Company Legal Entity. Essay

6604 words - 26 pages

The notion of separate legal entity and limited liability first created by the case Salomon v. Salomon & Co Ltd [1897] AC 22 had generated debates on whether an artificially formed entity should be granted the rights analogous to a natural person and, more importantly, permit those who own and control it to be immune from liability.I evaluate and discuss the legal position regarding the above statement with reference to the Corporations Act 2001 and relevant cases.Introduction.1. The decision of the House of Lords in Salomon v Salomon & Co Ltd evinces the accuracy of Gooley's observation that the separate legal entity doctrine was a "two-edged sword".[2] At a general level, it was a good decision. By establishing that corporations are separate legalentities, Salomon's case endowed the company with all the requisiteattributes with which to become the powerhouse of capitalism. At aparticular level, however, it was a bad decision. By extending thebenefits of incorporation to small private enterprises, Salomon's casehas promoted fraud and the evasion of legal obligations. Nonetheless,this article will argue that the overall balance is positive.Salomon v Salomon.2. At its most general level, the decision of the House of Lords inSalomon v Salomon & Co Ltd was a good decision. Salomon's case isuniversally recognised as authority for the principle that acorporation is a separate legal entity.[3]3. The case firmly established that upon incorporation, a new andseparate artificial entity comes into existence. At law, a corporationis a distinct person with its own personality separate from andindependent of the persons who formed it, who invest money in it, andwho direct and manage its operations.[4] It follows that the rightsand duties of a corporation are not the rights and duties of itsdirectors or members who are, most of the time, obscured by acorporate veil surrounding the company.[5]4. The recognition that a corporation is a separate legal entity in itsown right is the foundation of modern corporate law: MacLaine Watson &Co Ltd v Department of Trade and Industry.[6] Indeed "[e]very systemof law that has attained a certain degree of maturity seems compelledby the ever increasing complexity of human affairs to create personswho are not men...".[7] Consistent with this observation, Arnoldstates that "[o]ne of the essential and central notions which give ourindustrial feudalism logical symmetry is the personification of greatindustrial enterprise."[8]5. Support for the principle of the separateness of legal personality,shared amongst academic commentators, has been unbroken in legislativeand judicial circles. Notably, this principle is enshrined in section124 of the Corporations Act. Similarly, the judiciary has, with minorexceptions, consistently reaffirmed the need to treat this legaldoctrine seriously.[9] Subsequent English and Australian judicialdecisions have upheld the Salomon principle.[10] In other words, sincethe decision in...

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