COPROPRATE PERSONALITY

SALMONDS CORPORATE THEORY:

Sir John Salmond is justly famous for his work on torts1 and jurisprudence2 and as a judge of the
Supreme Court of New Zealand. What is less well known is that he had very distinct views on
corporate theory which he developed in his Jurisprudence and also in some of the cases which he
decided as a judge. His views were strongly influenced not only by the positivism and
utilitarianism of Bentham and Austin but also by Maitland and the German jurists of the late 19th
century. At the same time he had a sharp and original mind which was capable of independent
thought of a liberal and pragmatic nature which greatly influenced the development of modern
legislation s on company law. His book on jurisprudence was popular until the 1970s and was
treated as a useful theoretical foundation for the practice of law.
Salmond's views on corporate theory appear in Chapter XV of his Jurisprudence, which deals
with Persons. Salmond's basic view was that "persons are the substances of which rights and
duties are the attributes. It is only in this respect that persons possess juridical significance, and
this is the exclusive point of view from which personality received legal recognition".3
He distinguished between natural and legal persons and said that legal persons are beings, real or
imaginary, to whom the law attributes personality by way of fiction when there is none in fact.
Although Salmond adopted the fiction theory he did so with certain reservations. He said that,
although fictitious personality involves personification, the converse is not true. Personification
in itself is a mere metaphor, not a legal fiction. "Legal personality is a definite legal conception;
personification as such is a mere artifice of speech designed for compendious expression.
People talk about a bench of judges or a partnership as a firm. This is simply metaphorical usage.
A corporation is, on the other hand, a fictitious person representing a group of persons but is not
identical with them. It is treated in law as a separate person. He followed the conventional
1 Sir John Salmond, The Law of Torts, London,6 ed, Sweet & Maxwell, London, (1924).
2 Sir John Salmond Jurisprudence,New Delhi,12th ed, Universal Law Publishing Co., (1966), reprinted (2013).
3 ibid

distinction between corporations sole and aggregate. He thought that the chief difficulty in
comprehending the true nature of a corporation sole is that it bears the same name as a natural
person who is himself the sole member for the time being.
He acknowledged that while he accepted the generally received view that corporations are
fictitious persons the theory has not gone unchallenged. He referred to the views of Gierke 4 that
the real Verbandspersonlichkeit is a group organism whose parts are human beings.
He, in a memorable phrase, stated that, "The so-called will of a company is in reality nothing but
the wills of a majority of its directors or shareholders. Ten men do not become in fact one person,
because they associate themselves together for one end, any more than two horses become one
animal when they draw the same cart".5 He thought that the apparent absurdity of treating a joint
stock company as a mere fiction proceeded not from the fiction theory but from a
misunderstanding of it. He said: "No-one denies the reality of the company in the sense of a
group of shareholders. What is denied is the reality of its personality. A group or society of men
is a very real thing, but it is only a fictitious person." This passage appeared in the first edition in
1902. In the works cited in the 1924 edition, which include Gierke, Maitland, Pollock, Brown
and Savigny, he also includes Gray.
In The Nature and Sources of the Law, John Chapman Gray stated, "It should be observed that
even if a corporation be a real thing, it is yet a fictitious person for it has no real will, but it
would be a fictitious person only as an idiot or a ship is a fictitious person". 6 Gray argued, "Is the
corporation to which these wills of individual men are attributed a real thing or only a thing of
fiction, a fictitious entity? If it is a fictitious entity we have a double fiction; first a fiction on the
creating of an entity, and then by a second fiction we attribute to it the wills of individual men. If
the corporation is a real entity then we have need only of this second fiction."7
4 Hollis F., Corporate Personality. A Study in Jurisprudence London, Oxford University Press,( 1930) p 17
5 ibid
6 Carr, C.T., The General Principles of the Law and Corporations Cambridge,Cambridge University Press, (1905), p 185.
7 Gray, John C., The Nature and Sources of the Law New York, Roland Gray 2 ed, The Macmillan Co, (1927). p19

