Salomon v A. Salomon Ltd

| June 15, 2012


 

This essay argues that the doctrine of ‘separate legal personality’ confirmed in the case of Salomon v A. Salomon Ltd though greatly diminished in importance by numerous judicial and statutory exceptions, remains bedrock English company law. The essay explains the meaning and origin of the doctrine before discussing the various judicial and legislative exceptions to it. With the help of decided cases, the essay shows how the doctrine has been eroded. It is concluded that despite these numerous exceptions, the core of the doctrine remains intact and hence it would be wrong to assert that the doctrine has been ‘fatally undermined. To support this assertion, cases where the courts have refused to lift the veil and those were the veil has been reluctantly pierced due to the need not to depart from the doctrine are highlighted. 


Introduction

This essay analyses the current legal standing of the cardinal doctrine of ‘separate legal personality’ as applied in English law. Arguably, though the doctrine has been greatly undermined by exceptions that allow for ‘lifting the corporate veil’ (Wild and Weinstein, 2011), it remains bedrock English law. The exceptions developed by courts and the legislature have indeed severely undermined the doctrine but not fatally. Rather than expand exceptions, the courts have in some instances instead abandoned some exceptions, notably, the ‘interests of justice’ exception (Moore, 2006).

 

The doctrine

The doctrine of ‘separate legal personality’ originated in the 1844 Joint Stock Companies Act. It was later articulated in Salomon v A. Salomon Ltd [1897]. Also known as the ‘Salomon doctrine’, the doctrine requires properly incorporated companies to be regarded as autonomous legal persons in its own right, capable among others of bearing rights and obligations (Moore, 2006). The doctrine applies to protect shareholders in the event of liability (Hannigan, 2009; Dignam and Lowry, 2010; Wild and Weinstein, 2011; Macintyre, 2010). English courts have over the years been keen to uphold the cardinal doctrine.

 

The exceptions

The exceptions to the doctrine were either developed by the courts or by statute.

 

Mere sham or faҫade

This is the most established and clear judicial exception to the Salomon doctrine. It was applied in the case of Gilford Motor Co Ltd v Horne [1933] Ch. 935 (CA) where an ex- employee sought to avoid being bound by a restrictive covenant. The court found the ex-employee’s company to be a sham intended to achieve an illegal purpose. Several cases have applied this exception to the extent that it can be said to be the deepest incision into the separate corporate personality doctrine (Jones v Lipman (1962). In contrast, in Ord v Belhaven Pubs Ltd [1998], court affirmed its power to pierce the veil but there was no evidence to show that the company was a mere sham. Arguably, the exception is in line with general public policy not to enforce fraudulent activities and to facilitate avoidance of existing legal obligations (Hannigan, 2009). Due to the nature of what it protects, it would be wrong to argue that this exception fatally undermines the Salomon doctrine. Laws need to be read in harmony with each other.

 

Agency

This exception is used to lift the corporate veil where it appears that a subsidiary company is in fact carrying on business simply as the agent of the parent company to avoid existing legal obligations. This exception was applied in Smith, Stone & Knight Ltd v Birmingham Corp [1939]. However, the same principle was found inapplicable in the case of Adams v Cape Industries plc [1990]. Court declined to pierce the corporate veil merely because the shares are in the control of one shareholder or even where the corporate structure has been used to avoid future potential liability that could otherwise be incurred by a parent company. Court stated that the Salomon doctrine was in fact inherent in English corporate law.

 

Single economic unit exception

The Adams case reasserted the separate corporate personality principle by rejecting the single economic unit exception that had been applied by Lord Denning in DHN Food Distributors Ltd v Tower Hamlets (1976). Lord Denning’s approach had in fact directly been attacked by the House of Lords in the case of Woolfson v Strathclyde RC (1978). So with regard to future liabilities, the doctrine of separate legal personality stands not fatally undermined. However, with regard to already acquired legal rights, the courts can greatly undermine the doctrine as happened in Re a Company [1985], and in Trustor AB v Smallbone and Kensington International Ltd v Republic of Congo [2006].

 

Protecting the public interest to avoid trading with ‘enemy aliens’

The courts have had to ignore separate corporate personality by lifting the corporate veil to avoid trading with alien enemies during periods of war (Daimler v Continental Tyre and Rubber Co. [1916]). This confirms that the doctrine of separate legal personality is not sacrosanct. Nevertheless, it does not support the assertion that the doctrine has been fatally undermined.

