Incorporation and Corporate Personalities
Introduction
The concept of incorporation and corporate personality addresses the various legal procedures involved in declaring a corporate entity as separate from its owners and assorted queries regarding the rights and liabilities to which the company and individuals associated with it are subject. Incorporation and Corporation Personality also focuses on circumstances, which may lead to lifting of the corporate veil and legislations governing ownership of companies in the United Kingdom. The essay has particularly reviewed the case of Salomon v Salomon & Co Ltd (1897) and that of Littlewoods Mail Order Stores Ltd v Inland Revenue Commissioners (Judge 2010 p. 98). Salomon v Salomon & Co Ltd is an interesting case of corporate law pitting Mr. Salomon and six other shareholders (wife, daughter and four sons). Even though the High Court had ruled in favor of Salomon, the Court of Appeal would later rule against such a decision arguing that Mr. Salomon had abused the privileges that govern incorporation and liability. The Court ruling took another twist when The House of Lords unanimously reversed the decision of the Court of Appeal, renouncing any accusations of fraud. The case of Littlewoods Mail Order Stores Ltd v Inland Revenue Commissioners is on the assessment of the income tax for the years 1960-1961, 1961-1962, and 1962-1963 and against the assessment of profits tax for the financial and accounting periods of 1959, 1860, and 1961. The ultimate ruling restored the decision of special commissioners (Judge 2010 p. 98).
The Case of Salomon v Salomon & Co Ltd
This is a case of corporate law and derives its basis on an organization as an independent legal entity. Although it involved simple elements and considering those involved in the case were exclusively members of one family, it was a landmark ruling in the legal field.
Facts of the Case
As a sole trader, Aaron Salomon was one of the most successful leather merchants. He specialized in the manufacture of leather boots. He ran a successful business before bringing on board other shareholders in his already established entity. His sons became interested in joining the business as shareholders to which Mr. Salomon agreed. Effectively, he decided to incorporate his business as a Limited Company dubbed Salomon & Co Ltd. Seven persons subscribed to the entity at the time of incorporation as always a legal requirement (Rush 2006 p. 199). The members include Mr. Salomon, his wife, daughter, and 4 sons. As the managing director, Mr. Salomon was commanding a colossal 20, 001 out of the 20, 0007 shares of the Company. This means the rest, which include wife, daughter and 4 sons only managed to share equally the remaining shares. Mr. Salomon sold his business to the newly formed corporation consisting of seven shareholders (Salomon & Co Ltd) at a whopping £39,000. Out of the £39,000 price tag, £10,000 was a debt to Mr. Salomon. In effect, he became the undisputed Company’s principal shareholder as well as the company’s principal creditor. He would later ask the company to issue him a debenture of £10,000.
However, the business enterprise went through a period of slow down recording dismal sales. Hence, the company could not raise sufficient funds to pay Mr. Salomon in interests. The wife even tried to inject her own finances to boost operations of the corporation but all in vain. Mr. Salomon took a step further to rescue the situation by transferring the debentures to one B. The company was not sound enough financially to pay. In this particular scenario, B is a secured creditor as far as the company is concerned, and holds trust and respect of his security over Company’s property in terms of debenture. B had to bring on board a receiver and effectively managed to sell the somehow easiest part of the company (Wallace 2002 p. 632). Apparently, B sold the Company’s factory to cover Mr. Salomon’s debts. In effect, selling of the factory ended the business enterprise. Since the business had come to an abrupt end, debts of general creditors such as the general suppliers were unpaid. Liquidation of the company would then ensue which saw selling of a range of company assets to settle the debts. The liquidator, however, argued that debentures that Mr. Salomon used as security for the debt were unsound hence unacceptable (Wallace 2002 p. 632).
The Doctrine
The doctrine originated in 1844 courtesy of the Joint Stock Company Act. It is all about individual legal personality. The doctrine would later incorporate the case of Salomon v Salomon Co Ltd. According to the doctrine, proper incorporation procedures would be inevitable taking into account the legal individualities into individual right with the capacity to bear rights as well as obligations among others (Wallace 2002 p. 632).
The Appeal
The Court ruled in favor of Mr. Salomon citing failure of the later to follow the legal procedures governing rights to incorporation and limited liability. In the view of the judges, the corporation was a mere fiction and myth.
The Lords
The House of Lords overturned the Court of Appeal’s decision. It rejected the agency from fraud (Judge 2010 p. 98). They cited the absence of anything concrete in the Act that would link the shareholders or subscribers becoming independent of the organization. The organization went through proper establishment procedures with the relevant regulations. The House of Lords also made the decision that the judge’s function of reading into law limitations as they themselves considered as useful. The act of 1862 made limited liability organizations as legal entities, distinct and separate from shareholders (Rush 2006 p. 199).
Post-Salomon developments
The judiciary and legislature have defined several exceptional conditions of incorporation and corporate personality mainly in England and other parts of the world.
Littlewoods Mail Order Stores Ltd v Inland Revenue Commissioners
Facts of the case
The case is about two appeals by Little Mail Order stores. One of appeals is about the assessment of income tax. This is during the period of three fiscal years from 1960 to 1963. The second appeal is about the assessment of profits tax between the years 1959 and 1961 (Hicks 2008 p. 106). Littlewoods Mail Order Stores sells a variety of goods in London and other provinces. The company also conducts a mail order business. The main fact of this case is about the profits that the company has made through trading activities. Littlewoods Mail Order Store operates on Jubilee House. The house located in Oxford Street. The company holds the store on a lease of a period not less than 99 years. The company got the lease from a charity company named Oddfellows Friendly Society (Lutter 2006 p. 199). The company got the lease in 1947 at a price of 23, 444 pounds per year. Over the next 11 years, the value of the money reduced since in 1958 Jubilee House valued at two million pounds i.e. if the owners sold it while vacant.