Having posed the problem he declined to solve it as he feared he should "find no end in
wandering mazes lost." It seems clear, therefore, that Gray derived some of these ideas from
Salmond although he does not cite him.
Salmond thought that although corporations are fictitious persons the acts, interests, rights and
liabilities attributed to them by the law are those of natural persons .Otherwise the law of
corporations would be destitute of any relation to actual fact. His attribution doctrine seems to
have preceded that of Lord Hoffmann delivering the judgment of the Judicial Committee of the
Privy Council in Meridian Global Funds Asia Ltd v Securities Commission.Lord 8 Hoffmann
develops the attribution doctrine without reference to Salmond or indeed to counsel's argument
and analyses it substantially in terms of systems of rules. A corporation is a bundle of rules
interfacing with other bundles of rules.
Salmond ponders that If Smith has legal rights then it is a human being that has legal rights. But
if Smith and Company Ltd. has legal rights, what is it really that possess these rights? 9 Salmond
is of the opinion that corporations are mere fictions. Just like scientists, for the sake of
convenience, consider electric current as current of water likewise the lawyers designate
corporations as persons. It is evident to both of them that, in reality electric current is no current
at all and corporations are not persons.
He further goes on to point that from the face of it it may look like the lawyers are indulging in
the make belief theory yet that is certainly not the case. in a work of fiction the charecters
actually never exist but in contrast to this is case of a corporation, one is not forced to imagine an
entity that does not exist in reality. He puts it simply that, even though Smith Co. Ltd. is not the
same as Smith, yet the existence of the former is no way doubtful.
He draws a contrast between the Fiction Theory and the Realist Theory and acknowledges that
the former explains the concept of corporate personality with clarity. While the fiction theory
points, to the earlier drawn conclusion that corporations are mere fiction; the realist theory
8

[1995] 2 AC 500

9 Sir John Salmond Jurisprudence,New Delhi,12th ed, Universal Law Publishing Co., (1966), reprinted
(2013) p 328

remains unambiguous on this subject. According to Salmond, the extreme opposite of the fiction
theory asserts corporation is a real but mysterious entity with a special type of existence
remains unsatisfactory. 10
The statement that-corporations are nothing but their members, and that statement about
corporations are disguised abbreviations for statements about all the members also does not
hold to be entirely true. This theory was also purported by Ihering and was popularly called the
bracket theory. Salmond explains the contradictions with an example that if a corporation owed a
debt to a person, it in no manner implied that every member of the corporation owed a debt to
that person. this statement can be held true if one specifies that the company owes the debt, along
with it listing the legal consequences , liability of the ones who were to pay and the effect of the
same on the members of the corporation. Thus, we can see that Salmond clearly justified his
viewpoint that statements about corporations are simple unified methods of stating what would
otherwise be inordinately complicated law makes rules about ordinary person and by way of
analogy it extends it to group of persons. However, not all laws of natural person apply to
corporations. Their civil and criminal liability as per him must be dependent on public
interest11
CORPORATIONS AND SEPARATE LEGAL ENTITY DOCTORINE:
SALOMON v SALOMON & Co

12

: Aaron Salomon was a successful leather merchant who

specialized in manufacturing leather boots. For many years he ran his business as a sole trader.
By 1892, his sons had become interested in taking part in the business. Salomon decided to
incorporate his business as a Limited company, Salomon & Co. Ltd. At the time the legal
requirement for incorporation was that at least seven persons subscribe as members of a
company i.e. as shareholders. Mr. Salomon himself was managing director. Mr. Salomon owned
20,001 of the company's 20,007 shares - the remaining six were shared individually between the
other six shareholders (wife, daughter and four sons). Mr. Salomon sold his business to the new
10 ibid p 329
11 ibid
12 (1897) AC 22