 

Statutory law: taxation, insolvency, employment and others

The most near fatal undermining of the Salomon doctrine is provided by statutory law. The companies Act, the Insolvency Act 1986, taxation legislation are key examples. Re H [1996] was a taxation case where actually the sham or facade exception was deployed. Under the Company Directors Disqualification Act 1986, directors who act while disqualified will be jointly and severally liable cannot rely on the Salomon doctrine to avoid liability. The Insolvency Act 1986 provides for lifting of the veil in situations of fraudulent and wrongful trading (section 213 and 214 respectively). Further, under the Companies Act 2006, Plc company directors trading without a trading certificate are personally responsible despite the separate legal personality. The Employment Rights Act 1986 protects continuous employment where employees are transferred from one subsidiary company to another within a group (Dignam and Lowry, 2010, p. 32) by treating separate entities as one.

 

Tortious liability exception

English courts have allowed lifting of the veil in order for a claimant to sue a holding company for tortious acts of a subsidiary. In Connelly v RTZ Corporation Plc (1988), the dissenting Judge vouched strongly for the separate legal personality doctrine. Accordingly, this principle remains a major principle that it cannot easily be swept under the carpet through piercing of the veil. (Lubbe v Cape Industries Plc (2000).

 

Conclusion

The doctrine articulated in the case of Salomon v A Salomon Co. Ltd is very much alive and respected in English company law despite the many exceptions imposed both by the courts and statute. Courts zealously uphold the doctrine except in certain factual situations where they have either pierced the corporate veil or declined to do so citing concerns over the Salomon doctrine. Legislative interventions are the greater threat to the doctrine. However, the doctrine’s core remains a backbone of company law in England. In conclusion, the doctrine has not been fatally undermined.

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References and bibliography


Dignam, A. & Lowry, J., “Company Law”, Oxford University Press ( 2010)

Griffin, S., “Company Law: Fundamental Principles”, Pearson, (2006)

Gower, D., and Davies, “Principles of Modern Company Law”, Sweet and Maxwell, (2008)

Grantham, R.B. & Rickett, E.F., “The bootmaker’s Legacy to Company Law Doctrine, in Grantham, R.B. and Reckitt, E.F. (eds.), Corporate Pesrsonality in the 20th Century, Hart Publishing (1998)

Hanigan, B., “Company Law”, Oxford University Press, (2009)

Kenton, M., and Walker, M.,”Antonio Gramsci Shipping Corp v Stepanovs, Case commentary, [2011] Company Lawyer 274

Macintyre, E, “Business Law”, Pearson (2010)

Maughan, B and Copp,  S., “Piercing the corporate veil”, N.L.J. 1998, 148(6846), 938-940

(2006)

Moore, M “A temple built on faulty foundations”: piercing the corporate veil and the legacy of Salomon v Salomon”(2006) JBL 180

Morse, G., “Charlesworth’s Compnay Law”, Sweet and Maxwell (2005)

Muchlinski, P., “Limited Liability and Multinational Enterprises: a case for reform?(2010) 34 cambridge Journal of Economics 915

Rixon, F.G., “Lifting the veil between Holding and Subsidiary Companies”[1986] LQR 415

Wild, C., and Weinstein, S, “Smith and Keenan’s Company Law”, Pearson, (2011)

 

Cases:

Adams v Cape Industries Plc [1990] Ch. 433 (CA (Civ Div))
Apthorpe v Peter Schoenhofen Brewing Co 4 T.C 41 (CA)

Connelly v RTZ Corporation Plc (1998) 854

Creasey v Breachwood Motors Ltd [1992] B.C.C. 638 (QBD)
Daimler Co Ltd v Continental Tyre & Rubber Co (Great Britain) Ltd [1916] 2 A.C. 307 (HL)
DHN Food Distributors Ltd v Tower Hamlets (1976) 3 All E.R. 462

Gilford Motor Co Ltd v Horne [1933] Ch. 935 (CA)
Gramophone & Typewriter Ltd v Stanley [1908] 2 K.B. 89 (CA)
Jones v Lipman [1962] 1 All E.R. 442

Kensington International Ltd v Republic of Congo [2006] 2 BCLC 296

Lubbe v Cape Industries Plc (2000) 1W.L.R. 1545 HL

Ord v Belhaven Pubs Ltd [1998] 2 BCLC447, C.A.

Re a Company [1985] BCLC 333, CA

Re H and others [1996] 2 BCLC 500 (CA)

Salomon v A. Salomon & Co Ltd [1897] A.C. 22 (HL)
Smith, Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116

Trustor AB v Smallbone [2001]2 BCLC 436

Tunstall v Steigmann [1962] 2 Q.B. 593 (CA)
V.T.B. Capital PLC v Nutritek International Corp [2011] EWHC 3107(Ch)(Ch.D)

Woolfson v Strathclyde RC 1978 S.C. (H.L.) 90 (HL)

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