COMPANY LAW 1

CRITICAL ESSAY ON SALOMON V. SALOMON

ASSIGNMENT 1

BY VASUNDHARA DAGA
LLB – 2ND YEAR
18010122067
Introduction

Separate Legal Personality (SLP) is the basic tenet on which company law is premised. The
most profound and steady rule of corporate jurisprudence is establishing the foundation of
how a company exists and functions. In its simplest, the principle of separate personality of a
company provides that once a company is incorporated it becomes in law a legal person
similar to other legal persons with rights and obligations of its own just like any other legal
person1.The idea provides that a corporation is a legal entity separate and distinct from its
members. A company’s assets are its own assets and do not belong to its members, similarly
the liabilities of the company belong to it and not to its members.

The ‘rigid construct’ of company law, Salomon v A Salomon, 2 established a century-old

principle, that is, the separate juristic personality of a corporation, out of which ‘the legal
structure of modern businesses was born; and, the so called corporate veil remains
unchallenged. A mythology has developed around the case that has resulted in the Salomon
principle exercising an iron grip on company law. Salomon carried on a business as a leather
merchant. The company had been formed by Mr. Salomon in 1892 with Salomon, his wife
and five of his children being the member with the clear intention of taking advantage of the
limited liability afforded by the Companies Act 1862, which required a private limited
company to have seven members (the Companies Act 2006 requires only one). The members
of the family apparently holding the shares as nominees for Salomon. Salomon was also the
managing director. The newly incorporated company purchased the leather business and the
company immediately ran into difficulties. One year later the company was in liquidation and
its asset were insufficient to discharge its liabilities to its unsecured creditors. The liquidator,
on behalf of the unsecured creditors, brought an action alleging that the company was but a
sham and a mere "alias" for Salomon. Although, the court has provided various exceptions to
the rule, which allows for the ‘lifting of the veil’ i.e. treating the rights and liabilities or the
activities of the company as the right or liabilities or activities of its shareholders 3these

1
Ham Dorita, Salomon if decided today, available at;
https://www.academia.edu/9828444/Salomon_if_decided_today
2
Salomon v A Salomon & co ltd (1897 AC 22)
3
Salomon V. Salomon & Co. Analysis, available at;
https://phdessay.com/salomon-v-salomon-co-analysis/

2
exceptions have been a basis for continuous debate amongst legal scholars as to whether they
render the century-old rinciple out of place and its relevance in modern company law. The
circumstances under which the courts may life the corporate veil may broadly be grouped
under the following heads and sub-heads:
1. Statutory Provisions
1.1 Reduction of membership
1.2 Misrepresentation in prospectus
1.3 Mis-description of name
1.4 Fraudulent conduct
1.5 Liability for ultra vires acts
2. Judicial Interpretation

Nonetheless, this principle, established in the epic case of Salomon v A Salomon4,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.5The importance of the separate
legal entity concept in its own right is clear enough, but the fact that the case subsequently
assumed its lofty status as a landmark company law case has made it difficult, and at times,
virtually impossible, to challenge in principle. Also, the continued legal controversy across
several countries, and the ongoing economic and social issues with which the legal position is
associated, remains a highly relevant concern.

History

In my opinion there has been an adequate change in the attitude of the courts towards the
Salomon principle. It will not be wrong to contend that during the period ranging from 1897-
1966 courts strictly adhered by the principle laid down in the Salomon decision. They refused
to ignore a company’s separate personality or otherwise the veil of incorporation and did so
in very limited, exceptional cases.Courts declaredcompany to be a separate legal person,
being capable of suing and being sued6(a registered company) ,having perpetual

4
Supra Note no.2
5
Salomon v. A Salomon Co. ltd [1897] AC 22 Case Summary available at;
https://www.lawteacher.net/cases/company-law/salomon-v-salomon.php
6
Foss v Harbottle (1843) 67 ER 189

3
succession,7and h power to acquire, hold and dispose of property.8 In Lee’s Air Farming
case9, it was found that the wife of a deceased owner of a company was entitled to
compensation under the Workers’ Compensation Act 1922 as her husband was an employee
of that company. Lord Morris found that: ‘…a man acting in one capacity can make a
contract with himself in another capacity. The company and the deceased were separate legal
entities’. Further, during the period of 1966-1989 courts exhibited quiet a flexible attitude
wherein it deviated from the principle of Salomon which was in many case described as
producing unfair results and where thus inclined to life the veil more easily. However, the
subsequent era was highlighted by a restatement of Salomon and this approach is applied
until today.

