salomon principle - a blessing or otherwise?

The case of Salomon v Salomon & Co. Ltd has become a landmark law in setting the principle that a corporation is a separate legal entity. The unanimous ruling of the house of the Lords firmly upholds the doctrine of corporate personality. From then onwards, corporations are being treated as a distinct 'person', separated from and independent of the persons who formed it, who invest money in it, and who direct and manage its operations. It follows that the rights and duties of a corporation are not the rights and duties of its directors or members who are, most of the time, obscured by a corporate veil surrounding the company.

The fact that the corporation is a separate legal entity in its own right has birthed many criticisms. What was supposed to be granted as a privilege for legal and business convenience, has turned into a way to commit fraudulent activities and get away with it. The increase of companies going into a state of bankruptcy, workers getting laid off and the poor keep getting poorer are somehow a produce of directors and owners exploiting the Salomon principle. They have billions of dollars stacked away in bank accounts, enough to sustain their succeeding generations of heirs, while the companies are left for doom. This is due to the fact that corporations may have incurred huge losses, but the assets of the directors are to be left untouched as they do not represent the corporation.

Professor Kahn-Freund described the decision of the House of Lords in the case as "calamitious" and called for the abolition of private companies. In his article in the Modern Law Review, he mentioned that the impact on the society by a failing economy and corporations and uses two main approaches whilst at this; first that the interests of the community itself in the distribution, investment of profits of the concern, the prevention of fraudulent transactions affecting the community at large and the measure of publicity should be taken into consideration. The second by the abuse of the principle of a corporate entity and undermining of the company’s capital as a ‘guarantee fund’ by the issue of shares and buy outs in exchange for over valued assets.

The conniving minds of the directors caused the downfall of Fannie and Freddie Mac in the U.S, and now the whole world economy. Such a problem does not call for a legal remedy, but an economic one. Any slight possibility of looking at a legal solution, will be countered by the decision in Salomon.

There is therefore still a debate as to whether the Salomon principle should be applied in a modern legal environment, with directors manipulating the principle for their own good use. Many have referred to this principle as a 'double edged sword', endowing companies with the attributes to be a powerhouse of capitalism yet promoting fraud and the evasion of legal obligations. So what is the final verdict? Yay or nay to the Salomon principle?

Reference:
A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine
Wikipedia
The Social Blog