Notesale: Turn your study into money

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Table of Contents
1
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2
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2
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Ltd
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3 Origin
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Ruling of the Case
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3
2
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3
3
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1 Artificial person
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2 Limited Liability
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Disadvantages of Salomon’s principle
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Lifting the Corporate Veil
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7

1

1
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Encase of Company failure of repaying its debt the
shareholders are insulated from such liability and the company can just be liquidated to
finance the outstanding debt without transferring the company’s managerial structure and to
the creditors
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1 Salomon’s principle
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The principle explains that a company is a separate legal entity
in the eyes of law
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2 Salomon v A Salomon & Co Ltd (1897)
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K Company case law where House of Lord Court uphold firmly separation between
the shareholder and the company as set up in the Companies Act 1862, thus creditors cannot
sue the company’s shareholder to pay outstanding debt of the company
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3 Origin in (1890s)
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Aaron Salomon was a Jewish leather merchant in Victorian England and he set up a
company with the required 7 shareholders (his wife and children) thus making his company
Limited
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Later on Salomon’s business collapsed leaving unpaid
debts, interest rate on the debentures half held by Broderip
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Broderip was repaid leaving little company asset which was claimed
by Salomon, leaving nothing for the unsecured creditors
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K court of Appeal felt Salomon was a fraud and his company was a sham
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2
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This includes issues discussed by Court of Appeal and House of Lords
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Limited
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Views from both courts are as follows:
2
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Salomon that Mr
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The Court of Appeal strongly
argued that 6 members of the family were never intended to take part in the business
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Salomon to carry on as before but with limited liability
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2 House of Lords
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They argued that there was nothing in the Act about
whether the members (shareholders) should be independent from the majority shareholder
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They concluded that the business belonged to the company
and not Salomon rather Salomon was just its agent
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3

3
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The following principles resulted from the case:
3
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The company is a juristic (artificial) person under the law
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These individuals whenever they bind in
contract with other parties, they bind the company and not themselves
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3
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The Company is liable to its debts and not the members of the company
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The shareholder liability to contribute is determined by the face value of the
shares they hold
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From the principle the following problems arises
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From the principle it’s
likely the to have no compensation to creditors (entrepreneurs) when the company fails to pay
its debt even when the service/product is consumed and contract ended
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4

Reduction of membership
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Liability for ultra vires acts
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This is when a director tends to excessively use
power
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Mis-description of Company name
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Formality and expense
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It recquires alot of
formalities to be complied and meet legal obligation unlike partnership
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Even when under law the company is regarded separate
from its members as a legal entity, at some times there is a need of identifying people behind
the company
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b) Trust or Agency or Government Company-For public company the company is under
the government and everything is made aware to the public
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d) Enemy character-This arises within the company when shareholders are in conflict
over their activities/ decision making in the company
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Lifting the corporate veil is when a limited company is made known to the court by
disclosing its managers, employees, contracts and other managerial structure and activity
performed by the country
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The veil is only lifted when Company faces
fraud, group enterprises, agency, enemy character and many other factors
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6

REFERENCE
McCormack N
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Carswell
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(2000), Chitty on Contract,31st Edition, 2Volume
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ISBN
978041032835
Dowding N; Reynolds C
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The Modern Law and Practises, Sweet &
Maxwell

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