Ethics, Governance and Regulation

Essay on

“Salomon v Salomon & Co. Ltd. [1897] AC 22 – its impact on

modern laws on corporations – selected studies from the UK and
the USA”

Rajib Dahal

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1. Introduction

Corporate personality has been considered to be the most fundamental principle in company
law. It constitutes the pedestal upon which company is viewed as an entity distinct from the
shareholders who subscribe its memorandum. When a company is incorporated, it is treated as
a separate “legal entity distinct” from its shareholders, promoters, directors, members, and
employees; and the concept of the corporate veil, separating those parties from the corporate
body, has arisen. The issue of “lifting the corporate veil” has been considered by courts and
commentators for many years and there are instances in which the courts have negated from the
strict application of this doctrine.

In this essay, I am going to discuss the genesis of “principle of corporate personality” under
English Law and how subsequently, the courts and commentators have departed or agreed with
this principle. In this process, it is necessary to introduce the concept of “lifting/piercing of
corporate veil” as it is to a certain extent a departure from the “principle of corporate
personality”. I begin the essay by tracing the origin of corporate personality under famous
English case law Salomon v Salomon & Co. Ltd. [1897] AC 22 (herein after referred as
“Salomon”) and conclude it by looking at subsequent legal developments under English and
American case laws. In conclusion, I would also point to a definite legal position with respect
to Salomon and the significance of the case law even today in the modern globalised business
world.

2. The significance of Salomon

2.1.Facts and the judgement from Salomon

First, very briefly, the fact and the ratio decidendi of Salomon.

Mr. Salomon had a business of leather boots and shoes. In 1892, he established a company
“Salomon and Company Ltd.”. Salomon, his wife, and five of his children held one share each
in the company. The members of the family held the shares because the Companies Act required
at that time that there should be seven shareholders. Salomon was also the managing director
of the company. The newly incorporated company purchased the sole trading leather business.

The business was valued by Mr Salomon at ₤39,000 and he held 20,001 shares in the company,
his family held the 6 remaining shares. He was also, because of the debenture, a secured creditor
in the company. Salomon had borrowed funds from creditors to invest in the business. Things
did not go well for the leather business, and within a year, Salomon had to sell his debenture to
save the business. This did not have the desired effect, and the company was placed in insolvent
liquidation. The liquidator on behalf of the unsecured creditors alleged that the company was

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an agent for Salomon, and that Salomon was therefore personally liable for the debt of the
company.

The Court of Appeal held that the whole transaction was contrary to the true intent of the
Companies Act and the company was a mere sham and added that Salomon remained the real
proprietor of the business. As such, Salomon was liable to indemnify the company against
its trading debts.

On appeal, House of Lords did not agree with the judgment of the Court of Appeal. It found
that a company was formed in compliance with the regulation of the Companies Act and
therefore, it is a separate person, not the agent of its controller.

The words of LORD MACNAGHTEN clearly summarises the law propounded in Salomon.
The Hon’ble Lord Comments, “……………. The company is at law a different person
altogether from the subscribers to the memorandum; and, though it may be that after
incorporation the business is precisely the same as it was before, and the same persons are
managers, and the same hands receive the profits, the company is not in law the agent of the
subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or
form, except to the extent and in the manner provided by the Act. That is, I think, the declared
intention of the enactment……..1”

2.2. Significance of Salomon for the development of modern laws on corporation

The decision of the House of Lords in Salomon created a bedrock principle of corporate
personality, and also a very significant limited liability concept. So, in a way, it will not be an
overstatement to hold Salomon principally responsible to have acted as a genesis of modern
laws on corporation.

In fact, the significance of decision in Salomon can be said to have two aspects. The first and
the foremost is the sound edifice of “separate corporate personality” distinct from its
shareholders and is to be treated as any other independent person with its own rights and
liabilities. The decision in Salomon has also been, in initial days, a judicial pronouncement
legitimising the concept of the one person or private company. More importantly, the decision
shielded the one-man-army shareholder, manager and proprietor for any claims from the
creditors. The second principle which simultaneously emerges from Salomon is that it
guarantees the limited liability of shareholders. These two doctrines are recognized as the twin
pillars which are mostly sacrosanct and hold the position firmly for more than a century. It is
also completely justified to state that the decision in the Salomon is the one on which modern

1
http://corporations.ca/assets/Salomon%20v%20Salomon.pdf at p.27 of 38

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company law rests. That’s why the courts in the UK and the USA have been keen to maintain
the position despite growing clamour to deviate from it2.

