acts that are in against of the interest of shareholders.
Therefore, provisions related to duties towards shareholders are needed to set out clearly in the
law. Further, responsibilities of directors towards society and government also need to define
under the law. It is common that in the absence of a penalty provision, the responsible person
does not follow the liabilities in an ethical way. Although, penalty provisions are defined in the
Corporations Act, 2001, yet some additions are needed in the same.

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Further, section 198A of Corporations Act, 2001 gives the power to the director to manage the
business affairs of the company (austlii, 2018). In conjunction with, according to this section a
director of the company can do all the task except the one that is mentioned under powers of
shareholders or not mentioned under the constitution of the company. It has noted that due to the
powers are given in the said section, directors do misuse of their position, and hence some
amendments in form of restriction are required to develop in relation to the subjective section. In
conclusion, this can be stated that the current provision required some of the changes and
amendments in order to provide a better economic development to the country and businesses.
Conclusion
Companies are the separate legal entities and the same cannot be held liable for the act of it is
directors and officers. Similarly, directors also cannot be held personally liable for the acts that
they do in the capacity of a director. In many of the case, courts have refused to apply the
separate legal personality rule due to the unethical task is done on the part of the directors.
Corporations Act, 2001 is the lead legislation in Australia that provides the set of rules and
provision for the governance of the company. However, due to the globalization and recent
changes in the economy, some of the amendments are required in the said act.

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References
Austlii. (2018) Corporations Act 2001 - Sect 198a. [online] Available from:
http://classic.austlii.edu.au/au/legis/cth/num_act/ca2001172/s198a.html [Accessed on
30/07/2018]
CliffsNotes, (2018) Characteristics of a Corporation. [online] Available from:
https://www.cliffsnotes.com/study-guides/accounting/accounting-principles
ii/corporations/characteristics-of-a-corporation [Accessed on 30/07/2018]
Corporations Act, 2001 (cth)
Inns, J. (2014) Behind The Metaphor: Lifting The Corporate Veil. [online] Available from:
http://jesse-dylan-inns.com/blog/2014/1/19/behind-the-metaphor-lifting-the-corporate-veil
[Accessed on 30/07/2018]
Law Explorer. (2015) The Salomon principle and the corporate veil. [online] Available from:
https://lawexplores.com/the-salomon-principle-and-the-corporate-veil/ [Accessed on 31/07/2018]
Robertson, A and Tilbury, M. (2016) The Common Law of Obligations: Divergence and Unity.
United Kingdom: Bloomsbury Publishing.
Salomon v A Salomon And Co Ltd [1897] AC 22
Stim, R. (2016) Contracts: The Essential Business Desk Reference. 2nd ed. California: Nolo.

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