The Relationship Between a Corporation and its Shareholders: The Cases of Solomon versus Solomon (1897) and Lee versus Lee Air Farming (1961)
In law, a corporation is a legal entity that is separate and distinct from its owners. The owners of a corporation have limited liability for the debts and obligations of the corporation. A corporation is a business entity that is chartered by a state or federal government. The owners of a corporation are known as shareholders. A shareholder has the right to vote on corporate matters, and the right to receive dividends on their shares. A shareholder is also entitled to the assets of the corporation in the event of its dissolution.
A creditor of a corporation is an individual or entity to whom the corporation owes money. A creditor has a claim against the assets of the corporation in the event that the corporation defaults on its debt obligations. A creditor may also bring a lawsuit against the shareholders of the corporation for the unpaid debts of the corporation.
In incorporation law, there are two important cases that have shed light on the relationship between a corporation and its shareholders: Solomon versus Solomon (1897) and Lee versus Lee Air Farming (1961).
2. The Cases of Solomon versus Solomon (1897) and Lee versus Lee Air Farming (1961)
2. 1 Solomon versus Solomon (1897)
In 1897, the English Court of Chancery issued a decision in Solomon versus Solomon & Co., Ltd., which was a landmark case in English incorporation law. The case concerns the question of whether a shareholder can be held liable for the debts of the company beyond the amount of their investment in the company.
The case began when Mr. Samuel Solomon, who was a shareholder in Solomon & Co., Ltd., brought suit against another shareholder, Mr. Albert Lee, for payment of his share of the company’s debts. Mr. Solomon contended that, as a shareholder, Mr. Lee was liable for the debts of the company up to the full value of his shares. Mr. Lee argued that he should only be liable for his share of the company’s debts, and not for the debts of the company as a whole.
The court found in favor of Mr. Solomon, holding that shareholders are jointly and severally liable for the debts of their company beyond their investment in it. This decision established that shareholders are liable for the debts of their company even if they do not directly participate in its management or control its operations. This rule is known as “limited liability.”
2. 2 Lee versus Lee Air Farming (1961)
In 1961, the English Court of Appeal issued a decision in Lee versus Lee Air Farming Ltd., which concerned the question of whether creditors can sue shareholders for unpaid debts of their company. The case began when Mr. Samuel Lee, who was a shareholder in Lee Air Farming Ltd., brought suit against another shareholder, Mr.. Ernest Wright, for payment of his share of the company’s unpaid debts. Mr.. Wright argued that he should not be liable for any unpaid debts because he did not participate in management or control operations ofthe company. However,the court found in favorofMr..Lee, holdingthat creditorscan sue shareholdersforunpaid debtsof theircompany ifthe shareholdershave”control or management”overthe company. This ruleis knownas”piercingthe corporateveil.” Thus, inthe caseofLeeversusLee AirFarming, itwasheldthatcreditorscan sue shareholdersonlyiftheycanprovetheshareholdershadcontrol or managementoverthe company. Thiscaseestablished an importantexceptionto the ruleoflimited liability.
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