corporation for almost 39,000, of which 10,000 was a debt to him. He was thus simultaneously
the company's principal shareholder and its principal creditor. When the company went into
liquidation, the liquidator argued that the debentures used by Mr. Salomon as security for the
debt were invalid, on the grounds of fraud. The judge, Vaughan Williams J. accepted this
argument, ruling that since Mr. Salomon had created the company solely to transfer his business
to it, the company was in reality his agent and he as principal was liable for debts to unsecured
creditors.
High Court: The judge, Vaughan Williams J. accepted this argument, ruling that since Mr.
Salomon had created the company solely to transfer his business to it, then the company and
Salomon were one unit; the company was in reality his agent and he as principal was liable for
debts to unsecured creditors.
The appeal: The Court of Appeal also ruled against Mr. Salomon, on the grounds that Mr.
Salomon had abused the privileges of incorporation and limited liability, which the Legislature
had intended only to confer on "independent bona fide shareholders, who had a mind and will of
their own and were not mere puppets". The lord justices of appeal variously described the
company as a myth and a fiction and said that the incorporation of the business by Mr. Salomon
had been a mere scheme to enable him to carry on as before but with limited liability. The
Lords: The House of Lords unanimously overturned this decision, rejecting the arguments from
agency and fraud. Salomon followed the required procedures to set the company; shares and
debentures were issued. The House of Lords held that the company has been validly formed
since the Act merely required 7 members holding at least one share each. There was no fraud as
the company was a genuine creature of the Companies Act as there was compliance and it was in
line with the requirements of the Registrar of Companies.
The Company is at law a separate person. The 1862 Act created limited liability companies as
legal persons separate and distinct from the shareholders. They held that there was nothing in the
Act about whether the subscribers (i.e. the shareholders) should be independent of the majority
shareholder. It was held that: "Either the limited company was a legal entity or it was not. If it
were, the business belonged to it and not to Mr Salomon. If it was not, there was no person and
nothing to be an agent [of] at all; and it is impossible to say at the same time that there is a
company and there is not." Hence the business belonged to the company and not to Salomon, and

Salomon was its agent. The House further noted: "The company is at law a different person
altogether from the [shareholders] ...; 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
received the profits, the company is not in law the agent of the [shareholders] or trustee for them.
Nor are the [shareholders], as members, liable in any shape or form, except to the extent and in
the manner provided for by the Act." 13
At its most general level, the decision of the House of Lords in Salomon v Salomon & Co Ltd
was a good decision. Salomon's case is universally recognised as authority for the principle that a
corporation is a separate legal entity. The case firmly established that upon incorporation, a new
and separate artificial entity comes into existence. At law, a corporation is a distinct person with
its own personality separate from and independent of the persons who formed it, who invest
money in it, and who direct and manage its operations14
It follows that the rights and duties of a corporation are not the rights and duties of its directors
or members who are, most of the time, obscured by a corporate veil surrounding the company. 15
The recognition that a corporation is a separate legal entity in its own right is the foundation of
modern corporate law.
Indeed "[e]very system of law that has attained a certain degree of maturity seems compelled by
the ever increasing complexity of human affairs to create persons who are not
men..."16Consistent with this observation, Arnold states that "[o]ne of the essential and central

13 ibid
14 Roman Tomasic and Stephen Bottomley, Corporations Act in Australia Sydney, The Federation Press, (1995),
p 40

15 H.A.J. Ford, RP Austin, and IM Ramsay, Ford's Principles of Corporations Act Sydney, 8th ed, Butterworths,
(1997), p 101.

16 Frederic Pollock and Frederic W Maitland, The History of English Law, Birmingham, special edition,, Legal
Classics Library, vol 1,(1982), p 486

notions which give our industrial feudalism logical symmetry is the personification of great
industrial enterprise."17
Support for the principle of the separateness of legal personality, shared amongst academic
commentators, has been unbroken in legislative and judicial circles. Subsequent English and
Australian judicial decisions have upheld the Salomon principle.
In other words, since the decision in Salomon's case, the complete separation of the company and
its members has never been doubted.The ruling has, with few exceptions, stood the test of time.
All theories of the corporate entity agree on the practical need for the artificial personality with
which the legal system invests corporations. Concession theorists, for example, regard corporate
personality as a privilege granted by the state "for legal and business convenience". 18 Similarly,
the contractarian school argues that "corporation law reduces transaction costs by implying in
every corporate charter the normal rights on which shareholders could be expected to insist",
such as separate legal status.19This principle, the essence of corporate law, is said to operate as a
default provision that facilitates corporate activity
In many ways, this is the view taken by aggregate theorists who praise the role of the Salomon
principle in assisting the formation of contractual relationships that constitute the backbone of
voluntary aggregations of individuals that the law otherwise identifies as corporations. Thus,
many commercial enterprises must be owned and managed by a body corporate rather than by its
human owners directly, in person. This is possibly due to the recognition in Salomon's case that
incorporation achieves the interposition of a legal person between the natural persons who own
and control it, and the business activity to be undertaken.

17 Thurman W Arnold, The Folklore of Capitalism New Haven, Yale University Press,(1937), p 185
18 D Bonham and D Soberman, "The Nature of Corporate Personality", Toronto, Studies in Canadian Company Law,
Butterworths, (1967), p 5.

