This case was an interesting case I came across in one of the classes during my MBA lecture. The case mainly consisted of unsecured creditors in the liquidation process of Salomon limited. In this company Saloman was the major shareholder and hence he was made personally liable for his company's debt.Hence, the issue was whether, regardless of the separate legal identity of a company, a shareholder/controller could be held liable for its debt, over and above the capital contribution, so as to expose such member to unlimited personal liability.The Court of Appeal, declaring the company to be a myth, reasoned that Salomon had incorporated the company contrary to the true intent of the then Companies Act, 1862, and that the latter had conducted the business as an agent of Salomon, who should, therefore, be responsible for the debt incurred in the course of such agency.
The House of Lords, however, upon appeal, 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".Thus, the legal fiction of "corporate veil" between the company and its owners/controllers was firmly created by the Salomon case. 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, Lee v Lee's.
Air Farming Limited, and the Farrar case. The legal fiction of 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 on its own name, it facilitates legal course too. Lastly, the most striking consequence of SLP is that a company survives the death of its members.While the Salomon rule appears to have been eroded substantially, a reversal in the judiciary's approach, commencing with the Adams case, is now visible.
For instance, in Bank of Tokyo v Karoon,the Court of Appeal rejected the "single economic unit" theory arguing that "we are concerned not with economics but with law. The distinction between the two is, in law, fundamental and cannot here be abridged". Further, in the case of VTB Capital Plc v Nutritek International Corporation,the court reiterated the restricted scope of veil piercing as only a limited equitable remedy.On a similar note, in the most recent judgment of Prest v Petrodel, Sumption J. confined the lifting of veil to only two situations, namely, (a) the "concealment principle", akin to the sham or façade exception; and (b) the "evasion principle", being the fraud exception. Deciding not to pierce the corporate veil on the facts, this case once again reinstated the Salomon rule.
All in all, the Salomon ruling remains predominant and continues to underpin English company law. While sham, façade and fraud primarily trigger the invocation of the veil piercing exception in limited circumstances, these grounds are not exhaustive, and much is left to the discretion and interpretation of the courts on case-to-case basis.
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