The principle of Separate Legal Personality has been the foundation of Company Law. The case established that upon incorporation, a company become a separate person distinct from its members. The principle established by this case has served as precedent for various cases. Although Salomon v Salomon affirmed the principle of Separate legal Personality, it was often asserted that courts are able to ignore it through a process known as piercing the corporate veil. The first part of this paper looks to give a brief history of the Case, the second part would look into the concept of separate legal personality and the cases where the principle has been adopted. The third part of the essay would examine the areas where the court has disregarded the principle of separate legal personality. The concluding part of the essay would then look at whether the decision in the case is still good law establishing that it is, based on the writers’ view of the case as argued below.
Mr Salomon owned a boot-making business. He decided to start a company that sold his business and he named the company A Salomon and Co Ltd. The company unfortunately went into liquidation and the liquidator appointed by the company sort to impose personal legal responsibility on Mr Salomon, on behalf of the other creditors, for the company’s debts. The issue raised in the case by the liquidator was that company never really existed because not seven independent shareholders; that the company was trustee for Mr Salomon because assets improperly held; that the company was an agent of Mr Salomon because he continued to be sole trader and that the contract transferring business to company voidable for ‘fraud’.
At the High Court, Vaughan William J held that “the company was the mere nominee and agent of Mr Salomon.” He further stated that there was a clear relationship of principal and agent that existed between Mr. Salomon and the company. Lindley LJ at the Court of Appeal likened the “company to be a trustee of Mr Salomon- a trustee improperly brought into existence by him to enable him to do what the statue prohibits.” Both courts found Mr Salomon liable to indemnify the company against the creditors claim. However the House of Lords overruled the decision of the High court and Court of Appeal and found Mr Salomon not personally liable for the company’s debts. It was established in the House of Lords that once a company has been incorporated, the company becomes, at law, a legal entity separate from those who had set it up. A company gains the status of a separate legal entity distinct from its members hence the company can “enjoy rights like owning property, entering into contracts and be a party to legal proceedings which are not the same as those enjoyed by its members.”
The courts have unfailingly respected the separate legal entity principle created in Salomon when a company is incorporated and enforced it. In Macaura v Northern Assurance Company it was held that a company’s property is “the property of the company as a separate person, not the members.” The appellant in this case sold timber to a company in which he owned almost all the shares. He insured the timber against fire and took the policies in his name. The timbers got destroyed by fire and he claimed on the insurance policies. The insurance company however refused to pay.
Similarly in Lee v Lee’s Air Farming Ltd it was held a company is distinct from its shareholders and that an individual can be an employee of the company although he is a director and major shareholder.
The aforementioned cases have confirmed the principle that members of a company cannot claim its property or its legal rights. This follows from the rule laid out by Lord Halsbury LC in Salomon that “once a company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself.”
However, there are circumstances where the court will disregard the separate legal personality of a company. The courts will treat the company’s obligations, property and rights as belonging to a person who owns and controls the company. This is usually referred to as ‘lifting the veil’ or ‘piercing the veil’. Murray Pickering stated that “the courts have found it necessary to make certain exceptions and to deal with some companies for certain purposes as if they were not entities separate from and independent of their members.” The issue then becomes when the courts actually lift the veil. “It is impossible to list the cases in which the veil will be lifted.”
Gower expressed that the courts would lift the veil “when corporate personality is being blatantly used as a cloak for fraud or improper conduct.” This exception is seen as when a company structure is a ” ‘mere façade concealing true facts-“façade” and “sham” having replaced an assortment of epithets.” In Prest v Petrodel , Lord Sumption identified what he called the ‘concealment principle’ which exists to deal with a company that is being used as a device or façade to conceal true fact and to avoid or conceal the liability of the individual controlling the company. He further went on to describe the ‘evasion principle’ which will apply “when an individual interposes a company so as to evade or frustrate the enforcement of, an existing legal obligation.” In Gilford Motor Ltd v Horne, the defendant attempted to evade a covenant not to compete in business with the claimant. Mr Horne arranged with his wife to form a company which carried on business in completion with the claimant. Lord Hanworth said: “I am quite satisfied that this company was formed as a device, a stratagem, in order to mask the effective carrying on of a business of Mr E B Horne. I do hold that the company was ‘a mere cloak or sham’; I do hold that it was a mere device for enabling the defendant to commit breaches….”
