Posted: July 2nd, 2015

CORPORATE LAW

The separate legal entity is a form of legal entity under company law that is known to have detached accountability. This entity stipulates that a company or a business may be established independently of the owner who establishes the company. This means that the business now becomes a separate legal entity and is endowed with the same rights as those people enjoy. This way, such a form of business can be sued if necessary and may even enter into a contract as an individual rather than under the shareholders. As stipulated by Australian law, a shareholder of a company can only loose the amount of money he/she has invested in a company in form of shares and not more than this (Thomson, 2015).

However, there are some exceptional cases where the concept of separate entity principle does not hold. There are times when a court of law may summon a company and lift the corporate veil. This is where the court decides to hold the shareholders responsible for the dealings and operation of a company. It should be however, noted that the veil is only lifted when the representatives of the company cannot differentiate the difference that exists between the company as well as the shareholders (Thomson et.al, 2015).

In our case, we refer to the Salomon v. Salomon & co. which is often referred to as the founding case of this practice. This case gave a guideline that should be followed towards lifting a corporate veil. In this case, Salomon was accused of creating a business to carry out his personal work and that he was liable for the losses that resulted from the business. However, despite being found responsible by the court, this was overruled by an act by the house of lords where they stipulated that shareholders right are restricted as per the share of the profits they get and the capital they pump into the business(Thomson et.al, 2015).

Lifting a veil under the common law simply means that the court completely disregards the separate entity principle because the shareholders in a way did not satisfy the requirements or the formalities that should be fulfilled. Lifting the veil under common law is usually practiced when a common law court wants to know about the operating mechanism that a company operates under (Thomson et.al, 2015).

One of the few examples where the veil may be lifted under common law is the scenario where there is fraud. This simply means that the people who are in charge of the company are using this chance as a way of running away from their fiduciary obligations. The most notable form of fraud is when the owner of the company willing fully or intentionally uses this window of opportunity as a way to deprive the creditors of the legal rights they enjoy. The owner of the company will always argue on the basis of limited liability. This way, a common law tries to ensure that the any property that will be acquired after the company has already been declared bankrupt will not be put under the responsibility of the bankruptcy trustees (Thomson et.al, 2015).

This was the case during the Salomon v. Salomon & co. where the liquidators tried to convince that Mr. Salomon had used invalid debentures as securities for his company and argued that this was some form of fraud. This was further argued by Vaughan Williams J during the same case who urged the court to consider that the accused Mr. Salomon sole purpose with the company was to carry out his personal business and further went ahead to stipulate that he was and should be made accountable and liable of the debts of the company especially that of unsecured creditors (Thomson et.al, 2015).

References

Reuters, T. (2). Understanding Company Law 17th ed . Australia: Thomson Reuters.