Analysis

Salomon Case forms the basis of company law and corporate theory. Not only is this case
often quoted in textbooks and journals or articles but also, its principles have found their way
to English courtrooms and law firms. 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. Thus, The issue in case of Salomon10 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 company was declared to be a myth by the Court of Appeal being incorporated by
Salomon against the true intent of the then Companies Act, 1862 and having conducted the
business as an agent. The House of Lords however, upon appeal, reversed the above ruling
and unanimously laid down the principle of separate legal entity and doctrine of limited
liability. In the opinion of court, the business belonged to the company and not to Salomon.
Salomon was an agent of the company, not the company his agent. Lord Halsbury L.C.: -
“Either the limited company was a legal entity or it was not. If it was, the business belonged

7
Regal (Hastings) Ltd v Gulliver [1942] UKHL 1
8
Macaura v Northern Assurance Co Ltd [1925] AC 619
9
Lee v Lee’s Air Farming [1961] A.C. 12
10
Supra Note no. 2

4
to it and not to Mr. Salomon. If it was not, there was no person and nothing to be an agent at
all; and it is impossible to say at the same time that there is a company and there is
not.”11Despite the seemingly explicit statement made by Lord Halsbury, the English court
laid down certain circumstances or exceptions wherein it was permissible to disregard this
principle. and to ‘pierce the corporate veil’ (Mugambwa 2007 ).12According to Marc
Moore13, the House of Lords in case of Salomon v A Salomon & Co. Ltd.14have emphasized
that the formally separate personality of a company should prevail in the eyes of the law
regardless of any economic or moral considerations that might otherwise justify regarding a
registered company as the mere extension of its de facto incorporators. The principle of
15
separate identity was also restated by Lightman J. He considered that the principle of
separate identity should be upheld unless there was a specific statutory provision or some
other contractual term or established common law principle to the contrary. He stated,
‘outside these exceptions [the company] is entitled to organize and conduct its affairs in the
expectation that the court will apply the principle of Salomon v A Salomon & Co Ltd in the
ordinary way’.

In my opinion the role that the Salomon principle has played in assisting the formation of
contractual relationships that constitute the backbone of voluntary aggregations of individuals
that the law otherwise identifies as corporations is worth praising. It has led to reduced costs
involved in the separation of ownership and control but also, has led to reduction of the need
to monitor management and other shareholders, facilitated market control by imposing
limited liability and free transfer of shares, improved the information fed to the market place
by the increased volume of transactions, provided shareholders with an opportunity to
diversify their holdings and has rendered optimal investments by promoting positive attitude
towards risk taking. However, from my point of view it will not be wrong to contend that the

11
Dignam Alan John, An analysis of corporate legal structure and the evolution of an alternative ownership-
control system, 1st February,1995 available at;
http://doras.dcu.ie/18502/1/Alan_John_Dignam.pdf
12
Rodrigo,The Doctrine of Separate Legal Entity; A case of Salomon Vs Salomon& Co Ltd., available at;
https://writepass.com/journal/2016/11/the-doctrine-of-separate-legal-entity-a-case-of-salomon-vs-salomon-co-
ltd/
13
The principle of Salomon, available at;
https://www.lawteacher.net/free-law-essays/business-law/the-principle-of-salomon-business-law-essay.php
14
Supra Note no.2
15
Acatos and Hutcheson plc v Watson [1995] 1 BCLC 218

5
strict adherence to the principle of Salomon and the doctrine of limited liability has
legitimized one man companies thereby permitting or authorizing the controllers of the
companies to hide behind the protection (termed as veil) facilitated by the separate liability
principle and the doctrine of limited liability (if registered as a limited liability company).

In article 7 Modern Law Review 54, professor Kahn-Freund has referred the Salomon’s case
as "calamitous”.16 He further called for the abolition of private companies. In my view the
major reason for the criticism of this principle is two fold. Firstly, the decision renders the
advantage of limited liability to even the apparently honest incorporates merely to encourage
them to carry on their trade or business. Secondly, it provides ample opportunities to the
unscrupulous owners and controllers of the company to abuse the principle by indulging in
the fraudulent practices like “bottom of harbour” schemes whereby all of the assets of one
corporation that is about to incur a large income tax liability are transferred to a new
corporation incorporated for this purpose.17In my view many of the recent developments have
involved claims of tortious liability. Indeed, tortious liability is one of the fault lines formed
by limited liability. Not only this it has also placed an unsecured creditor of a limited
company in a more vulnerable position than that of a creditor of a partnership. Although, it
has established the independent corporate existence of a registered company, a principle that
is of the greatest importance in company law. But if applied inflexibly, it can lead to shield
parties unreasonably as happened in case of Salomon.

