Salomon V Salomon And Co Ltd Principal example essay topic

The concept of Limited Liability for a company can be traced back to the 1897 land mark case of Salomon V Salomon and Co Ltd. In this case it was established that the actions of a company, are that of the company and not of the shareholders themselves. This is written into the Companies Act 1993 which states that "a company is a legal entity in its own right separate from its shareholders" (Legislative Extracts, School of Accountancy, 2001). This law separates the company as another individual person / entity which will be held responsible for the fortunes of the company and separates all blame from the directors / shareholders of the company except under situations where the veil is lifted. This will however lead to situations where justice can not be carried out as people will commit various injustices and hide behind the shield that the doctrine, in the case of Salomon V Salomon and Co Ltd created. This is what the Securitibank principal is designed to counteract, this principal allows the veil to be removed in situations where the result "would create a substantial injustice, which the court simply cannot countenance.

Something really compelling must be shown to go behind the veil" (Study Guide 1). The lifting of the Veil that is mentioned in the above concept is "a description of the process by, which in certain situations the courts can look behind the corporate facade and identify the nature of a transaction and the reality of the relationships created. It is not a principal. It describes the process but provides no guidance as to when it can be used" (Watson, 2003). If the veil is successfully removed this would then create unlimited liability, directors or shareholders may then become liable for any criminal or financial proceedings that may take place due to wrong or illegal practices. This is usually only done when the company has been committing dishonest activities or failing to follow the proper practices; these may include ignoring legal obligations as in Jones V Lipman, Sham transactions or not following legislation.

The legislations which have provisions for these actions are the Income Tax Act, Fair Trading Act, Resource Management Act and The Companies Act. Together they have various sections that prohibit such acts such as dishonesty in trades, tax evasion and fraudulent activities. Incorporation can be utilised by a company in order to make a mockery of justice. In order to keep faith in the court systems the Salomon doctrine may at times have to be ignored.

In the case of the Standard Chartered Banks V Pakistan National Shipping Corporation, a director made a false statement deliberately in order to obtain a letter of credit. The director then tried using the Salomon V Salomon and Co Ltd principal to say that he done the fraudulent act under the companies name and that they were vicariously liable. The House of Lords found in this case that a director can not escape personal liability on the grounds he acted on behalf of and for the benefit for the company and in doing so he lifted the veil. Lord Hoffmann summed it up by saying that "No one can escape Liability for his fraud by saying I wish to make it that I am committing this fraud on behalf of someone else and am not to be personally responsible". (web).