COMPANY LAW

Internal Assessment I
SALOMAN V/s SALOMAN
[1896] UKHL 1, [1897] AC 22

Name: Siddhi Pawar

PRN No.: 17010126474
Batch: IIInd Year BBA.LLB.(Hons.)
Div : E
Table of Contents
Abstract....................................................................................2
Introduction................................................................................3
Salomon v Salomon & Co Ltd.....................................................4
Criticism Against Salomon’s Case................................................6
Piercing Of The Corporate Veil....................................................7
Statutory And Judicial Exceptions................................................8
Abstract

The principle of separate legal entity is a principle which has gained growing importance in
the study of company law. The importance of this principle and its relevance in the study of
laws relating to companies is evident in the case of Salomon v A Salomon and Co Ltd [1897]
AC22, the leading case which gave effect to the separate entity principle.

Salomon v A Salomon and Co Ltd [1897] AC22 has formed the foundation of company law
and corporate principle. Not only is this case every so often quoted in textbooks and journal
articles, but also, its principles have found their way to English courtrooms and law firms.

In reference with the above, this article explains the following statement made by Lord
Halsbury in Salomon’s case

“Either the limited company was a legal personality or it was not. If it was, the company
belonged to it and not to Mr. C Salomon. If it was not, there was no person and nothing to be
an representative at all; and it is not possible to say at the same time that there is a company
and there is not”.
Introduction

Corporate principle has certain theory which practitioners and academics have struggled to
define. Some of these theories seem somehow inappropriate for strict and permanent
descriptions given that their structure often change with time. The case of Salomon V.
Salomon and Co. Ltd which has formed the foundation of company law worldwide is one
such example.

Not only is this case every so often quoted in textbooks and journal articles, but also, its
theories have found their way to English courtrooms and law firms . The principle of
‘separate legal personality’ placed down in Salomon’s case has received increased
acknowledgement and is frequently cited in court.

In reference with the above, this article explains the following statement made by Lord
Halsbury in Salomon’s case

“Either the limited company was a legal personality or it was not. If it was, the company
belonged to it and not to Mr. C Salomon. If it was not, there was no person and nothing to be
an representative at all; and it is not possible to say at the same time that there is a company
and there is not”.

We will also attempt to find the foundation under which courts may resolve to disregard the
separate entity of a company. A delve on this area will not be complete without exploring on
Salomon’s case.

Salomon v Salomon & Co Ltd

In the case of Salomon v Salomon the issues revolves around Mr. Salomon, a businessman
who incorporated his business; and given the necessities put forth in the Companies Act 1862
which need the presence of atleast seven shareholders, he made his family members as
business partners allotting one share to each of them.

The whole business was bought at £39,000. Mr. Salomon owned some 20,000 shares and
since £10,000 was not paid for, he paid the rest by debentures and arranged a floating charge
on the company’s assets as part payment. Soon after the business had been incorporated, the
shoe business witnessed a successions of strike which led to the government’s decision to
split agreements with several other firms with the aim of expanding and reducing the risk of
its few dealers, given the constant strikes.

Considering that the company was in requirement of more funds, they sought after £5,000
from Broderip. Salomon’s debenture was then allotted to Broderip and protected by a
floating charge. In the end, however, the business failed and Broderip sued to enforce his
security.

Given that, at the time, the business was indebted to unsecured creditors; an action against the
complainant was brought by the company’s liquidator and the case tried before Vaughan
Williams, J. of the high court. Vaughan Williams J declared Broderip’s entitlement to be
binding arguing that the signatories were just but mere dummies and that Mr. Salomon was
stand-in as an agent of the company. Thus the business was entitled to indemnity from the
principal who in this case was Mr. Salomon.

The decision taken by the Court of Appeal further asserted the earlier decision made by
Vaughan William. The Court of Appeal ruled that Broderip’s entitlement was binding on
grounds that the Appellant had abused the rights of incorporation. According to the Court of
Appeal, the incorporation of the company was inappropriate as the Act only contemplated the
incorporation of independent bona fide shareholders with the will and minds of their own and
not mere puppets.

This verdict was, however, unanimously reversed by the House of Lords and the arguments
of fraud and agency rejected. They held that the Act had to be the sole guide for defining
whether a company had been properly constituted. According to the Companies Act 1862,
just a share was sufficient for one to be termed as a member. It was therefore not in order to
term shareholders as dummies or mere puppets since the company had been duly constituted
by law and thus had a separate legal entity.

The House of Lords remarked that it was unsuitable for the judges to read into the statute
limitations built on their personal opinion. The House additionally noted that while the
company continued precisely the same even after being incorporated with the same hands
getting profits; by law, the company was not an representative nor a trustee of the subscribers
and the subscribers were also not liable for any of the company’s obligations.
Since then, legislatures and courts have followed the separate entity theory. This theory
which is preserved in article 16 of the Companies Act 1997 have since been followed in
company proceedings in court. Salomon’s case has become a milestone company case law in
the UK and is repeatedly cited in most cases within the area of company law.

