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Key Topics
Requirement
Write essay on “Companies are said to be an artificial legal person".
Solution
Legal Basis
A company is an artificial person, which signifies that company is not a biological or a natural person. Artificial persons are those, which did not exist prior to man creating them and giving them a status of a legal or juristic person. So, a company or a corporation is artificial, since its birth is made by the legal process, and hence unlike the natural birth as in humans. The only existence of this artificial person, comes with the law and the operations of it. So, like a natural person, i.e. human being, it has its own rights and liabilities, and due to this unique nature, it is distinct from other business entities like that of the partnership and the sole proprietorship. Being a separate legal person, it has separate legal entity, and hence can sue and be sued (Foss v Harbottle, 1843) under its own name and this status is separated from the rest of the members within the company, i.e. the directors or other members to it and have the perpetual succession (Regal (Hastings) Ltd v Gulliver, 1942). Hence, the status as an artificial person, gives the company such distinct features that it is often involved into buying, selling like a natural person and can also be fined if found at fault (Macaura v Northern Assurance Co Ltd, 1925).
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Landmark Decision in 1897 and incorporation in (Corporation Act, 2001)
House of Lords back in 1897 in the landmark decision of (SALOMON V A SALOMON AND COMPANY LTD, 1897), decided the matter in front of it with an advanced proposition that the company do have a separate legal existence and is a solely separate legal personality. As of today, facts of the (SALOMON V A SALOMON AND COMPANY LTD, 1897), so, facts will be briefly discussed. S started a business for manufacturing boots and was a sole trader, but subsequently, the entity was shifted and the business became a company, where S as consideration, allotted himself shares and debentures, along with his wife and children. When the company became insolvent, S claimed as secured creditors. This is where the dispute heightened. House of Lords while deciding (Broderip v Salomon, 1895), overruled it fully and endorsed the separate entity of a company in to corporate law. (Corporation Act, 2001), under section 124(1), upholds this and hence, on the basis of that, limited liability is conceptualized, where if the company run into debts, or sustain damage in any form or manner and get penalized, then the directors cannot be held liable. So, House of Lords, in (SALOMON V A SALOMON AND COMPANY LTD, 1897), actually held that, company cannot be construed as being the agent of the shareholder, so while interpreting this, corporation contracts were also not considered as having the relationship of agent and principal (JH Rayner (Mincing Lane) Ltd v Department of Trade & Industry , 1989). But, till today there is no explicit principle about breaking or piercing the corporate veil and look beyond to find the real misdemeanor. There are exceptions though, from where the relationship of agencies gets applicable to the circumstances, thereby attributing the principal the liability for the consequences. So, based on this quasi exception, can there be any significance so that the arguments set forth by the liquidator in (SALOMON V A SALOMON AND COMPANY LTD, 1897) can be invoked in today’s perspective. Court in (Wallersteiner v Moir (No 2), 1974), pierced the veil, where a subsidiary company was treated as a non- entity or rather a puppet by the parent company, which was again the sole argument in (SALOMON V A SALOMON AND COMPANY LTD, 1897) made about having the control on the company. Again, Court in (SMITH, STONE AND KNIGHT LIMITED V BIRMINGHAM, 1939), held that in order to displace from the decision made in (SALOMON V A SALOMON AND COMPANY LTD, 1897), argument by the liquidator will have significant effect, but again in (JH Rayner (Mincing Lane) Ltd v Department of Trade & Industry , 1989), it was held that, every case depends on its own facts and hence Simon cannot be accepted as a principle to rest upon, thus (SALOMON V A SALOMON AND COMPANY LTD, 1897) cannot be a basis as well from today’s viewpoint.
Future of Company Law
Since (SALOMON V A SALOMON AND COMPANY LTD, 1897) was decided back in 1897, it faced a lot of controversies (Qintex Australia Finance v Schroders Ltd, 1990) and debates (Equiticorp Finance Ltd (in liq) v Bank of New Zealand, 1993). But, Court in (Industrial Equity Ltd v Blackburn and Walker v Wimborne, 1977), (Pioneer Concrete Services Ltd v Yelnah Pty Ltd , 1987), (Adams v Cape Industries plc, 1990), and (Commissioner of Taxation v BHP Billiton Minerals Pty Ltd, 2011), also held that application of (SALOMON V A SALOMON AND COMPANY LTD, 1897) in corporate sectors, is to create a distinct entity for the companies. But, with the passage of time, the implementation of this application of (SALOMON V A SALOMON AND COMPANY LTD, 1897) became difficult. England in (DHN Food Distributors Ltd v London Borough of Tower Hamlets, 1976), held corporate group as a single unit in the economic enterprise, but this move is accepted in Australia, since denying realities of commercial activities and acknowledging (SALOMON V A SALOMON AND COMPANY LTD, 1897), at the same time was proved to be difficult. So, controversies got heightened in (Qintex Australia Finance v Schroders Ltd, 1990), when Court faced difficulty while resolving the conflict of individual company who undertook the foreign exchange contracts, and hence again (SALOMON V A SALOMON AND COMPANY LTD, 1897) was proved to be unjustified. Thus, law was not only lagging behind, but also operating as one who is intentional blind, and do not want to face the reality.