It is also important to make a note that before the decision in Salomon, the separate legal entity
concept had not yet been fully recognized or developed, and that therefore until Salomon was
decided in 1897, it remained unclear to what extent, and in what circumstances, a company was
thought to be legally separate from its shareholders3. The significance of Salomon lies in the
fact that the decision has stood the test of time because it has meant that corporations do have
practical utility. As companies are regarded as a “juridical entity” having its own legal
personality post Salomon decision, what it has ensured is the development of modern
corporations as a separate legal entity subject to limited liability, with a number of
characteristics such as share transferability, perpetual existence, flexible financing methods,
specialized management, majority rule etc.

3. Departure from Salomon

3.1. Lifting/Piercing the Corporate Veil

As discussed above, Salomon has hugely contributed to the certainty of laws on corporations.
However, there are still situations where the courts have felt it is necessary to depart or
distinguish Salomon case. One of such exceptions to the general rule is: lifting the corporate
veil.

Piercing the corporate veil or lifting the corporate veil is a legal pronouncement by which the
rights or duties of a corporation are treated as the rights or liabilities of its shareholders, i.e.
subscribers of memorandum or charter. Usually a corporation is treated as a separate legal
person, which owes its genesis to Salomon. The implications are that the corporation alone is
solely responsible for the debts it incurs and is the sole beneficiary of the credit it extends to its
customers. Common law countries, which follow English law, usually uphold this principle of
separate and distinct personality of a corporation, but in exceptional situations, Courts may be
willing to pierce or lift the veil.

Lifting the corporate veil means trying to look beyond the company framework (or behind the
company’s separate personality) to make the individual or parent company liable.

2
Hutchinson, Allan, and Ian Langlois. "Salomon Redux: The Moralities of Business." Seattle University Law
Review 35.4 (2012):1109-1134, Accessed from:
http://digitalcommons.osgoode.yorku.ca/cgi/viewcontent.cgi?article=1458&context=scholarly_works , Accessed
on: 18 April 2018
3
Phillip Lipton, The Mythology of Salomon’s Case and the Law dealing with the Tort Liabilities of Corporate
Groups: An Historical Perspective, Accessed from:
http://classic.austlii.edu.au/au/journals/MonashULawRw/2014/20.pdf, Accessed on: 15 April, 2018

Electronic copy available at: https://ssrn.com/abstract=3169431

However, there is no uniformity and consensus even among courts when they can pierce the
corporate veil thereby making individual members liable for the debts or wrongs done by the
company. In this section, an attempt has been made to analyse some of the English and
American case laws which deal with departure from “limited liability of shareholders”.

In VTB Capital PLC v. Nutritek International Corporation (2013 2 AC 337), the Supreme
Court of the United Kingdom was called upon to decide whether a claimant who has entered
into a contract with a company as a result of a fraud practised by the company’s owners can
“pierce the corporate veil” so as to sue the owners of the company under that contract 4. This
was one of such occasions when the Hon’ble Supreme Court at length examined the principle
of “lifting of corporate veil”. Thereafter, it propounded a common position that when the
corporate structure was being used as a “sham” or a “façade” to conceal wrongdoing, then,
court can invoke the lifting of veil. Nevertheless, the Court refused to invoke any such principle
in VTB Capital PLC as it deemed that the facts of the case does not demand lifting of any veil.
The judgement in VTB is a welcome move as it gives some certainty to commercial laws5. This
is more so in the light of a judgement in Antonio Gramsci Shipping Corp v Stepanovs [2011]
EWHC 333 where Burton J. had held that the veil could be pierced to allow the controllers of
a company to be sued under the company’s contracts as if they were themselves a contracting
party. Gramsci, which involved a fraudulent shipping charter party scheme, had caused
considerable uncertainty in commercial law and had been widely regarded as an over-extension
of legal principle to provide justice on a fairly extreme set of facts.

Prest v Petrodel Resources Ltd & Others [2013] UKSC 34 is another recent case law which
required the examination of lifting of corporate veil principle. with the separate legal personality
of a registered company and the circumstances in which it might be possible to disregard the
separate personality of a company by ‘piercing the corporate veil’ or looking beyond an
individual company’s ownership of assets or bearing of liabilities. The Court concluded that
there exists only a narrow operation with regard to the ‘piercing the corporate veil’ doctrine, so
the courts disregarding the separate personality of the company was “limited”.

