The paper 'The Doctrine of Limited Liability' is a perfect example of a business assignment. In this case, the legal issue is to determine whether Simon, who is the majority shareholder and managing director of the Slowgo Pty Ltd, is severally and personally liable for the debt incurred while the company was in a state of insolvency. The company has few assets which cannot cover the debt owed to creditors. The separate entity doctrine holds that when an incorporated company becomes a legal person separate and distinct from its shareholders and managers.
Therefore, the law states that the company becomes a body corporate with an autonomous legal existence with the capacity to sue or be sued, and with limited liability. In the underlying doctrine of limited liability, a shareholder member is not required to contribute to help the company settle its debts, beyond the amount originally subscribed for the shares. This doctrine is much reflected in the Corporate Act section (9) in the definition of the ‘ company limited by shares. ’ As a result, the members who have fully paid shares are not required to contribute extra amount to assist the company cover its debts. Salmon v Salmon case and company liabilityThe principle of legal personality was originally formulated by the House of Lords in the United Kingdom, in the very much known case of Salomon v, Salomon and Company limited where Lord Macnaghten was categorical that the limited company is a different person from the people subscribed to the memorandum.
The principle of separate legal persons is contained in the Company’ s Act of Section 16 (1) and provides inter alia that the subscribers along with other persons may become company members who are a corporate body as contained in the memorandum; possess the power of performing functions and activities of an incorporated company; hold perpetual succession, and a common seal, from the time and date of incorporating a company.
Therefore, the decisions and resolutions made in the Salmon v Salmon’ s case are based on certain principles as described below: That the company even so-called one-man company is a legal person separate and distinct from managers and shareholders. That incorporation was also possible for sole proprietorships and partnerships. The members can also subscribe to the debentures. Lifting the veil of incorporationIn exceptional situations, the court is maybe willing to lift the veil of incorporation by treating the company’ s deeds as a responsibility or belonging to another. In certain situations, the Corporate Act is capable of piercing or lifting the veil of incorporation where the company in question is suspected to have been transacting while insolvent.
Piercing or lifting the veil of incorporation, the court is willing and able to make certain people severally and personally liable for the company’ s debt or responsible for bringing back the company’ s situation it would have been if the insolvency did not occur. Under section 588G of the Company’ s Act, directors can be made liable because of failing to prevent the company.
The liability may occur where a person is a director at the time when the company incurs debts and at the same time is insolvent, and there were considerable grounds for detecting that the company would become insolvent, and the director is aware of the fact, the director contravenes the Company’ s Act if he fails to prevent the company from incurring the debt.
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Rudorfer, M. (2009). Piercing the Corporate Veil: A Sound Concept. München: GRIN Verlag GmbH.
Wood, R. W. (2001). Limited liability companies: Formation, operation, and conversion. New York: Aspen Publishers.