Following the decision in Salomon v Salomon [1897] AC 22, incorporated
companies are a legal entity separate from their members. As a consequence
of the separate legal personality of a company, the members are not liable for
the company's obligations, and they have no direct claim on the company's
property. This rule constitutes a sensible legal policy and its benefits
outweigh its disadvantages.” Critically discuss.
Summary
The decision in Salomon v Salomon & Co 1 contains the successful
development of the changes brought about by the UK company law case. 2
The case appears to support the view that the courts have been equipped with
a useful and more abstract tool to tailor outcomes to suit a workable practical
solution to the problems arising from the often simultaneous liabilities of
company and company owner in commercial transactions. This means that
pursuant to incorporation, company is now regarded by law as a person and
acquires corporate legal personality with limited liability as a result: own
assets3, enter into contracts and be a party to legitimate actions. 4 In doing so,
my research aims to explore the ways in which hegemony and great
consciousness of corporate personal entities as a configuration of legal
practice is experienced by corporations following the landmark case of
Salomon.
Introduction
In popular parlance, a company denotes an association of like-minded
persons (Shareholders) formed for the purpose of carrying on some business
or undertaking, having been incorporated under the existing law of a
country.5 It acquired a corporate body status and a legal entity distinct and
separate from the members constituting it. 6The principle of Corporations as
personal entities according to Susan denotes that a registered business
organization incorporated, such as a limited liability company or an LLP, has
a separate legal identity, its debts are its own, and the personal liabilities of its
owners are limited to the amount invested in the business. 7 This reform has
1
[1897] AC 22.
2
Stephen Mayson, Derek French &Christopher Ryan, Company Law (30th edn, Oxford
University Press 2013-2014) 121 @1.3.1.
3
Macaura v Northern Assurance Co Ltd [1925] AC 619.
4
Sarah Worthington, Sealy & Worthington’s text, Cases, and Materials in Company law
(11the edn. Oxford Publishing UK, 2016) p. 35.
5
Ibid.
6
Ibid.
7
Watson, Susan Mary, How the Company Became an Entity: A New Understanding of
Corporate Law (March 17, 2015). Journal of Business Law 120, 2015, Available at SSRN:
https://ssrn.com/abstract=2579955
1
become an increasingly accepted in the commercial world following the
Salomon ruling in the late nineteen century. 8 Most countries now have
statutes or constitutional provisions which create a freedom of corporation
acting as a person. In what follows, this essay describes that the Salomon case
was instrumental to this development that offers a company to be correctly
formed, and registered to afford it a legal personality that is separate from the
shareholders who own it.
Analysis
This is reflective of the fact that Salomon has higher proportions of the share
deemed ‘wealthy’ in his boot making business after transforming his business
as a sole trader to a newly incorporated company. The incorporated company
comprises his immediate family as minority joint shareholders. Thereafter, the
company went into liquidation and the court identified Salomon as a sole
owner owing to his largest share in the family owned liquidated company.
This according to the court decision is to fulfil the obligation in meeting the
unsecured creditor’s demand for a successful offsetting of his debt. However,
in the experience of the House of Lords, following the appeal of the case, their
Lordship unanimously declared that the decision of the first instance court
failed because of deficiency or lack of identifying the company as a limited
liability enterprise on the part of Salomon. This is acknowledging that
commercial litigation in favour of the unsecured creditors failed because
Salomon had used the process tactically, and as a result Salomon has
experienced liquidation not associated with the perceived fraudulent act of
incorporation, in a famous passage of Salomon v Salomon Lord Macnaghten
stated:
the company is at law a different person altogether from the subscribers…and,
though it may be that after incorporation the business is precisely the same as
it was before…the company is not in law the agent of the subscribers or
trustee for them. Nor are the subscribers, as members liable, in any shape or
form, except to the extent and in the manner provided by the Act. 9
Implications
Taking on the case more broadly, the analysis in this collection also brings out
the institutional and systemic criticisms the concept of corporate personality
8
[1988] 3 WLR 1033 at 1098 per Kerr LJ. LCB, Gower, Gower's Principles of Modern
Company Law (5th ed, Sweet & Maxwell, London, 1992), p 88.
