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.1 Nonetheless, this principle, established in the
epic case of Salomon v Salomon,2 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.

Commonly known as: Salomon v Salomon

FACTS
Salomon transferred his business of boot making, initially run as a
sole proprietorship, to a company (Salomon Ltd.), incorporated
with members comprising of himself and his family. The price for
such transfer was paid to Salomon by way of shares, and
debentures having a floating charge (security against debt) on the
assets of the company. Later, when the company's business failed
and it went into liquidation, Salomon's right of recovery (secured
through floating charge) against the debentures stood aprior to the
claims of unsecured creditors, who would, thus, have recovered
nothing from the liquidation proceeds.

To avoid such alleged unjust exclusion, the liquidator, on behalf of

the unsecured creditors, alleged that the company was sham, was
essentially an agent of Salomon, and therefore, Salomon being the
principal, was personally liable for its debt. In other words, the
liquidator sought to overlook the separate personality of Salomon
Ltd., distinct from its member Salomon, so as to make Salomon
personally liable for the company's debt as if he continued to
conduct the business as a sole trader.

ISSUE
The case concerned claims of certain unsecured creditors in the
liquidation process of Salomon Ltd., a company in which Salomon
was the majority shareholder, and accordingly, was sought to be
made personally liable for the 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.

RULING
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.

IMPLICATIONS
Commencing with the Salomon case, the rule of SLP has been
followed as an uncompromising precedent5 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.11 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.

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 "lifting or
piercing of the corporate veil".

It is worthwhile here to refer to the case of Adams v Cape

Industries16, which examined the common law grounds, primarily
evolved through case law as an equitable remedy, namely- (a)
agency, (b) fraud, (c) façade or sham, (d) group enterprise, and (e)
injustice or unfairness. The exception has been invoked widely by
English courts, including in the recent cases of Caterpillar Financial
Services (UK) Limited v Saenz Corp Limited, Mr Karavias, Egerton
Corp. Beckett Investment Management Group v Hall, Stone & Rolls
v Moore Stephens, and Akzo Nobel v The Competition
Commission, to cite a few. Needless to mention, the journey of
English law in defining the contours of the SLP doctrine and
carving out these exceptions has been quite topsy-turvy. Moreover,
veil piercing is now also rampant as a statutory exception.

So, considering the gamut of statutory and judge made exceptions

above, has the Salomon rule become redundant?

March back to the Salomon rule

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 Petrodel2,

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.

Conclusion
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.