Company Law

First Internal

“Salomon v Salomon & Co. LTD case”

Name – Kandarp Jha

Course – BBA LLB
PNR – 17010126324

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 Table of Contents
1. Abstract .......................................................................................................................... 3

2. Facts ............................................................................................................................... 4

3. Issue ............................................................................................................................... 4

4. Analyisis ........................................................................................................................ 4

5. Principle ......................................................................................................................... 5

6. Piercing of the corporate veil ......................................................................................... 5

7. Judgement ...................................................................................................................... 7

8. Conclusion ..................................................................................................................... 8

9. Bibliography .................................................................................................................. 9

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Abstract

The best feature of a company is its independent corporate existence. In a partnership, the
firm has no existence apart from its members.

The doctrine of separate legal entity is an important doctrine in analysing the company law.
The importance of this doctrine and its relevance in the analysis 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.

The separate legal personality of the company means that shareholders of the company and
directors of the company are not responsible for any of the liabilities that arise as a result of the
actions of the company.”

(i) explain what this statement means (ii) critically discuss this statement (iii) indicate whether
or not you agree with this statement.

Key Words: Separate Legal Entity, Corporate Veil, Corporate Jurisprudence.

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 Facts

 Aron Salomon was a boot and shoe manufacturer. His son wanted to bececome
business partners so he converted his business into a limited company.
 Salomon & Co LTD purchased Mr Salomon’s business for 38,000 Pounds.
 The members of the company were Mr. Aron Solomon with 20,000 equity share,
Wife with one share, Daughter with one share ad four sons with one share each.

 The company gave Mr Salomon £10,000 in debentures and received an advance of

£5,000 from Edmund Broderip, on security of the debentures.
 Salomon’s business eventually failed and it defaulted on its interest payments on the
debentures (half held by Broderip). Broderip sued to enforce his security.
 The company went into liquidation. Broderip was repaid his £5,000. This left £1,055
company assets remaining. Salomon claimed this amount under his retained
debentures. This would leave nothing for unsecured creditors.
 The company’s liquidator argued that Salomon should be responsible for the
company’s debts.
Issue

 Whether the formation of A Salomon & Co Ltd a fraud intended to defeat creditors?
 Whether the corporate veil should be applied?

Analyisis

Salomon v Salomon Ltd, 1986, presented the fundamental guideline of English organization
law, the different legitimate character of an organization. Up until this time the relations of an
organization had predominantly been value-based and wide scale speculation was prevented as
investors were at risk for any obligations that an organization amassed. The idea made a 'cover'
of fuse, isolating the obligations, resources, commitments and privileges of the organization
from its investors and executives. Anyway there are situations where courts (through the legal
executive or lawmaking body) have 'lifted the cover' of fuse and recognized individuals or
chiefs as having individual obligation for activities of the organization. This paper will look at

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the degree to which the different lawful character of an organization likens to investors and
chiefs not being in charge of liabilities that emerge from the activities of the organization.

Principle

Artificial Person
The company is a juristic individual; be that as it may, it doesn't have the body of a
characteristic being. It exists just in consideration of law. Being an artificial individual, it needs
to rely on regular people, specifically, the chiefs, officials, investors, and corporate supervisors,
and so on., for its administration and everyday running. In any case, these people just speak to
the organization and as needs be whatever they do inside the extent of the specialist gave upon
them and in the name and for the organization, they tie the organization and not themselves.

Limited Liability
One of the principal advantages of trading through the medium of a limited company is that the
members of the company are only liable to contribute toward payments of its debts to a limited
extent. If the company is limited by shares, the shareholders liability to contribute is measured
by the nominal value of the shares he or she holds. In other words, once he or she or someone
who held the shares previously has paid that nominal value plus any premium agreed on when
the shares were issued, he is no longer liable to contribute anything further. However, the
companies may be formed with unlimited liability of members, or members may guarantee a
particular amount. In such cases, liability of the members shall not be limited to the nominal or
face value of their shares and the premium, if any, unpaid thereon. In the case of unlimited
liability companies, members shall continue to be liable till the whole amount has been paid
off. If a company is unable to pay its debts, its creditors may petition the court to wind it up.

Piercing of the corporate veil

Regardless of the apparently clear cut articulation made by Lord Halsbury for Salomon's
case, a couple of years after the fact, the English court held that in specific circumstances it
was reasonable to ignore this standard and to 'pierce the corporate cover'. In this unique
circumstance, 'pierce the corporate cover' portrays circumstances wherein the different
element rule might be considered out of line and the courts may settle on choices as opposed

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to this rule on different grounds. The court frequently does this to contact the individual
behind the cover and to uncover the genuine idea of the organization.

It has anyway turned into a hard task for scholastics and specialists to discover a premise in
which courts may lift the cover. This is a region which is said to be badly characterized,
conflicting and very unusual. In Briggs v James Hardie & Co Pty Ltd, Rogers AJA1 point out
to the lack of a common and unifying principle underlying the court’s decision to lift or
ignore the corporate veil.

In instances where it is integral to know when to disregard the principle, commentators

usually segregate them into many different categories. The final rule determining the lifting
of the veil also remains cagey where some commentators depending on policy while others
depend on justice.

