TOPIC 1 - Corporate Personality Flashcards
(5 cards)
- Topic 1 – Corporate Legal Personality
The general rule established in 1897 Solomon v Solomon – the main principle established in this case
The Salomon Principle
○ Formation of the company by Mr. Salomon; he became a secured creditor and upon insolvency, unsecured creditors were left unpaid.
○ The House of Lords held that, as a properly constituted company, A Salomon & Co Ltd was distinct from Mr. Salomon.
○ Confirmed that compliance with the Companies Act formalities was sufficient to create a separate corporate personality.
It was ruled that subsidiaries within a conglomerate were to be treated as separate entities of the parent company.
○ Once a company is validly incorporated, it is treated as a separate entity.
○ Members are only liable up to the amount they have invested (limited liability).
This principle has become the bedrock of English company law and has been widely adopted globally.
Topic 1 – Corporate Legal Personality
Piercing (or Lifting) the Corporate Veil -
Although Salomon’s principle is foundational, there are instances where courts and statutes allow the veil to be lifted to impose liability on individuals behind the company.
Exceptions to the general rule
○ Common law exceptions & related cases for each exception
- In cases of sham or fraud:
These occur where individuals have used the separate legal entity to do something they are personally forbidden from doing. Gilford Motor Co Ltd v Horne (1933)
H was a car salesman, and left G. His contract stated that he wasn’t allowed to sell to G’s customers for a period after leaving. H set up a company which then approached his former customers; H argued that firstly his company was approaching the customers, not him; and secondly, if thee was wrongdoing, his company was liable and not him. The courts held that the company was sham, and granted an injunction against his company as well as him. - In an agency relationship:
If a subsidiary company is acting as an agent for its holding company, it may be bound by the same liabilities and rights of its holding company. However, no court has yet found subsidiary companies liable for their holding company’s debts. Smith, Stone & Knight Ltd v Birmingham Corporation (1939)
SSK owned some land, an a subsidiary company operated on this land. BC issued a compulsory purchase order on this land. Any company which owned the land would be paid for it, and would reasonably compensate any owner for the business they ran on the land. Since the subsidiary company did not own the land, BC claimed they were entitled to no compensation. The courts held that the subsidiary company was an agent and BC must pay compensation. - In a single economic entity:
When the entities are considered to be a single economic unit. DHN Food Distributors Ltd v London Borough of Tower Hamlets (1976)
A subsidiary company of DHN owned land which LBTB issued a compulsory purchase order on. The courts held that DHN was able to claim compensation because it and its subsidiary were a single economic unit. - Under EU Law: The European Court of Justice can consider subsidiary companies as a single unit for competition purposes. If there was a monopoly which set up ten subsidiaries to make it appear as if there was competition, the ECJ could consider all companies to be a single economic unit.
- In cases of national emergency:
The courts may need to consider ownership of companies. Daimler Co Ltd v Continental Tyre and Rubber (GB) Ltd (1916): C sued D for debts owing. C was a UK company; however all shareholders but one) were German. D argued that they should not pay the debt to German individuals to prevent money going towards Germany’s war effort. The court held that C was German. - Other grounds: When companies have been set up for tax evasion purposes. Companies may transfer assets between subsidiary companies to reduce tax liability, but the courts may ten treat them as a single unit.
Exceptions to the general rule:
○ Statutory exceptions
– Related Acts and sections & cases
The Companies Act 2006 includes a number of exceptions to the general rule imposed by Salomon v Salomon & Co Ltd.
* 1) A public company must have at least two members. If there is a single member (who is aware he is the only member) for more that six months, he is personally liable for any debts incurred during that period.
2) Groups of companies must produce accounts acknowledging their internal relationship, and profits and losses of different subsidiaries can be offset for taxation purposes
3) Under the Transfer of Earnings and Protection of Employment Regulations (1978), if an employee transfers from one company to a sister company, their period o employment is held to be continuous.