The theory established in Salomon vs. Salomon & Co Ltd has stood the test of time, given
that this principle has formed the foundation of company law. As observed in Salomon’s case,
a company is at law a separate legal entity from its members and can neither be an agent nor
a trustee of the subscribers.

The verdict made by the House of Lords in Salomon’s case checks Gooley’s observations that
the principle of separate legal entity was a ‘double-edged sword’. While this verdict was good
as it promoted capitalism, the verdict also extended the privileges of incorporation to private
businesses thereby providing for fraud and evasion of legal obligations.

Commencing with the Salomon case, the rule of SLP has been followed as an
uncompromising precedent5in several subsequent cases like Macaura v Northern Assurance
Co.1, Lee v Lee’s Air Farming Limited 2 and the Farrar case3.

Criticism Against Salomon’s Case

Regardless of having been cited in court, Salomon’s case has met significant criticism. Much
of the critic has been based on “the fact that corporate veil may sometimes lead to injustice.
For instance, in the article 7 Modern Law Review 54, Kahn-Freund painted the verdict made
in Salomon’s case as “calamitous”. Kahn-Freund additionally called for the elimination of
private companies.

Criticism is also riding against Salomon’s case on the foundation that priority is given to the
separate entity theory over the economic reality of a one-person company. In the article, ”The
Law Quarterly Review”, Goulding clarifies that criticism put against Salomon’s case is two-
fold. First, the undisputed ruling made by the House of Lords in this case gives incorporators
the profit of limited liability even in circumstances where it may be deemed unnecessary.
Secondly, this verdict affords corrupt promoters opportunities to abuse the benifits provided
for under the Corporations Act.
1Macaura v Northern Assurance Co.,1925 AC 619
2 Lee v Lee’s Air Farming Limited , 1961 AC 12.
3 Farrar v Farrars Ltd., (1888) 40 ChD 395.
While the Salomon rule appears to have been worn significantly, a reversal in the judiciary’s
method, beginning with the Adams case, is now noticeable.

For example, in Bank of Tokyo v Karoon4, the Court of Appeal excluded the “single
economic unit” theory arguing that “we are concerned not with economics but with law.
Additionally, in the case of VTB Capital Plc v Nutritek International Corporation5, the court
repeated the limited scope of veil piercing as only a limited equitable remedy.

On a parallel note, in the most recent judgment of Prest v Petrodel6, Sumption J. limited the
lifting of veil to only two situations, namely, (a) the “concealment principle”, akin to the
sham or façade exception; and (b) the “evasion principle”, being the fraud exception.
Determining not to pierce the corporate veil on the truths, this case once again restored the
Salomon rule.

Piercing Of The Corporate Veil

In spite of the seemingly definite statement made by Lord Halsbury in Salomon’s case, a few
years later, the English court held that in certain circumstances it was permitted to disregard
this theory and to ‘Pierce The Corporate Veil’. In this situation, ‘Piercing Of Corporate Veil’
defines circumstances wherein the separate personality principle may be deemed unfair and
the courts may make verdicts differing to this principle on various grounds. The court
frequently does this so as to influence the person behind the veil and to disclose the true
nature of the business.

It has however become a tough task for academics and practitioners to find a foundation in
which courts may lift the veil. This is a part which is said to be ill-defined, varying and quite
unpredictable. In Briggs v James Hardie & Co Pty Ltd7, Rogers AJA stated the absence of a
common and unifying principle underlying the court’s verdict to lift or ignore the corporate
veil.

In deciding when to disregard the separate personality theory, critics have often divided their
instances into numerous distinct categories and often there is no agreement as to the number

4 Bank of Tokyo v Karoon , 1987 A.C. 45, 64.

5 VTB Capital Plc v Nutritek International Corporation, 2013 UKSC 5
6 Prest v Petrodel, 2013 UKSC 34
7 Briggs v James Hardie & Co Pty Ltd (1989),16 NSWLR 549
or type of categories, with some alike cases being placed in different categories. The final
policy for lifting the veil also remains elusive with some in conflict on ‘policy’ while others
arguing that it depends on ‘justice’.

Efforts have been made by reporters to categorize cases with the opinion of predicting the
outcome of future cases but this has proved hard largely due to the fact that this is an area
where case facts have noteworthy influence on the outcome. It has also proved tough to
rationalize and categorize cases since this is an area in which the private views of judges have
a bearing on what validates lifting the corporate veil.

Statutory And Judicial Exceptions

In the face of being enshrined in the Companies Act 1997, noteworthy exemptions have been
made to the separate entity theory. In other words, there are certain circumstances in which
the courts can justifiably neglect the separate legal entity theory. According to Bourne
(2001)8, there are two key exceptions to the separate entity theory. These are statutory and
judicial exceptions.

