Corporations Law Report

This report analyzes the concept of separate legal entity in corporations law, discussing its legal basis, implications, and landmark cases such as Salomon v A Salomon And Co Ltd. It highlights the importance of this principle in protecting corporate members from personal liability and addresses the future of corporate law in light of globalization and modernization.

Running head: SEPARATE LEGAL ENTITY 0
Corporations Law

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Table of Contents
Introduction................................................................................................................................2
Artificial Legal Person...............................................................................................................3
Legal Basis of Separate Entity...................................................................................................3
Salomon v A Salomon And Co Ltd...........................................................................................4
Future of Corporation Law.........................................................................................................5
Requirement of Changes............................................................................................................5
Conclusion..................................................................................................................................7
References..................................................................................................................................8

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Introduction
A corporation is considered as an artificial person in the eyes of the law means it has several
rights and liability including the right to own property, sue or being sued, enter into a contract
and issues shares to raise capital. A company has separate legal entity from its owners and
directors meaning they cannot be held liable for the actions of the organisation. The concept
of an independent entity was introduced in Salomon v A Salomon And Co Ltd case. This
report will focus on analysing the legal basis of the provision of the different legal entity in
the corporation’s law. The importance of Salomon v A Salomon And Co Ltd case will be
discussed in the report as well. Further, the future and necessity of separate legal entity act
will be addressed in the report.

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Artificial Legal Person
Artificial legal person means an entity which is not a human being, who is recognised by the
law as legitimate being and has a separate identity, character, rights, and duties. As per
Banerjee (2008), a company is considered as an artificial legal person as per Corporations
Act 2001; it has several rights and liabilities which can be enforced by the court. An
enterprise is regarded as unnatural because it did not have physical parts or brain to function
as a natural person, therefore the business is operated by directors and members. The identity
of an organisation is different from those people who run its operations. A company is liable
for its actions rather than the persons who operate its operation (Archer and Karim 2009).
The rights and liability of corporations are originated from the law, right after its
incorporation. For incorporating organisations, it is necessary that the company is registered
under the Corporation Act 2001, which provides provision regarding various rights and duties
of an enterprise. As per section 112, the companies are divided into two parts by the act,
public and proprietary. The public corporations are divided into two parts:
 Limited by Shares
 Unlimited with share capital
There are four types of proprietary companies:
 No Liability
 Limited by Shares
 Limited by Guarantee
 Unlimited with share capital
Legal Basis of Separate Entity
The separate legal entity is a concept regarding corporations which is globally applicable
over companies. This principle provides that an enterprise is considered as independent being
from its members. According to Ramsay and Noakes (2001), a separate existence meaning
corporation can buy or sell the property, enter into a legal contract, sue or be sued, and raise
investment under its name. The peoples, who operate and decide for the company’s
transactions, cannot be held liable towards the actions of an enterprise. Being an artificial
person, the various principle of natural human being did not apply to corporations, for

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example, a company cannot die, and therefore it has perpetual succession. The entity of
corporate cannot be altered by a change in its management, even after the death of each
member, the existence of corporation remains the same in the eyes of the law. As per Rose
(2013), in Macaura v Northern Assurance Co Ltd [1925] AC 619 case, the insurance claim of
a person was rejected by six insurers because the property was under the name of
corporations. The court provided that even if a person holds all the shares in businesses, he
still cannot be considered as the corporations because the company has a separate entity from
its owners and members. This case proves the principle that an organisation can hold a
property under its name and all the rights of such property shall be the company’s rights
(Noussia 2008).
The company’s right to enter into a legal agreement was provided in Lee v Lee’s Air Farming
Ltd [1960] UKPC 33 case, in which Lee formed the corporations, and he was also the
director and principal shareholder of such organisation. The companies enter into a contract
with farmers to provide the service of aerial topdressing. Lee died while performing the work
and his wife file for workers compensation because Lee works in his company as an
employee (Baragwanath 2012). The insurance companies denied the claim by stating that Lee
was the director of such corporation. The court provided that never assume an enterprise to be
a scam; a company has its own identity which cannot be changed merely because Lee was the
director of such business. This case also provides the right of the company to employ worker
under its name (Barrett 2016). These examples show the importance of separate legal entity
principle in the corporation law.
Salomon v A Salomon And Co Ltd
The provision of the separate legal entity was first introduced in R v Arnaud (1846) 9 QB 806
case, in which the court provided that a corporation has an independent body which cannot be
mix with the existence of its owners (Kouo 2016). But, Salomon v A Salomon And Co Ltd
[1897] AC 22 was considered as the landmark case in establishing the principle of separate
legal entity worldwide. The fact of this case is: Salomon sold his shoe business to another
company which was founded by him. The shareholders of the company include his family
members and Salomon himself. Salomon transferred the debentures of £10,000 of the
company to another party. The business of organisation did not perform well, and it went into
insolvent liquidation (Amaeshi, Osuji and Nnodim 2008).