4) Employees of a company can be liable for the company’s actions in some circumstances:
- A public company must have an s117 certificate. If it operates without one, a director may be personally liable for any debts incurred.
- A company cheque must bear the name of a company exactly, otherwise the director who signs is liable if the cheque is not cleared.
- This applies even if the omission is due to a printing error. A director of Michael Jackson Ltd was personally liable for a cheque he signed bearing the company name M Jackson Ltd.
If a company is wound up, its director may not carry out similar business with a similar name for five years. Double glazing
companies are a good example of this; before his legislation, directors would pay themselves high bonuses and run a company into the ground, then would buy the assets of the insolvent company cheaply and set up a virtually identical company with a similar name to transfer any goodwill.
Under the Company Directors Disqualification Act 1986, a person who is disqualified from being a director can be personally liable if they act as a director during their disqualification period.
If directors know a company is close to insolvency but continue trading, they may be personally liable. For example, Courts Furniture Ltd recently continued taking orders and deposits despite the directors knowing the business was close to closing.
- Under Insolvency Proceedings – Sections 213 and 214 of the Insolvency Act 1986
- The Environmental Protection Act 1980
Incorporate some academic commentary on the ‘contemporariness’ of the Solomon principle in your responses.
- Contemporary Critiques and Academic Views
- Balance Between Certainty and Fairness
○ Salomon provides certainty—investors know their liability is limited.
○ Counter-argument: Courts should more easily pierce the veil to protect third parties (especially unsecured creditors and employees). - Pragmatic Judicial Approach
○ Courts historically have been cautious about disregarding Salomon, focusing on clear evidence of fraud or agency rather than broad “justice” considerations.
○ Adams v Cape Industries underscores that corporate structures set up to minimize liability/tax are generally permissible unless contrary to law or fraudulent. - Evolving Statutory Measures
○ Parliament increasingly intervenes to prevent abuse (e.g., wrongful trading, disqualification of directors).
○ These interventions reflect acknowledgment that Salomon’s principle, while foundational, must be balanced against misuse.
- Balance Between Certainty and Fairness
essay plan
Salomon v Salomon & Co Ltd (1897) stands as the bedrock of modern corporate law, establishing the doctrine of corporate legal personality. Under this principle, a company, once duly incorporated, is recognized as a separate legal entity distinct from its shareholders. This separation underpins crucial features of corporate existence—namely, limited liability, perpetual succession, and the independent capacity to enter contracts and own property. In effect, limited liability shields shareholders by restricting their financial exposure to the value of their investment, while the veil of incorporation ensures that the company’s legal identity remains autonomous from its individual members, thereby fostering entrepreneurship and business growth.
However, the absolute application of the Salomon principle has not gone without criticism. While it promotes commercial certainty and investment, its rigid framework may sometimes enable fraudulent or abusive practices, leaving creditors or other stakeholders exposed. In response, courts have developed methods to “lift” or “pierce” the corporate veil in exceptional circumstances, thereby intervening to rectify or prevent wrongdoing.
This essay will critically assess the circumstances under which the corporate veil may be disregarded, exploring both common law and statutory exceptions. It will evaluate the effectiveness of these judicial and legislative interventions in curbing abuse, while also incorporating academic commentary on whether the Salomon principle remains fully relevant in today’s complex corporate environment. The discussion will proceed in three parts: first, by clarifying the foundational Salomon principle and its central role in corporate law; second, by examining the scenarios and legal grounds that justify piercing the veil; and third, by evaluating the practical impact and contemporary relevance of these exceptions.