Similarly, in Jones v Lipman and Another, Mr Lipman had contracted to sell land to Mr Jones. After entering the contract and before the contract for sale could be completed, Mr Lipman transferred the land to a company where he and a nominee were the sole shareholder and directors. A specific performance of the contact was ordered by Russell J against the company and Mr Lipman. Russell J further established that: “the defendant company is the creature of the first defendant, a device and sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity.” These cases are examples of where the court pierced the corporate veil ignoring the separate legal personality of the companies. “The company had nothing to do with the legal obligations to which Mr. Horne and Mr. Lipman were subject. The obligations were imposed upon the companies in both cases because of their connections to the obligated party.”
It has however been established in Prest that the piercing of the veil in this cases were not necessary. Lord Neuberger in agreement with Lord Sumption and Lord Clarke established that the court can pierce the veil only if it is necessary to do so. He further stated that it is only “when all other, more conventional remedies have proved to be of no assistance” that veil should be pierced.
However, there are instances where the courts have had no reason to pierce the veil but instead affirmed the separate legal personality principle laid out in Salomon. The case of Salomon established that a relationship of agency cannot exist between the company and its shareholders. The liquidator stated that the company was an Agent of Mr Salomon but the House of Lords made it clear that the company is not the shareholders’ agent by reason of the fact of incorporation. It was established in Salomon that the circumstances that a person is a member of a company does not in itself make the company an agent to that person. The rule of agency is an affirmation of a company’s separate legal personality and not an example of piercing the veil. It asserts that there is a separate relationship of agency created with the company. In Smith, Stone and Knight Ltd v City of Birmingham, Atkinson J held that “the mere fact that a man hold all the shares in a company does not make the business carried on by that company his business, nor does it make the company agents for the carrying on of his business.”
Another case where the court looked into both piercing the veil and agency was in Adams v Cape . The Court held that there was no separate relationship of agency between the parent company and the subsidiaries. The court focused on whether there had been any given authority to act on behalf of the parent.
In Prest v Petrodel, the Court held that companies must be presumed to hold properties on resulting trust for Mr. Prest. The properties therefore could be treated as personal properties of Mr Prest for the purposes of the matrimonial proceedings. Lord Sumption in this case found that this did not involve piercing the veil instead it was an example of the ‘concealment principle’.
DHN Foods v Tower Hamlets was a case where the courts considered an exception of the separate legal personality principle in group companies. Lord Denning at the Court of Appeal held that a group of companies be treated as a single entity. He was the only one of all the judges that seemed comfortable with the decision to lift the veil. The basis for his decision appears to be on the complete control by the parent to the subsidiary. Lord Denning was willing to pierce the veil on the basis of control. It is however clearly noted from the case that control alone can result in piercing the veil and this would be completely inconsistent with Salomon v Salomon. However in
In conclusion, we can see that the Salomon principle is still applicable and relevant in today’s law. The decision of Prest establishes this fact. This paper has been able to establish that the law still upholds the principle of separate legal personality and courts are reluctant to ignore the principle but would do so when there is an issue of fraud. It establishes that the idea of piercing the veil is difficult and the courts would only consider it in rare circumstances. This however does not mean that in the few instance that the court have pierced the veil they have disregarded the case of Salomon. Most cases since Adams have refused to pierce the veil, confining the real exception of sham or façade. In Adams v Cape, the court held that “the court is not free to disregard the principle of Salomon v A Salomon & Co Ltd merely because it considers that justice requires it.”