9
Op. cit. 2 Per Lord Macnaghten, at p. 51.
2
has created in academic jurisdiction. Susan, 10 Tope11 and Gonzalo Villalta12
highlights this in their findings, as a corollary with Otto Kahn-Freund.13 They
asserted that the potential implications for trading with a limited company
raise wider implications of the ruling such as the ‘veil of incorporation’
separating the company from its shareholders. The metaphor of the ‘veil’
identifies a cloak of secrecy / shield of the people behind it – the members of
the company are protected from liability for the company’s debts. Further, it
transpires that due to the company’s separate legal personality, the courts
have often been unwilling to ‘lift the veil’ and find out what the directors
actually did in running the business (what decisions were taken, and by
whom and so on).14 Due to this unconsciousness, it has been said that the veil
of incorporation protects the members of the company. Whilst the veil is
effective, to continue the metaphor, it has been ‘raised’ by the courts where it
has been deemed relevant. The courts have been notoriously unwilling to
establish clear rules as to when the veil will be lifted, and they have stated
that they will not do so ‘merely’ in the interests of justice15.
In the light of the foregoing argument, this rather wide and highly technical
legal framework was not exactly user friendly. 16 It therefore comes as no
surprise that this essay presents that the ratio of Salomon case has
philosophical and ethical aspects to it as well as commercial and business
ones arguably. Much depends on what perspective one takes when
addressing this issue. For instance, we have seen the difficulties created by the
existence of a separate legal personality when the company goes into
liquidation and the creditors attempt to recover monies. The shareholders’
liability is limited to their investment, and the directors may have established
some creditors as secured, whilst others are unsecured with very little scope
of recovering money owed. This can have disastrous financial consequences
(particularly for smaller companies). The giant automobile company of
Nissan made the case that became more popular in recent years for fraudulent
activities of its director,17 even if assumed - the focus then brought to the
10
Susan Mary Watson (2019) The corporate legal person, Journal of Corporate Law Studies,
19:1, 137-166, DO1:10.1080/14735970.2018.1435951.
11
Tope O. Odusanya, (2021) ‘Corporate Personality and Piercing the Corporate Veil: Case
Analysis of Salomon v A Salomon & Co Ltd’. Academic Letters,
Article10.13140/RG.2.2.33121.22886, Publication.
12
Op. cit (n 1)
13
Otto Kahn-Freund, "Some Reflections on Company Law Reform" (1944) 7 The Modern Law
Review 54.
14
Stephen Griffin, Holding companies and subsidiaries-the corporate veil, Com. Law. 1991
(12) 1, 16-17.
15
Adams v Cape Industries Plc [1990] Ch 33
16
Roman Tomasic and Stephen Bottomley, Corporations Act in Australia (The Federation
Press, Sydney, 1995), 40;
17
Financial Times, Nissan and Carlos Ghosn settle with SEC over pay disclosure <
https://www.ft.com/content/aa6ce5e8-de0f-11e9-9743-db5a370481bc > accessed 15th
3
salient issues of reliance, responsibility and control in such situation - These
are by far the measure which the policy of limited liability has sought to
achieve that draws closer its critics-that its promotes a clear articulation of the
reasoning process - a process that at present is obscured by a ‘veil of
incorporation’ as noticed in Prest v Petrodel Resources Ltd [2013] UKSC 34.18
Significant
Note that although Salomon is famous for propagating the concept of
separate personality for company, accordingly, the ability to use corporate
personality to shield oneself from liability may also encourage the setting up
of more businesses which will have a positive effect on the economy. 19 This,
ultimately, makes business nearly available for everyone otherwise small
investors would be deterred from investing owing to unlimited personal
liability. In effect, shareholdings would be limited to a few wealthy investors
who can monitor their shareholdings. It could also be argue that Salomon
erased agency application attachment to small share contributor and
implicitly recognized the validity of the most significant investment of an
individual,20 and further represents the values of independence and security
in the one-man company (that is, a company run by one person with a
number of dormant, nominee members) as was incumbent to the legislative
initiative of the Company Act 2006.