The new value of the building meant that the tenants of the house would pay a significant amount of 60000 pounds a year. This was not in favor of Littlewoods Mail Order Stores. This is because it still had another 88 years to the lease at a price of 23 444 pounds per year (Cassidy 2006 p. 60). In 1958, Oddfellows Friendly Society carried out a deal that would be of significant advantage to both companies. In this new deal, Oddfellows Friendly Society transferred the freehold of Jubilee House. Oddfellows Friendly Society transferred the freehold to Fork Manufacturing Co. Ltd. to Fork Manufacturing Co. Ltd was a subsidiary of Little Mail Order stores. The company fully owned it. The amount of rent that Oddfellows would pay as rent to the Fork Company would be six pounds (Hicks 2008 p. 106). Oddfellows in return would grant an under lease to Littlewoods for twenty-two years at a price of 42,450 pounds per year.
This new deal meant that Littlewoods would give up the 88-year lease from Oddfellows and take up another lease of 22 years at a price of 42, 450 pounds per year. The deal stipulated that Littlewoods through their wholly owned subsidiary (Fork Company) would acquire the whole freehold at the end of the 22 years. Oddfellows would benefit from this new deal by receiving rent of £42,450 for a period of 22 years. The rent that Oddfellows would receive would free of tax. This would be of great benefit to them (Lutter 2006 p. 199). The new deal would be advantageous to them since both parties involved would escape a lot of tax. The disadvantage to this would be that the two companies would lose a lot of revenue if they agreed to the deal. Littlewoods, however, complained about the new deal would ensure that the new rent of £42,450 would be subject to deductions as an expense under the 137 Income Tax Act 1952. The House of Lords would reject this plea (Cassidy 2006 p. 60).
Statement of Lord Denning
In his statements Lord Denning, held that the transfers were not on basis on money wholly for the purpose of trade. This transfer would not be deductible. Lord Denning further said that the courts should look into the nature of transaction and come up with a justified judgment over the case (Rush 2006 p.199). Lord Denning also stated that the court’s ruling should ensure that judgment made while considering the wholly owned subsidiary (Fork Company Limited) considered as a separate entity.
Lifting the corporate veil
The doctrine in the case Salomon vs. Salomon, the court should observe this. The case casts out a veil over the personality of a limited company. People assume that this makes it hard for the court to see this. This is, however, not a fact. The courts do draw aside the veil by pulling the mask off. The legislature shows the way in-group accounts and the courts should follow this example. It is important for the court to view Fork Company to what it is. This company is a subsidiary of Littlewoods. The courts should consider this in a point of law. In this case, we see that Littlewoods has acquired a freehold of Jubilee House, which is a capital asset (Judge 2010 p. 98). They have done this by paying extra as rent in a year from 23 444 pounds to 42 450 pounds. This makes the case not distinguished by Land Securities Case. In this regard, Littlewoods has no entitle to any deductions while computing profits. The extra 19 006 pounds in rent should not be deducted while computing profits. Lord Denning, therefore, lifts the veil between the parent company i.e. Littlewoods Mail Order Stores and the subsidiary company i.e. Fork Company Ltd.
Relevant legal authorities
There are many legal authorities in the United Kingdom. Courts use this to decide on cases involving companies that want to solve a dispute. Courts do this with the help of company law cases. There are also relevant cases that courts in the United Kingdom use as reference guides to solve company disputes. One such is the Hickman v Kent or Romney Marsh Sheep-Breeders’ Association [1915] one Ch 881. This states that an outsider whose rights given in the company’s article cannot sue. The Macaura v Northern Assurance Co Ltd [1925] AC 619 states that for a person to have an insurable interest in a property then he must possess legal interest in the property.
Conclusion
The Littlewoods Mail Order Stores Ltd v Inland Revenue Commissioners case is one interesting case. This plays a major role in deciding over other similar cases. The case has played a key role to the understanding company law. The doctrines in this case help the courts to protect companies against fraud and abuse by other companies. The whole case is an example of how Company Laws helps protect companies that face hard situations.
References
Dignam, Alan J and Andrew Hicks (2011) Hicks and Goo’s Cases and Materials on Company Law. Oxford: Oxford University Press. pp.78
Judge, Stephen (2010) Business Law, Palgrave Macmillan; OR. Ed.4th. pp. 98
Rush, J., & Ottley, M. (2006). Business law. London: Thomson. pp. 199
Sealy, L. S., & Worthington, S. (2008). Cases and materials in company law. Oxford: Oxford University Press. Pp. 350
Smith, D (1999) Company Law Taylor & Francis, pp. 20
Tomasic, R., Bottomley, S., & McQueen, R. (2002). Corporations law in Australia. Sydney: Federation Press. pp. 44
Wallace, C. D. (2002). The multinational enterprise and legal control: Host State sovereignty in an era of economic globalization. The Hague: M. Nijhoff. Pp. 632
Hicks, A., & GOO, S. H. (2008). Cases and materials on company law. Oxford, Oxford University Press.
Cassidy, J. (2006). Concise corporations law. Annandale, N.S.W., Federation Press.
Rush, J., & Ottley, M. (2006). Business law. London: Thomson. pp. 199
Judge, Stephen (2010) Business Law, Palgrave Macmillan; OR. Ed.4th. pp. 98
Lutter, M. (2006). Legal capital in Europe. Berlin, de Gruyter Recht.