In Salomon v Salomon & Co Ltd (1897), the court held that once a company is properly incorporated, it becomes a separate legal entity distinct from its shareholders. This means that the legal formalities of incorporation create an independent person capable of owning property, entering into contracts, and incurring liabilities, while shareholders benefit from limited liability and the company enjoys perpetual succession. The court’s decision established that even if Mr. Salomon, the founder, became a secured creditor by transferring his sole-trader business into the company, his personal liability was not affected by the company’s subsequent insolvency—unsecured creditors, in fact, bore the brunt of the loss. This holding has been reinforced in cases such as Lee v Lee’s Air Farming Ltd and Macaura v Northern Assurance. Although the decision underpins modern corporate law by encouraging investment and economic growth, contemporary academic commentary raises concerns that the rigid application of the Salomon principle can enable corporate abuse, particularly by shielding wrongful conduct from personal liability, suggesting that a more flexible judicial approach may be warranted in today’s complex business environment.
Courts generally uphold the corporate veil by insisting on the separate legal personality of a company, but in exceptional circumstances they will look behind the structure. When a company is used as a device to commit fraud or evade legal obligations, as seen in Gilford Motor Co v Horne (1933) and Jones v Lipman (1962), the court will pierce the veil by determining whether the company is simply a façade concealing the true facts. Similarly, if a subsidiary is found to act as an agent for its parent—demonstrated in Smith, Stone & Knight v Birmingham Corporation—the veil may be lifted; though modern rulings such as Adams v Cape Industries have imposed stricter limitations on this agency exception. While there have been instances, like in DHN Food Distributors v Tower Hamlets, where the notion of a single economic unit was considered, subsequent cases including Woolfson v Strathclyde and Adams v Cape Industries reaffirm that the separate legal personality should remain intact except in rare instances. In more unusual scenarios, such as wartime, the courts have even deemed a UK-registered company an “enemy” in cases like Daimler Co Ltd v Continental Tyre, where control by foreign interests was a key factor. Finally, although earlier cases suggested that the veil could be pierced for the sake of justice and equity, modern jurisprudence, as articulated in Adams v Cape Industries, insists that such intervention must be guided by clear policy considerations rather than a purely discretionary standard.
Legislative intervention under the Companies Act 2006 and related statutory provisions introduces several narrow yet pivotal exceptions to the general rule of separate legal personality. For instance, under the Insolvency Act 1986, sections 214 and 213, directors may be held personally liable for wrongful and fraudulent trading if they continue trading while insolvency is foreseeable or engage in business with the intention of defrauding creditors. Additionally, the Company Directors Disqualification Act 1986 serves to bar directors from management roles when they breach their fiduciary duties, while statutory requirements, such as those found in CA 2006 s.82 and onward (which replaced the older CA 1985 provisions), ensure that signatories are personally accountable for failure to correctly display the corporate name. These measures reflect a public policy imperative to curb abuse—exemplified in cases like Re Bugle Press, where companies exploited their form for unscrupulous purposes—and collectively work to enforce capital maintenance, proper charge registration, and other safeguards. Despite these statutory exceptions, which are designed to deter misconduct by imposing personal liability on wrongdoers, the corporate veil remains robust outside of such clearly wrongful contexts, ensuring that limited liability continues to underpin commercial certainty and investment.
Courts remain cautious about piercing the corporate veil, placing the onus on claimants to prove fraud or a statutory breach—as illustrated in Adams v Cape Industries. This approach balances the need for commercial certainty via limited liability with protecting against abuse. While critics argue that these narrow exceptions may leave creditors exposed, they effectively deter director misconduct and ensure fiduciary duties are upheld. Academically, debates persist over whether these reforms sufficiently moderate the rigidity of Salomon without undermining its core benefits.
Salomon v Salomon continues to be the cornerstone of modern corporate law, providing limited liability and perpetual succession that support business growth. Yet, both judicial and statutory measures have created narrow exceptions—targeting fraud and wrongful trading—to address instances where the corporate form is misused. Although the high threshold for piercing the veil is criticized by some, it strikes a necessary balance between fostering investment and ensuring accountability. Ultimately, the law evolves incrementally, preserving the essential benefits of separate legal personality while curbing potential abuses.
