Gonzalo villalta puig a two edged sword salmon and

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Gonzalo Villalta Puig, ‘A Two Edged Sword: Salmon and The Separate Legal Entity Doctrine’ (2000) 7(3) Murdoch University Electronic Journal of Law32.81Gonzalo Villalta Puig, ‘A Two Edged Sword: Salmon and The Separate Legal Entity Doctrine’ (2000) 7(3) Murdoch University Electronic Journal of Law32.82Ibid.83Corporations Act 2001(Cth) ss 19 and 124; Oscar Shub, ‘Piercing the Corporate Veil’ (Working Paper, Allens Arthur Robinson, July 2005) 1.84Salomon v A Salomon & Co Ltd [1987] AC 22.85Ibid.
20Salomon (the debentures being a secured charge over the company’s assets), £1000 paid in cash to Salomon an £8000 payment in discharge of the debts of the business.86Business went into decline and Salomon injected more funds, which were apparently insufficient to stabilize the company. He then borrowed £5000 from Edmund Broderip by reissuing the debentures in Broderip’s name. However, the business deteriorated further and eventually the company went into liquidation. The liquidator found that the company’s assets were worth only £6000. £5000 was used to repay Broderip’s claim, and the remaining £1000 was repaid to Salomon, the debenture holder, because the debentures were a secured charge over the company’s assets. After these repayments, there would be nothing left to repay of the £8000 owed to the unsecured creditors. The liquidator attempted to hold Mr Salomon personally liable as a director for the debts of the company. The liquidator argued that the debentures used by Mr Salomon as a security for the debt were invalid, and that Salomon had committed fraud by deceiving the unsecured creditors with the excessive price of the business. Williams J in the High Court, Vaughan J and the other judges in Court of Appeal ruled against Mr Salomon on the grounds that the company was Mr Salomon’s agent to commit fraud and Mr Salomon as a principal was liable for debts to unsecured directors.8786Debentures are long-term security yielding a fixed rate of interest, issued by a company secured against assets, Corporations Act 2001(Cth) s 9; Levy v Abercorris Slate and Slab Co (1887) 37 Ch D 260, 264.87Salomon v A Salomon & Co Ltd [1987] AC 22, 51.
21The House of Lords unanimously overturned the decision and held that:A company is not, per se, the agent of its shareholders, even if control is concentrated in only one shareholder. The mere fact that a person owns all the shares in a company does not make the business carried on by that company his business. Once the company is legally incorporated, it must be treated like any other independent person with rights and liabilities of its own.88In other words, the House of Lords affirmed the legal principle that, upon incorporation, a company is considered as a new legal entity, separate from its shareholders. The company has its own right and liabilities. Therefore, Mr Salomon was not liable for the company’s debts.893 Post-Salomon’s case The Salomon’scase established the foundation rule that a company is recognised by law as a legal person with its own rights and liabilities, and not merely an agent of its owners.

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