19 ibid

In essence, a corporation is " an artificial person composed of natural persons". 20Being a legal
artifice, however, the company is metaphysical in form rather than physical. In line with the
decision in Salomon's case, a registered company "is capable of performing all the functions of a
body corporate" In other words, the corporation is a legal entity distinct from its members. This
is the fundamental attribute of corporate personality, from which all the other practical
consequences flow. First, as a separate legal person, a registered company is capable of suing and
being sued: Foss v Harbottle.21 Second, a corporation has perpetual succession: Regal (Hastings)
Ltd v Gulliver.22 Third, a corporation can enter into contracts in its own name. Fourth, a
corporation has power to acquire, hold and dispose of property: Macaura v Northern Assurance
Co Ltd. However, this statutory list of attributes is not exhaustive
LIFTING THE CORPORATE VEIL THEORY
Law recognizes a corporation as a separate legal entity. Since Salomon decision in 1897, the
courts have often been called upon to apply the principle of separate legal personality. In some
cases, the principle was upheld and in some others it was not. For centuries, there was a heated
controversy over the applicability of the doctrine of separate legal entity and further to limit the
theory of limited liability which is often metaphorically termed as lifting the corporate veil. It
is defined by Blacks Law Dictionary (7th ed. 1999) as piercing the corporate veil: The judicial
act of imposing liability on otherwise immune corporate officers, directors, and shareholders for
the corporations wrongful acts. This term became popular after Maurice Wormser, a law
professor at Fordham University, wrote his key article on the subject. 23
The history of English Doctrine can be divided into three stages.

20 Harry G Henn and John R Alexander, Laws of Corporations and other Business Enterprises, St Paul, 3rd
edition, West Publication Company (1983), p 145.

21 (1843) 67 ER 189.
22 [1942] 1 All ER 378
23 Maurice Wormser, Piercing the Veil of Corporate Entity, Column Law Review, vol 496, issue 12
(1912)

a) 1897-1966: This period may be called as the classical veil lifting or the early experimentation
period. During which the English courts experimented with different approaches of the doctrine.
The House of Lords decision in Salomons case24 dominated in this period.
b) 1966-1989: This period started after the second world war and this is the interventionist
period. The rules of House of Lords in Salomons case were changed and the veil lifting was
encouraged during this period. In Littlewoods mail stores v. IRC 25, Lord Denning stated :- the
doctrine lai down in Salomons case has to be watched very carefully. It has often been supposed
to cast a veil over the personality of a limited company through which the courts cannot see. But
that is not true. The courts can, and often do, pull off the mask. With of wanting of any
hypothesis, the spirit of the doctrine in this period can be attributed to the most influential jurist
of the twentieth century, Lord Denning.
c) 1989-the present: Much of the credit can be given to the Woolfsons case at the beginning of
this period. The doctrine of corporate veil lifting began to be disfavored by the courts in this
period. Lord Keith in Woolfson v. Strathclyde Regional Council 26, stated that the one situation
where a corporate veil could be lifted was whether there are special circumstances indicating that
the company is a mere faade concealing the true facts
One of the reactions of the Parliament to Salomons decision was that an offence of Fraudulent
trading was introduced. This offence was continued in the Companies Act 1948 which contained
both civil and criminal sanctions. Now criminal offence is contained section 993 of the
Companies Act 2006 while the civil sanctions are contained in the Insolvency Act 1986, which
operate to lift the corporate veil.
INDIAN LAW:As most of the provisions of Indian Law were borrowed from the English Law, it more or less
resembles the English Law. Salomons case has been the authority ever since in the decisions of
24 [1897] A.C. 22.
25 [1969] 1 W.L.R. 1241, 1254
26 [1978] UKHL 5