In this case, statutory exemptions include provisions that punish office holders by applying
personal liability. Quite a lot of statutory provisions have introduced exceptions to the
separate legal entity theory. One such statute is the Insolvency Act 1986 which involves
fraudulent or rather unjust trading. In pursuant to the ‘fraudulent trading’ provision, if it
appears that fraud has been used in carrying out business dealings, the court may on request
of the liquidator announce any of the parties to the business liable for making contributions as
may be deemed required by the court.On the other hand Judicial exceptions, are concerned
with the company’s separate legal entity. These exceptions have, however, proven difficult to
define. Justification for creating such exceptions also differs significantly. Sealy &
Worthington (2010)9 gave an example wherein court may create such exceptions. They
claimed that members can be acknowledged by court liable where their acts establish them as
‘principals’ and the company acting as merely an agent. This example, however, does not
include all the judicial exceptions. One chief group to this type of exemption relates to fraud.

8 Bourne, N., 2001. Bourne on Company Law. 5th edition, Oxon, Routledge
9 Sealy, L. and S. Worthington, 2010. Sealy’s Cases and Materials in Company Law. 9th edn, Oxford, Oxford
University Press.
In this respect, Linklater (2006)10 recognizes three cases where fraud had substantial impact
on the court’s decision to lift the corporate veil:

 Kensington International Ltd v Congo11

 RvK

 Trustor v Smallbone12

A common characteristic in all these cases is that they would all have approved Salomon’s
test that – ‘either the limited company was legal entity or it was not’. There is, however, one
part in all these cases which set them separately from Salomon: the circumstance that all the
three cases were being used for fraud and to mask the true state of affairs rather than being
used for genuine trading.

Another group surrounding judicial exceptions re-counts to a group structure, wherein both
the parent and secondary company are viewed as one. This can be seen in the case
of Adams v Cape Industries Plc13. The court of Appeal governed that the secondary company
acted as an representative to the parent company and thus had to be insured by the parent
company.

Another real-world example wherein courts can neglect the principle of separate entity can be
seen with confident court cases. In UK, courts may disregard Salamon’s example particularly
when public funds are at stake. In such cases, courts may choose to impose financial
obligation on the shareholders and directors of the company.

While these exceptions have been viewed by many as dejecting the doctrine of separate legal
entity embodied in Salomon’s case, it should be noted that these exclusions serve to further
describe the doctrine by thinning its scope and instructing additional guidelines.

Conclusion

Without a Question the verdict in Salomon’s case established the separate legal entity of a
company, permitting shareholders to convey on interchange with minimal exposure to the

10 Linklater, L., 2006. ‘”Piercing the corporate veil” – the never ending story?’ Comp. Law 27 (3), 65-66
11 Kensington International Ltd v Congo, 03 Civ. 4578 (LAP) (S.D.N.Y. Mar. 29, 2007
12 Trustor v Smallbone, [2001] 1 WLR 1177
13 Adams v Cape Industries Plc ,[1990] Ch 433
risk of individual insolvency in the event of a breakdown. There are, however, exceptions to
this principle wherein the court may defensibly neglect and make verdicts divergent to this
principle.

It remains, however, a intimidating task for academics and practitioners to find a foundation
in which the courts may be acceptable to lift the corporate veil. This is mainly due to the fact
that this is a part where case evidences and private views of judges have a bearing on the
result. On the other hand, the theory in Salomon case is broadly recognized and followed in
courts. This theory which is enshrined in article 16 of the Companies Act 199714 have since
been followed in company proceedings in court. Salomon’s case has become a milestone
company case law in the UK and is frequently cited in maximum cases inside the area of
company law.

Reference
 Bourne, N., 2001. Bourne on Company Law. 5th edition, Oxon, Routledge

 Gooley, J., 1995. Corporations and associations law: principles and issues. 3rd
edition. Sydney: Butterworths

14 Section 16 in The Companies Act, 1956 - Alteration of memorandum

 Kahn-Freund, O., 1944. Some reflections on Company Law Reform. 7 Modern Law
Review, page 54-66

 Karasz, A., 2012, Corporate world today: courts respond to limited liability and
board’s decision making – a fight for a justice or rather prosperity at stake?

 Keenan, D. and S. Riches, 2009. Business law, 9th edition. Harlow, Pearson
Longman.

 Linklater, L., 2006. ‘”Piercing the corporate veil” – the never ending story?’ Comp.
Law 27 (3), 65-66

 Macintyre, E., 2012. Business law. 6th edition. Harlow: Pearson Longman.

 Mugambwa, J.T., 2007. Commercial and business organizations law in Papua New
Guinea. Routledge-Cavendish

 Puig, G.V., 2000. A two-edged sword: Salomon and the separate legal entity
doctrine. Corporation law. Vol.7 (3)

 Roach, L., 2012. Card & James’ Business Law for business, accounting and finance
students. 2nd edition. OUP Oxford.

 Sealy, L. and S. Worthington, 2010. Sealy’s Cases and Materials in Company Law.
9th edn, Oxford, Oxford University Press.

 Stephen, J., 2008. Business organisations and the veil of incorporation. In: Q & A:
Company Law. Oxford university press.