Changes necessary in current law
So, to bring reform, the Legislatures must take the initiative and in so doing something must be enacted so that the doctrine of piercing corporate veil do not have to be dependent on facts of the individual cases, and in so doing the wrong doer’s action in fault will be underpinned. So, if the reform comes, then only the law will identify the reality and will depart from fiction. In order to be aligned with the current legislation, and also to stay in parity with sections 180 and 181 of (Corporation Act, 2001) for making the directors liable for the conducts which are wrongful, if the parent company can be imposed such duties like that of the directors, then the concerned issues in relation to tortfeasors followed by fraud and also misrepresentation can be brought under control. But, this is not well accepted in English Law, and Court in (Prest v Petrodel Resources Ltd, 2013), held that concealment { as was held in (Gencor ACP Ltd v Dalby, 2000) and (Trustor AB v Smallbone (No 2) 4, 2001) }, as well as evasion {which was held in (Gilford Motor Co Ltd v Horne, 1933) and also in (Jones v Lipman, 1962)}, is creating the base to pierce the veil, which in a way synthesises the fault or the wrong finding approaches as claimed under this proposed reform, to be made applicable. This proposal if implemented, might not bring miraculous change but, the manipulations or the deceptive tactics invoked by (SALOMON V A SALOMON AND COMPANY LTD, 1897) will be extinguished and when the (SALOMON V A SALOMON AND COMPANY LTD, 1897) principle will be applied, it will be done with certainty. Court is normally under the opinion that, (SALOMON V A SALOMON AND COMPANY LTD, 1897) can only made applicable as the last recourse as was held in (VTB Capital plc v Nutritek International Corpn, 2012) and also in (Prest v Petrodel Resources Ltd, 2013), when all other means were made exhausted. The principle as laid down in (SALOMON V A SALOMON AND COMPANY LTD, 1897), was to provide the company with a practical utility along with the concept of separate legal existence, followed by perpetual succession, etc. but, this case cannot be inflexibly made applicable, because, if that is done, then it will only prove to be detrimental for those persons, who are not at all in fault. So, (SALOMON V A SALOMON AND COMPANY LTD, 1897) can be applied in such cases, where it would be just (Green v Green , 1993) and also reasonable (Mubarak v Mubarak, 2001).
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Adams v Cape Industries plc (1990).
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Broderip v Salomon (1895).
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Commissioner of Taxation v BHP Billiton Minerals Pty Ltd (2011).
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Corporation Act, 2001. (Corporation Act. [Online]
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Available at: https://www.legislation.gov.au/Details/C2013C00003
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DHN Food Distributors Ltd v London Borough of Tower Hamlets (1976).
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Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993).
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Foss v Harbottle (1843).
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Gencor ACP Ltd v Dalby (2000).
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Gilford Motor Co Ltd v Horne (1933).
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Green v Green (1993).
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Industrial Equity Ltd v Blackburn and Walker v Wimborne (1977).
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JH Rayner (Mincing Lane) Ltd v Department of Trade & Industry (1989).
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Jones v Lipman (1962).
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Macaura v Northern Assurance Co Ltd (1925).
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Mubarak v Mubarak (2001).
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Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1987).
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Prest v Petrodel Resources Ltd (2013).
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Qintex Australia Finance v Schroders Ltd (1990).
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Regal (Hastings) Ltd v Gulliver (1942).
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SALOMON V A SALOMON AND COMPANY LTD (1897).
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SMITH, STONE AND KNIGHT LIMITED V BIRMINGHAM (1939).
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Trustor AB v Smallbone (No 2) 4 (2001).
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VTB Capital plc v Nutritek International Corpn (2012).
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Wallersteiner v Moir (No 2) (1974).
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