the doctrine in Indian company cases. The Supreme Court in Tata Engineering Locomotive Co.
Ltd v. State of Bihar & othrs 27 stated: the corporation in law is equal to a natural person and has
a legal entity of its own. The entity of corporation is entirely separate from that of its
shareholders; it bears its own names and has seal of its own; its assets are separate and distinct
from those of its members; the liability of the members of the shareholders is limited to the
capital invested by them; similarly, the creditors of the members have no right to the assets of the
corporation.
In some of the cases, judicial decisions have no doubt lifted the veil. In a nut shell the position
with the observation that in a number of cases the legislature has rented in many respects, the
veil woven by Salomons case. The courts have only construed the statutes as cracking open the
corporate shell when compelled to do so by the clear words of the statute.
Thus, even in India it can be seen that at present, the consensus is that cracking open the veil is
somewhat cautious and circumspect In LIC of India v. Escorts Ltd (1986) 28, Justice O.Chinnapa
Reddy had stressed that the corporate veil should be lifted where the associated companies are
inextricably connected as to be in reality, part of one concern. After the Bhopal Gas leak disaster
case, the lifting of corporate veil has been escalated. Furthermore in State of UP v. Renusagar
Power Company29, the Supreme court lifted the veil and held that Hindalco, the holding company
and its subsidiary, Renusagar company should be treated as one concern and that the Power Plant
of Renusagar must be treated as the own source of generation of Hindalco and on that basis,
Hindalco would be liable to pay the electric duty. After the decision in Renusagar case, the
doctrine has been considered in several other cases.
The Companies Act, 1956, provides for circumstances when a veil is to be lifted. These
circumstances are as follows:-

27 1964 SCR (6) 885

28 AIR 1986 SC 1370
29 AIR 1988 SC 1737

1) When membership is reduced: Under section 45 of the Companies Act, when the number of
members of a company are reduced below 7 in case of a public company and below 2 in case of
a private company and the company continues to carry on its business for more than 6 months
while the number is so reduced, every person who is a member of such company, knows this
fact, is severally liable for the debts of the company contracted during that time.
2)Improper use of Name: Section 147(4) provides that an officer of a company who signs any
Bill of Exchange, Hundi, Promissory note, cheque, wherein the name of the company is not
mentioned in the prescribed manner, such officer shall be held personally liable to the holder of
such Bill of exchange, hundi, promissory note or cheque as the case may be; unless it is duly
paid by the company.
3) Fraudulent conduct: If in the course of winding up of a company, it appears that any business
of the company has been carried on with the intent to defraud the creditors of the company or
any other person or for any other fraudulent purpose, the persons who were knowingly parties to
the carrying on of the business, in the manner aforesaid, shall be personally liable for all or any
of the debts or other liabilities of the company, as the court may direct. [Section 542]
Failure to refund application money: Section 69(5) of the Act provides that the directors of a
company are jointly and severally liable to repay the application money with interest, if the
company fails to refund the application money of those applicants who have not been allotted
shares within 130 days from the date of issue of the prospectus. However, this does not in any
way affect the very existence of the company or indeed its subsequent independent personality
and other features.
The term piercing the corporate veil 30 is described as, the Courts unwillingness to permit
corporate presence and action to divert judicial course of applying law to ascertain facts. When
this principle is invoked, it is permissible to show that the individual hiding behind the
corporation is liable to discharge the obligations ignoring the concept of corporation as a separate
entity. Generally, an incorporated company is liable as a juristic person. It is different from its
shareholders and Board of directors of Company. The acts of malfeasance and misfeasance and
acts of misdemeanor by the shareholders and directors of a corporation (company), do not
30 Words and Phrases , Vol 32A, West Publishing Company , third reprint(1989 )p.84

always bind the company as such. However so as to apply law to ascertained facts, judicial
process can ignore juristic personality of the company and haul-up the directors and in certain
cases even shareholders to discharge the legal obligations. When the corporate veil is
lifted/pierced, it only means that the Court is assuming that the corporate entity of a concern is a
sham to perpetuate the fraud, to avoid liability, to avoid effect of statute and to avoid obligations
under a contract
. The corporate veil indisputably can be pierced when the corporate personality is found to be
opposed to justice, convenience and interest of the revenue or workman or against public
interest. The categorizations offered by Ottolenghi (1990) 31describes as to when the courts had
lifted the veil in the past. But the future of doctrine is still ambiguous as to how the courts
determine the question in a certain situation. Yet one can say that the courts shall lift the veil
sometimes and refuse to do so in the other. It can be said that the corporate veil lifting is being
considered on very rare occasions by the English Courts while the Indian doctrine is still in its
transitory phase. The Indian courts ordinarily appreciate the facts of each case and decide on the
merits

31Ottolenghi From peeping behind the corporate veil to Ignoring it completely [1990] at
http://onlinelibrary.wiley.com/doi/10.1111/j.1468-2230.1990.tb01816.x/pdf accessed on 25th April, 2015.