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“The doctrine of ‘separate legal personality’, as embodied in Salomon v Salomon & Co Ltd [1897] AC 22, has been fatally undermined by the number of subsequent exceptions to it.”

| April 20, 2012 | 0 Comments

Some argue that the doctrine in Salomon has been fatally undermined by the number of subsequent exceptions to it. This essay looks at the various exceptions, including statutory and judicial and decides the consequence of them on the doctrine. It is argued that statutory exceptions do not undermine the principle in Salomon as they do not properly concern the doctrine of separate legal personality. Furthermore, the subsequent deviations in case law have merely fine-tuned the doctrine, moulding it from its purest form to one which is commercially acceptable in today’s world.

The House of Lords decision in Salomon v Salomon & Co Ltd[1] established the doctrine of ‘separate legal personality’. Some argue that this doctrine has been fatally undermined by the number of subsequent exceptions to it. This essay will look at the various exceptions, including statutory and judicial and will decide the consequence of them on the doctrine.

Mr Salomon had formed a limited company and in order to comply with the requirement of the Companies Act 1862 that there should be at least seven shareholders, six members of his family were issued with one share each. Salomon held some 20,000 shares and in part payment for the sale, debentures of the company were also issued to him. Eventually, the company was placed in liquidation and after satisfying the debentures, there were not enough funds to pay the ordinary creditors. The liquidator claimed that the formation of the company had been a fraud upon its creditors. The Court of Appeal thought the company had not been properly incorporated as the Act contemplated the incorporation of seven bona fide members, who had minds and wills of their own and were not the mere puppets.

The House of Lords held that in deciding whether a company had been validly constituted, the sole guide had to be what the Act determined. The Companies Act 1862 provided that holding one share was sufficient to constitute a shareholder. It was irrelevant if shareholders were mere dummies because once a company had been legally incorporate, it had to be treated as a distinct legal persona. The fact that a company carried on business for and on behalf of its shareholders did not constitute the relation of principal and agent. Furthermore, no case of fraud could be established.

The decision in Salomon has been subject to much criticism and the cases since have been far from consistent. However in Adams v Cape Industries plc[2], Slade LJ said that ‘…save in cases which turn on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon v Salomon & Co Ltd merely because it considers that justice so requires’[3]. This view was restated by Lightman J in Acatos and Hutcheson plc v Watson[4].

There are, however, certain situations where the courts have shown themselves willing to go against the principle of Salomon and ‘pierce the corporate veil’, that is to ignore or set aside the separate legal personality of a company[5]. Bourne identified two types of exceptions: statutory and judicial[6]. Statutory exceptions include provisions that penalise directors and other office holders by imposing personal liability, for example sections 212-214 of the Insolvency Act 1986 and section 15 of the Company Directors Disqualification Act 1986. Sealy and Worthington, however, do not consider making a company’s director liable the same as piercing the corporate veil. [7] Thus it may be argued that such statutory exceptions do not undermine the principle in Salomon as they do not properly concern the doctrine of separate legal personality.

By majority opinion, judicial exceptions to Salomon certainly do concern the separate legal personality of the company. Judicial exceptions are, however, harder to define and resist attempts to be divided cleanly into sub-groups. Various arguments have been made for why the court makes such exceptions. Sealy and Worthingtongive the following example: the members are liable because their acts constitute them as ‘principals’, with the company being merely an agent, or constructive trustees, or ‘knowing assistants’ in a wrong committed by the company.[8] This argument, however, does not even begin to encompass all judicial exceptions to Salomon.

One major group of judicial exceptions centres on fraud. Linklater considers three cases in which fraud played a role in the court deciding to lift the corporate veil (Trustor v Smallbone (No. 2)[9], R v K[10] and Kensington International Ltd v Congo[11]) and identifies that the common feature of these three cases is that the companies were not shams in the true sense and that in fact they would all have passed the blunt test set by Lord Halsbury in Salomon – ‘either the limited company was a legal entity or it was not’[12].[13] However, as highlighted by Linklater, one element setting these three cases apart from Salomon is that they were all being used for a purpose other than legitimate trading and also to disguise the true state of affairs.[14] Thus, instead of undermining Salomon, these cases help to define the doctrine by narrowing its scope and providing guidance for when it can and, maybe more importantly, cannot be used.

One other group of judicial exceptions are those relating to a group structure, where the parent company and subsidiary are treated as one entity, as if they carry on the same business.[15] In Adams v Cape Industries plc[16], the Court of Appeal attempted to consolidate this diverging body of case law and drew three conclusions. Firstly, there was no support for the concept of the group as a single economic entity and there was no justification for a departure from the normal rule that ‘each company in a group of companies…is a separate legal entity possessed of separate legal rights and liabilities’.[17] Secondly, there was ‘one well recognised exception to the rule prohibiting the piercing of the “corporate veil”‘[18], ‘where special circumstances exist indicating that it is a mere façade concealing the true facts’[19]. The third conclusion concerned agency. The Court of Appeal confined the possibility that a subsidiary be treated as the agent of its parent company to situations where such an inference was factually justified, which in the absence of an express agreement will be hard to establish.[20] Once again, the conclusions of this body of case law do not serve to undermine Salomon but complement it by stipulating additional guidelines.

In conclusion it can be seen that the doctrine of separate legal personality, as embodied in Salomon has not been fatally undermined by the following case law. Instead, the subsequent deviations have merely fine-tuned the doctrine, moulding it from its purest form to one which is commercially acceptable in today’s world.

 

 

 

 

 

Bibliography

N Bourne, Bourne on Company Law (5th edn, Oxon, Routledge 2001)

J Birds, A J Boyle et al, Boyle and Birds’ Company Law (8th edn, Bristol, Jordan Publishing Limited 2011)

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

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



[1] [1897] AC 22 (HL)

[2] [1990] Ch 433 (CA)

[3] ibid [536]

[4] [1995] B.C.C. 446 [450]-[451]

[5] John Birds, A J Boyle et al, Boyle and Birds’ Company Law (8th edn, Bristol, Jordan Publishing Limited 2011) 62

[6] Nicholas Bourne, Bourne on Company Law (5th edn, Oxon, Routledge 2001) 20

[7] Len Sealy and Sarah Worthington, Sealy’s Cases and Materials in Company Law (9th edn,Oxford, Oxford University Press 2010) 53

[8] ibid [53]

[9] [2001] 1 WLR 1177 (Ch D)

[10] [2005] EWCA Crim 619

[11] [2005] EWHC 2684

[12] [1897] AC 22 (HL) [31]

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

[14] ibid

[15] Nicholas Bourne, Bourne on Company Law (5th edn, Oxon, Routledge 2001) 24

[16] [1990] Ch 433 (CA)

[17] ibid [532] (citing Roskill LJ in The Albazero  [1977] AC 774 (HL) [807])

[18] ibid [538]

[19] Woolfson v. Strathclyde Regional Council  [1978] S.L.T. 159 [161]

[20] John Birds, A J Boyle et al, Boyle and Birds’ Company Law (8th edn, Bristol, Jordan Publishing Limited 2011) 77

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Category: Essay & Dissertation Samples, Law Essay Examples

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