Introduction
Separate Legal Personality (SLP) is the basic tenet on which company law is premised. Establishing the foundation of how a company exists and functions, it is perceived as, perhaps, the most profound and steady rule of corporate jurisprudence. Contrastingly, the rule of “SLP” has experienced much turbulence historically and is one of the most litigated aspects within and across jurisdictions. This principle, established in the case of Salomon v Salomon, is still much prevalent and is conventionally celebrated as forming the core of, not only the English company law but of the universal commercial law regime.
Name - Salomon v. Salomon & Co. Ltd.
Citation - (1897) A.C. 22, [1896] UKHL 1
Facts
Aron Salomon had for many years carried on a prosperous business as a leather merchant. In 1892, he decided to convert it into a limited company and for that purpose, Salomon & Co. Ltd. was formed with Salomon, his wife, his daughter, and his four sons as members, and Salomon as Managing Director.
The company purchased the business of Salomon for £ 39,000. The price was satisfied by £ 10,000 in debentures, conferring a charge over all the company’s assets, £ 20,000 in fully paid up £ 1 shares, and the balance in cash. Seven shares were subscribed in cash by the members and the result was that Salomon held 20,001 shares out of 20,007 shares issued, and each of the remaining six shares was held by a member of his family. The company almost immediately ran into difficulties and only a year later the holder of debentures (Salomon had transferred his shares to another person) appointed a Receiver and the company went into liquidation. On liquidation, the value of assets was divided as £ 6,000 for liabilities,£ 10,000 for debentures, and £ 7,000 for unsecured debts. After paying off the debenture holders nothing would be left for the unsecured creditors.
Thus, an action was brought by the Liquidator against Salomon holding him liable to indemnify the company against the company’s trading debts.
Issues
- Whether Salomon & Co. Ltd. was a legally valid company?
- Whether Salomon was liable for the debts of the company?
Judgement
The Court of Appeal, declared the company to be a myth, reasoned that Salomon had incorporated the company contrary to the true intent of the then Companies Act, 1862 (hereinafter to be referred to as the Act) and that the company had conducted the business as an agent of Salomon, who should, therefore, be responsible for the debt incurred in the course of such agency.
However, upon appeal, the House of Lords reversed the above ruling, and unanimously held that, as the company was duly incorporated, it is an independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are.
In the present case, the Company Act of 1862 provided that any seven or more persons, associated for a lawful purpose may, by subscribing their names to a memorandum of association and otherwise complying with the provisions of the Act in respect of registration form a company with or without limited liability.
The Act further provided that “no subscriber shall take less than one share.” That there were seven actual living persons who held shares in the company was never doubted. Whether the capital of the company is owned by seven persons in equal shares, with the right to equal share in profits, or whether it is almost owned by one person who takes practically the whole profits, it does not concern a creditor of the company. The company does not lose its identity if the bulk of its capital is held by one person. The company at law is an altogether different person from its subscribers/shareholders.
Since the company fulfilled all the requirements of the Act, the court held that the company had been validly formed and was a real company.
Corporate Veil
Commencing with the Salomon case, the rule of SLP has been followed as an uncompromising precedent in several subsequent cases like Macaura v Northern Assurance Co[1]., Lee v Lee’s Air Farming Limited[2], and the Farrar case[3]
The legal fiction of the corporate veil, thus established, enunciates that a company has a legal personality separate and independent from the identity of its shareholders. Hence, any rights, obligations, or liabilities of a company are discrete from those of its shareholders, where the latter are responsible only to the extent of their capital contributions, known as “limited liability”.
This corporate fiction was devised to enable groups of individuals to pursue an economic purpose as a single unit, without exposure to risks or liabilities in one’s personal capacity. Accordingly, a company can own property, execute contracts, raise debt, make investments, and assume other rights and obligations, independent of its members. Moreover, as companies can then sue and be sued in their own name, it facilitates legal courses too. Lastly, the most striking consequence of SLP is that a company survives the death of its members as well.
The Exception of Veil Piercing
Notably, similar to most legal principles, the overarching rule of SLP applies with exceptions, where the courts may look through the veil to reach out to the insider members, known as the “lifting or piercing of the corporate veil“.
It is worthwhile here to refer to the case of Adams v Cape Industries[4], which examined the common law grounds, primarily evolved through case law as an equitable remedy, namely- (a) agency, (b) fraud, (c) sham, (d) group enterprise, and (e) injustice or unfairness. The exception has been invoked widely by English courts, including in the recent cases of Beckett Investment Management Group v Hall Stone[5] & Rolls v Moore Stephens[6] and Akzo Nobel v The Competition Commission[7], etc.
Needless to mention, the journey of English law in defining the contours of the SLP doctrine and carving out these exceptions has been quite a hassle. Moreover, veil piercing is now also rampant as a statutory exception.
Conclusion
The concept of lifting the corporate veil was later introduced after this case where no person could hide behind the company’s entity to commit fraud and avoid any sort of liability. A certain amount of proximity should be there to apply this concept of lifting the veil. In this case, it was decided that no illegal or sham act has been done by Mr Aron and that he was legally the creditor of the company and has a right to be paid at the winding up of the company before the unsecured creditors as his debt was secured by a charge against the assets of the company.
[1]1925 AC 61
[2]1961 AC 1
[3] (1888) 40 ChD 39
[4] 1990 Ch. 433
[5] 2009 1 A.C. 1391
[6] 2009 UKHL 39
[7] 2013 CAT 13 (21 June 2013)
