SLP Flashcards
What distinguishes a company from other business enterprises?
separate legal personality
What are some benefits of SLP?
separation of ownership and control
ability to sue
own property
limited liability
What are the 4 primary elements of a company?
the company as an entity
the shareholders
the directors
externalities like creditors and stakeholders
What are the facts of Salomon v Salomon 1897?
- Aron Salomon was a leather merchant and wholesale boot manufacturer who was a sole trader for many years
- He decided to set up a company consisting of himself, his daughter, his wife, and 4 sons
- when the company was created it was bought at an over evaluation of 39,000£
- the sale was paid partly by issuing a debenture worth 10,000£ to Salomon and partly paid through shares
- Salomon held 20,001 shares and his wife and family held 6 making Salomon the principal shareholder and principal creditor
- On the security of his debentures a Mr. Broderip paid Salomon 5,000£
- Company went insolvent, Broderip was repaid based on his debentures but aside from that the company could not pay the company’s unsecured creditors
- Liquidator sued on behalf of the unsecured creditors arguing the company was a sham intending to commit fraud and that Salomon should be personally liable to them as the company’s principal and it was his agent
What was the issue in Salomon v Salomon?
Whether, regardless of the separate legal identity of a company, a shareholder/controller could be held liable for its debt, over and above the capital contribution, so as to expose such member to unlimited personal liability.
What was held in Salomon v Salomon?
The Court of Appeal, declaring the company to be a myth, reasoned that Salomon had incorporated the company contrary to the true intent of the then Companies Act, 1862, and that the latter had conducted the business as an agent of Salomon, who should, therefore, be responsible for the debt incurred in the course of such agency.
The House of Lords, however, upon appeal, reversed the above ruling, and unanimously held that, as the company was duly incorporated, it is an independent person with its rights and liabilities appropriate to itself, and that “the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are”.3 Thus, the legal fiction of “corporate veil” between the company and its owners/controllers4 was firmly created by the Salomon case.
What are the consequences of SLP?
Company has rights similar to natural persons
Shareholders have limited liability
Company has legal capacity and can sue or be sued
Company has its own assests
What are the merits of the Salomon ruling?
- Legally coherent from a positivist perspective
- Encourages investment by reducing risk which increases potential fr economic growth
- Encourages risk taking and reduces the costs of business
- Ensures liquidity in the economy
- Keeps the financial market going
- Makes liquid wealth and therefore ensures it is used efficiently so the best and most efficient companies survive
Why is management of a company delegated to a board?
- reduces cost
- allows directors to manage the company
- reduces the burden on investors by allowing the investor to economise on the cost of decision making
- allows investors to invest across multiple companies without needing to be involved in the day to day running of them which therefore facilitates investment across multiple companies, lowering risk and increasing overall investment in the economy.
How does delegating the management of a company to a board reduce risk aversion?
- shareholders being shielded from most of the risks of investing makes them more willing to invest
- Wealth tied up in personal accounts or in land isn’t productive
- Wealth flowing around the economy by being invested makes the economy more dynamic so people are more willing to take risks/ innovate
- the company is at its’ core an institutional response to people’s risk aversion
What are the negatives of the Salomon ruling?
- company is being used as a mechanism to escape debt/ liabilities
- impacts creditors and other stakeholders
- increases cost of credit due to the risk of default
- encourages passive investment and a lack of responsibility over what companies do
What happened in the Clery’s example?
- Investor bought Clery’s and formed 2 companies
- Company 1 took the liabilities e.g. employee contracts, creditors
- Company 2 owned the building
- Company 1 paid rent to c2 and never made profit, whereas c2 did consistently
- Investor sold c2 for millions and put c1 into insolvent liquidation making employees redundant and leaving creditors to deal with a liquidator
What did the companies law reform group on protecting creditors and employees 2017 do?
- Enshrined doctrine of limited liability in companies act 2014 s17.2 to limit liability of members of private company limited by shares and bestows limited liability on different types of limited liability companies in the 2014 act
- shareholders of a company are now not liable to the company’s creditors, companies are separate from their shareholders and consequences stemming from that, this is a big reason why the corporate form is used
What did the company law reform group on protecting creditors 2017 do?
- Said limited liability could be open to abuse to evade debts
- But courts are hesitant to disregard SLP in this way because of the beneficial effect of limited liability would be compromised if the veil was pierced regularly
Why is distributive justice the main argument against SLP?
- argues that the overall goal of wealth maximisation by facilitating investment is a utilitarian argument with flaws
- ignoring how the welfare that is maximised is distributed
- a rules maximising aggregate welfare doesn’t leave everyone better off and doesn’t console those who lose for the gains of others