Moreover, it is pertinent to note that the lapses created by the doctrine of
‘separate legal entity’ has been responded to by attaching ‘corporate
governance’ in certain circumstances. Notwithstanding, the fact that
appropriate policies for the developing healthy business world have been
written upon by Company Law as is the case in UK, 21 and could be more
useful to present an arguable case for shielding from liability burden increase
on stakeholders in a free enterprise economy.22
Conclusion
October 2021.
18
[2013] UKSC 34, John H Farrar, Nigel E Furey, and Brenda M Hannigan, Farrar's Company
Law (2nd edn, Butterworth London, 1988), p 66.
19
Salomon (n 1).
20
Temitope O. Odusanya, (2021) ‘Corporate Personality and Piercing the Corporate Veil:
Case Analysis of Salomon v A Salomon & Co Ltd’. Academic Letters,
Article10.13140/RG.2.2.33121.22886, Publication. date 2021. Paul Heath, ‘Trusts and
Trustees: Bringing trading trusts into the company line’, Volume 16 > Issue 9, 1 October 2010
16 (9): 690.
21
Company Act 2006, any limited is defined as a company whose members’ liability is limited
by its constitution to such amount as they undertake to contribute to the assets of the
company in the event of its being wound up.
22
Alan Dignam & John Lowry, Company Law (9th edn. Oxford University Press 2016) p. 113.
4
The research results show that the widely acceptability and significance of the
Salomon case principle of limited liability could be the acceptability of
bringing in well a legislation reform that has profoundly innovated the legal
framework. It is also important to note that more attention needs to be paid to
illegal activities both in relation to the beneficiary shareholders of the modern
corporate limited liability and wider vulnerable stakeholders. In this regard,
stronger and more comprehensive laws need to be introduced in protecting
the interest of all stakeholders or third parties.
References
Adams v Cape Industries Plc [1990] Ch 33
Alan Dignam & John Lowry, Company Law (9th edn. Oxford University Press
2016)
Financial Times, Nissan and Carlos Ghosn settle with SEC over pay disclosure
< https://www.ft.com/content/aa6ce5e8-de0f-11e9-9743-db5a370481bc >
accessed on 15th October 2021.
Gonzalo Villalta Puig, ‘A Two-Edged Sword: Salomon and the Separate Legal
Entity Doctrine’, MurUEJL 32, Vol 7, Number 3 (September 2000)
Gower, Gower's Principles of Modern Company Law (5th ed, Sweet &
Maxwell, London, 1992)
John H Farrar, Nigel E Furey, and Brenda M Hannigan, Farrar's Company
Law (2nd edn, Butterworth London, 1988)
Macaura v Northern Assurance Co Ltd [1925] AC 619
Maclaine Watson& Co Ltd v Department of Trade and Industry [1988] 3 WLR 1033
at 1098 per Kerr LJ. LCB
Otto Kahn-Freund, "Some Reflections on Company Law Reform" (1944) 7 The
Modern Law Review 54
Prest v Petrodel Resources Ltd [2013] UKSC 34
Roman Tomasic and Stephen Bottomley, Corporations Act in Australia (The
Federation Press, Sydney, 1995), 40;
5
Salomon v Salomon & Co [1897] AC 22
Sarah Worthington, Sealy & Worthington’s text, Cases, and Materials in
Company law (11the edn. Oxford Publishing UK, 2016)
Shuangge Wen, Shareholder Primary and Corporate Governance (Routledge, UK
2013)
Stephen Griffin, Holding companies and subsidiaries-the corporate veil, Com.
Law. 1991 (12) 1, 16-17
Stephen Mayson, Derek French &Christopher Ryan, Company Law (30th edn,
Oxford University Press 2013-2014) 121 @1.3.1.
Susan Mary Watson (2019) The corporate legal person, Journal of Corporate
Law Studies, 19:1, 137-166, DO1:10.1080/14735970.2018.1435951
Temitope O. Odusanya, (2021) ‘Corporate Personality and Piercing the
Corporate Veil: Case Analysis of Salomon v A Salomon & Co Ltd’. Academic
Letters, Article10.13140/RG.2.2.33121.22886, Publication
Watson, Susan Mary, How the Company Became an Entity: A New
Understanding of Corporate Law (March 17, 2015), Journal of Business Law
120, 2015, Available at SSRN: https://ssrn.com/abstract=2579955