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The liquidator provided that Mr. Salomon was liable towards the creditors because he
conducted fraud and take all their money. The court of appeal provided a similar judgement
by holding Mr. Salomon personally accountable for corporation’s debts. The House of Lord
gave a unanimous decision that Mr. Salomon was neither liable towards company nor the
creditors (Ping and Wing 2011). The debentures issued by Salomon were valid, and he tried
his best to avoid the liquidation of the company. The court decided that the corporation has
separate entity from Mr. Salomon, and he cannot be held liable towards the debt of the
creditors. As per Anderson (2009), the Salomon v A Salomon And Co Ltd case has
significant influence over the Corporations Act 2001 because it introduced the policy of
corporate veil which protects company’s members from being personally liable.
Future of Corporation Law
The provision of separate legal entity is a century old principle which is applicable globally
over corporations. The ridged provision of corporate veil is still relevant to the enterprises.
With the popularity of globalisation, the number of companies has grown substantially along
with competition. Many corporations use this principle to conduct fraud in the organisation to
gain an unfair advantage. Due to the rigidity of this rule, many people suffer loss from actions
of enterprises. To avoid this issue, the doctrine of ‘Piercing of corporate veil’ has been
provided by the law. This principle enables the court to pierce or lift the corporate veil and
hold the directors liable for their acts (O’Sullivan, Percy and Stewart 2008).
Many experts believe that the concept of separate entity should be dismissed because the
directors take all the decision for a company. Thus, they should be held liable for its illegal
actions. But in the future, the doctrine of separate identity will not vanish because due to this
principle a company has various benefits. Due to the independent legal entity, a corporation
has perpetual succession which is necessary the growth of the business. People prefer to
invest in firms because they do not help personally liable for its actions, for the growth of
companies in the future, the doctrine of separate legal entity is necessary.
Requirement of Changes
Due to globalisation and modernisation in a business environment, there is a requirement of
changing in regulations regarding the corporate veil. In the present scenario, the role of the
doctrine of corporate veil is crucial to protect the interest of the public. This principle

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restrains corporations from misusing the provision of corporate veil and takes unfair
advantage of the public interest. In the swiftly changing business environment, the
requirement of strict regulations is necessary to protect the benefit of the public. The doctrine
of corporate veil is essential for the growth of corporations, but better laws are in need to
control the illegal transaction of the firms. The government should change the rules and bring
more strictness in the existing rules regarding corporate veil. The directors should be stopped
from taking the wrongful assistance of various provision to save society from misleading
practices (Matheson 2008).

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Conclusion
In conclusion, the separate existence principle is a century old rule which is still necessary for
the growth of the modern organisation. This law assists companies to perform their actions as
a different legal person from its members, and it also provides perpetual succession to a
corporation. Many enterprises misuse this doctrine to gain an unfair advantage from the
society. The policy of piercing of corporate veil assists the court in checking the person liable
for company’s actions and held him personally accountable for his acts. In the future, the
requirement of strict policy is necessary to avoid the misuse of corporate veil provision which
will help in the protection of society’s interest.

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References
Amaeshi, K.M., Osuji, O.K. and Nnodim, P., 2008. Corporate social responsibility in supply
chains of global brands: A boundaryless responsibility? Clarifications, exceptions and
implications. Journal of Business ethics, 81(1), pp.223-234.
Anderson, H., 2009. Piercing the veil on corporate groups in Australia: the case for
reform. Melb. UL Rev., 33, p.333.
Archer, S. and Karim, R.A.A., 2009. Profit-sharing investment accounts in Islamic banks:
Regulatory problems and possible solutions. Journal of Banking Regulation, 10(4), pp.300-
306.
Banerjee, S.B., 2008. Corporate social responsibility: The good, the bad and the ugly. Critical
sociology, 34(1), pp.51-79.
Baragwanath, D., 2012. The Later Privy Council and a Distinctive New Zealand
Jurisprudence: Curb or Spur. Victoria U. Wellington L. Rev., 43, p.147.
Barrett, J., 2016. Employee-citizens of the human rights state. New Zealand Journal of
Employment Relations (Online), 41(2), p.21.
Kouo, C., 2016. Post-Prest Corporate Group Veil Piercing: Alternative Avenues to
Justice. Legal Issues J., 4, p.65.
Matheson, J.H., 2008. The modern law of corporate groups: An empirical study of piercing
the corporate veil in the parent-subsidiary context.
Noussia, K., 2008. Insurable Interest in Marine Insurance Contracts: Modern Commercial
Needs Versus Tradition. J. Mar. L. & Com., 39, p.81.
O’Sullivan, M., Percy, M. and Stewart, J., 2008. Australian evidence on corporate
governance attributes and their association with forward-looking information in the annual
report. Journal of Management & Governance, 12(1), pp.5-35.
Ping, Z. and Wing, C., 2011. Corporate governance: A summary review on different theory
approaches. International Research Journal of Finance and Economics, 68, pp.7-13.
Ramsay, I. and Noakes, D.B., 2001. Piercing the corporate veil in Australia.

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Rose, F., 2013. Marine insurance: law and practice. CRC press.