Even though attempts have been made by commentators to segregate various cases in order to
determine the outcome of future cases; the difficulty arises owing to the fact that each case
fact has a significantly large bearing on the outcome of each distinct case. These cases are
also difficult to categorize due to the fact that a judge’s individual opinion also has a strong
bearing and influence on instances that justify the lifting of the corporate veil.

It is beneficial here to refer to the instance of Adams v Cape Industries2, which inspected the
precedent-based law grounds, principally developed through case law as an equitable
remedy,3 to be specific -

(a) agency,

(b) fraud,

(c) façade or sham,

(d) group enterprise, and

(e) injustice or unfairness.

The exemption has been summoned broadly by English courts, incorporating into the
ongoing instances of Caterpillar Financial Services (UK) Limited v Saenz Corp Limited, Mr

1
Briggs v James Hardie & Co Pty Ltd,16 NSWLR 549, (1989).
2
Adams v Cape Industries 1990 Ch. 433.
3
Peter B.Oh, ‘Veil-Piercing Unbound’ (2013) 93 B.U. L. Rev. 89.

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Karavias, Egerton Corp.4, Beckett Investment Management Group v Hall,5 Stone and Rolls v
Moore Stephens,6 and Akzo Nobel v The Competition Commission,7 to refer to a couple.
Unnecessary to make reference to, the adventure of English law in characterizing the shapes
of the SLP precept and cutting out these special cases has been very upside down.

Judgement

The Court of Appeal declared the company was a cover, elaborating that Salomon’s
intention of incorporating the company ran contrary to the true intent of the then Company
Act, 1862, and that the latter’s conduction of business was in the capacity of Salomon’s
agent, who was thus, liable for the debt incurred during the course of such agency.

The House of Lords, in any case, upon claim, switched the above decision, and collectively
held that, as the organization was properly fused, it is a free individual with its rights and
liabilities suitable to itself, and that "the intentions of the individuals who partook in the
advancement of the organization are completely superfluous in talking about what those
rights and liabilities are".8 Therefore, the legal principle of “corporate veil” cemented the
relationship between the company and its owners and was firmly established in the Salomon
case.

4
Caterpillar Financial Services (UK) Limited v Saenz Corp Limited, Mr Karavias, Egerton Corp. 2007 I.C.R.
1539 (A.C.).
5
Beckett Investment Management Group v Hall 2009 1 A.C. 1391.
6
Stone and Rolls v Moore Stephens 2009 UKHL 39.
7
Akzo Nobel v The Competition Commission 2013 CAT 13 (21 June 2013).
8
Lighting Improvement Co. Ltd. v Commissioners of Inland Revenue, 1923 AC 723.

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Conclusion

An intricate analysis of the case at hand yields the conclusion that even though the Salomon’s
case firmly established the fact that a company has a separate identity and that this legal
personality is distinct from its constituent members, there may be certain instances where the
corporate veil could be lifted, thus ignoring the corporate personality of a company and
recognizing individual members for who they are and what their rights and liabilities actually
are. The corporate veil is ordinarily lifted in cases where the statue itself contemplates that
improper conduct or fraud needs to be curbed. It is neither desirable nor necessary to enlist
categories of cases where lifting the veil is permitted, as that usually depends on statutory or
other relevant provisions. The driving object, conduct, effect on parties and furtherance of
public interest must be analysed in such cases. Moreover, several recent developments also
point to the fact that the lifting of the corporate veil may also involve claims of tortious
liability.

In all finality, the ruling laid down under the Salomon case continues to be predominant and
supports the course of English company law and corporate jurisprudence.

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Bibliography

Books

 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.

 Marc Moore, ‘A Temple Built on Faulty Foundations: Piercing the Corporate Veil
and the Legacy of Salomon v Salomon’ (2006). 4
 Mayson, French & Ryan, Company Law (29 th edn, OUP 2012). 4
 Murray A. Pickering, ‘The Company as a Separate Legal Entity’ 31 Mod. L. Rev.
481, (1968). 4
 P.W. Ireland, ‘The Rise of the Limited Liability Company’,12 International Journal of
the Sociology of Law 239, (1984).

Cases

 Adams v Cape Industries 1990 Ch. 433......................................................................... 5

 Akzo Nobel v The Competition Commission 2013 CAT 13 (21 June 2013). ............... 5
 Beckett Investment Management Group v Hall 2009 1 A.C. 1391. .............................. 5
 Briggs v James Hardie & Co Pty Ltd,16 NSWLR 549, (1989). ............................ 4
 Caterpillar Financial Services (UK) Limited v Saenz Corp Limited, Mr Karavias,
Egerton Corp. 2007 I.C.R. 1539 (A.C.). ........................................................................ 5
 Lighting Improvement Co. Ltd. v Commissioners of Inland Revenue, 1923 AC 723. . 6
 Peter B.Oh, ‘Veil-Piercing Unbound’ (2013) 93 B.U. L. Rev. 89................................. 5
 Stone and Rolls v Moore Stephens 2009 UKHL 39. ..................................................... 5

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