Question

can you please provide answer to this question for 10 marks

Provide a case summary of the case “Salomon v Salomon & Co Ltd [1897]” using the IRAC method. What was the significance of this case law in relation to the legal concept of separate legal entity

Answer 1

CASE SUMMARY OF THE CASE " SOLOMON V SOLOMON & CO LTD. [1897] USING IRAC METHOD

EXPLANATION

ISSUE

“Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr. CSalomon. If it was not, there was no person and nothing to be an agent at all; and it is impossible to say at the same time that there is a company and there is not”

RULE OF LAW

A company in the eyes of law is regarded as an entity separate from its members . It has an independent corporate existence. Any of its members can enter into contracts with the company in the same manner as any other individual can and he cannot be held liable for the acts of the company ev en if he holds virtually the entire share capital. The company's money and property belong to the company , and not to the shareholders.

Further from juristic point of view , a company is a legal person distinct from its members . It has its own corporate personality. This principle may be reffered to as ' the veil of incorporation'. The courts in general consider themselves bound by this principle. The effect of this principle is that there is a fictional veil between the company and its members. Thus, the company has a corporate personality distinct from its members. This principle must be used for legitimate business purposes only. Where the legal entity of a corporate body is misused for fraudulent and dishonest purposes, the individuals concerned will not be allowed to take shelter behind the corporate personality.

The principle of separate corporate personality has been firmly established in the common law since the decision in the case of Salomon v Salomon & Co Ltd, whereby a corporation has a separate legal personality, rights and obligations totally distinct from those of its shareholders. Legislation and courts nevertheless sometimes “pierce the corporate veil” so as to hold the shareholders personally liable for the liabilities of the corporation. Courts may also “lift the corporate veil”, in the conflict of laws in order to determine who actually controls the corporation, and thus to ascertain the corporation’s true contacts, and closest and most real connection.

ANALYSIS

The case of Salomon v Salomon revolves around Mr. Salomon, a businessman who incorporated his business; and given the requirements put forth in the Companies Act 1862 which require the presence of at least seven shareholders, he made his family members as business partners issuing one share to each of them .

The business was bought at £39,000. Mr. Salomon held some 20,000 shares and since £10,000 was not paid for, he was paid the remaining amount by debentures and granted a floating charge on the company’s assets as part payment . Soon after the business had been incorporated, the shoe industry witnessed a series of strike which led to the government’s decision to split contracts with several other firms with the aim of diversifying and reducing the risk of its few suppliers, given the ongoing strikes .

Since the company was in need of more funds, they sought £5,000 from Broderip. Salomon’s debenture was then assigned to Broderip and secured by a floating charge . In the end, however, the business failed and Broderip sued to enforce his security.

CONCLUSION

Given that, at the time, the company was indebted to unsecured creditors; an action against the appellant was brought by the company’s liquidator and the case tried before Vaughan Williams, J. of the high court . Vaughan Williams J declared Broderip’s claim to be valid arguing that the signatories were just but mere dummies and that Mr. Salomon was acting as an agent of the company . Thus the company was entitled to indemnity from the principal who in this case was Mr. Salomon

Source: Stephen, J. Business organisations and the veil of incorporation. In: Q & A: Company Law. Oxford university press.