The Legacy of Salomon today

The seed planted by the Salomon case continues to mature in a way that embodies a virtual
life for our companies as tools of businesses who want to market themselves to other people,
real and virtual. Aron Salomon manufactured boots in the East End of London in the
19century and his plight gave rise to the birth of one of the foundational principles of modern
company law in the 21century. Today, there is a company which manufactures boots
however, as befits the 21century they are sold over the internet as well as in shops; they bear
a corporate logo and names which play heavily on the technological advances which are said
to embody (Gore-Tex fabric, “3-D” soles designed to cope specifically with rough terrain,
16
Villalta Puig Gonzalo, A Two edged sword: Salomon and the separate legal entity doctrine, MurUELJ, Vol.7,
No.3, September 2003, available at;
http://www.austlii.edu.au/au/journals/MurUEJL/2000/32.html
17
Supra Note no.13

6
and so on); and they have a clear brand image of people running healthily in sunlit
mountains.

Companies have been legal persons ever since 1897, but today they have another aspect of
personality as well: hey have an image, and a reputation. Companies’ brands tell of
technological advances, reliability, energy, fun, reassurance, thrills, or whatever.

Conclusion

The decision of the House of Lords in Salomon v. Salomon & Co Ltd was given on
16.11.1896 wherein the appellant's appeal was allowed and the cross-appeal dismissed. The
effect of the Lords unanimous ruling was to firmly uphold the concept of a corporation as an
independent legal entity, as set out in the Companies Act, 1862.

In the light of analysis conducted above, the researcher holds the view that the decision of the
House of Lords in Salomon v Salomon & Co Ltd is a “two-edged sword”. On one handit
might be labelled as a good decision as it lead to the establishment of separate legal entity
principle and facilitated the company with all the requisite attributes with which to become
the powerhouse of capitalism. However, on the other hand considering the extent to which it
has extended benefits of incorporations to the small private enterprises, promoted fraud and
facilitatedthe evasion of legal obligations a strict and inflexible application of the principle
might lead to rendering of unfair results. Thus, labelling it as a good decision seems a far cry.

The basic premise of the judgment in the Salomon v. A Salomon Co. Ltd. still remains
unaltered; a limited liability company is a legal person, separate and distinct from the
members or directors.Keeping the above scenario and factual matrix in mind, along with the
arguments made and contentions put forward by both the parties and the decision rendered
the question of whether the negative aspects of the decision in Salomon's case outweigh the
good ones is best left unanswered for it is far too broad.

7
References

 Ham Dorita, Salomon if decided today, available at;

https://www.academia.edu/9828444/Salomon_if_decided_today
 Salomon v. A Salomon Co. ltd [1897] AC 22 Case Summary available at;
https://www.lawteacher.net/cases/company-law/salomon-v-salomon.php
 Villalta Puig Gonzalo, A Two edged sword: Salomon and the separate legal entity
doctrine, MurUELJ, Vol.7, No.3, September 2003, available at;
http://www.austlii.edu.au/au/journals/MurUEJL/2000/32.html
 Dignam Alan John, An analysis of corporate legal structure and the evolution of an
alternative ownership-control system, 1st February,1995 available at;
http://doras.dcu.ie/18502/1/Alan_John_Dignam.pdf
 Rodrigo, The Doctrine of Separate Legal Entity; A case of Salomon Vs Salomon & Co
Ltd., available at;
https://writepass.com/journal/2016/11/the-doctrine-of-separate-legal-entity-a-case-of-
salomon-vs-salomon-co-ltd/
 Salomon V. Salomon & Co. Analysis, available at;
https://phdessay.com/salomon-v-salomon-co-analysis/

Cases Cited
 Salomon v Salomon & co ltd (1897 AC 22)
 Macaura v Northern Assurance [1925] A.C. 619
 Foss v Harbottle (1843) 67 ER 189
 Lee v Lee’s Air Farming [1961] A.C. 12
 Regal (Hastings) Ltd v Gulliver [1942] UKHL 1
 Acatos and Hutcheson plc v Watson [1995] 1 BCLC 218

Legislations
 Companies Act, 1862
 Companies Act 2006

Online Database
 Manupatra