While discussing the ambit and the scope of the power of courts to invoke “piercing of corporate
veil principle”, the Supreme Court observed that the law relating to the circumstances in which
it would be permissible for the courts to pierce the corporate veil was characterised by

4
Case comment by Oliver Gayner, Olswang LLP, Accessed from: http://ukscblog.com/case-comment-vtb-
capital-plc-v-nutritek-international-corp-ors-2013-uksc-5/, Accessed 22 April 2018
5
Case comment by Stuart Shepherd, Ince & Co LLP, Accessed from:
https://www.lexology.com/library/detail.aspx?g=cb0148bb-db26-4f3c-a7ab-7b2fb3790f42 , Accessed 20 April
2018

Electronic copy available at: https://ssrn.com/abstract=3169431

"inadequate reasoning"6. Therefore, the court even doubted if there exists such principle.
Despite such confusion in the law, Lord Sumption in Prest held that the position is that the
doctrine of veil piercing required some dishonesty on the part of the company member and was
not simply a device that could be employed to ensure justice in any given case. Lord Sumption
in this case introduced the terms such as 'evasion' and 'concealment' as a condition precedent
to invoke the principle of lifting of veil (instead of the terms sham or façade which were used
earlier).

3.2.Necessity of departure from Salomon

There is no consensus among the corporate law experts and jurists with respect to the need to
depart from well-established principles enunciated under Salomon. Some have argued for the
sake of certainty and have appealed that Salomon case should be followed under all
circumstances as to ensure the reliability in corporate world.

However, a concern has been raised by many with respect to compensation for tort victims. It
is argued that the conditions for “lifting of corporate veil” should be relaxed when the tort
victims are unable to claim compensation because a tortfeasor subsidiary company is
insufficiently capitalized to meet the full extent of its tort liabilities. This line of argument is
gaining substantial ground as the companies are known to avoid liability for the subsidiary’s
debts by strategically drawing corporate boundaries within a group.

By invoking the principle under torts laws, Doe v. Unocal, 395 F.3d 932 (9th Cir. 2002) was
brought before a Court in California, US. Californian Court held in the case that the plaintiffs
must show both that the parent and subsidiary share a unity of interest and control, and that,
absent piercing, some form of "injustice" will result. However, in the instant case, Court refused
to pierce the veil. Therefore, the legal position in the UK and in the USA stand on an equal
footing.

4. Conclusion

After discussion on Salomon and subsequent judicial pronouncements, it is safe to say that
Salomon ruling remains the predominant and solid foundation of modern company law in the
UK and in the USA. There could be a scenario where members of a company may be personally
liable to indemnify the creditors in case such members resort to sham, façade, or fraud
transactions. Such situations demand the lifting of corporate veil. However, Courts have
exercised extreme care and restraint while invoking such principles. In fact, many times, the

6
Prest v Petrodel Resources Ltd & Others [2013] UKSC 34 (Lawteacher.net, April 2018), Accessed from:
https://www.lawteacher.net/cases/prest-v-petrodel-resources.php?vref=1 , Accessed 22 April 2018

Electronic copy available at: https://ssrn.com/abstract=3169431

courts have refused to apply such principle, have made it clear that only in limited cases, it is
possible to lift the veil. In most recent cases, courts have doubted if such principle called
“piercing of corporate veil” even exists. This gives a lot of legitimacy to the principles
enunciated and confirmed under Salomon and they are: separate corporate personality and
limited liability of subscribers of memorandum. Under Common law principles, there is a
greater degree of freedom on courts to decide when to move away from established principles
depending on the facts and circumstances of each case.

Electronic copy available at: https://ssrn.com/abstract=3169431

 REFERENCES/BIBLIOGRAPHY

1. Case comment by Oliver Gayner, Olswang LLP, Accessed from:

http://ukscblog.com/case-comment-vtb-capital-plc-v-nutritek-international-corp-ors-
2013-uksc-5/
2. Case comment by Stuart Shepherd, Ince & Co LLP, Accessed from:
https://www.lexology.com/library/detail.aspx?g=cb0148bb-db26-4f3c-a7ab-
7b2fb3790f42
3. http://corporations.ca/assets/Salomon%20v%20Salomon.pdf
4. Hutchinson, Allan, and Ian Langlois. "Salomon Redux: The Moralities of Business."
Seattle University Law Review 35.4 (2012):1109-1134, Accessed from:
http://digitalcommons.osgoode.yorku.ca/cgi/viewcontent.cgi?article=1458&context=s
cholarly_works
5. Phillip Lipton, The Mythology of Salomon’s Case and the Law dealing with the Tort
Liabilities of Corporate Groups: An Historical Perspective, Accessed from:
http://classic.austlii.edu.au/au/journals/MonashULawRw/2014/20.pdf
6. Prest v Petrodel Resources Ltd & Others [2013] UKSC 34 (Lawteacher.net, April
2018), Accessed from: https://www.lawteacher.net/cases/prest-v-petrodel-
resources.php?vref=1

Electronic copy available at: https://ssrn.com/abstract=3169431