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INTRODUCTION

This essay endeavours to show that the principle that was laid down in the case of Salomon v.

Salomon1 is not a disreputable one and that it did not unleash a tidal wave of unruliness in the

business community.

In the case of Salomon v. Salomon2;Mr. Salomon formed a company in which, initially seven

people held one share each (as required by the Companies Act 1862 which was in force at the

time) : the shares were taken by Mr. Salomon, his wife and five of his children. Mr. Salomon

then transferred his footwear business which he valued at some £30,000 to the new company.

The company paid him by issuing to him 20,000 ordinary £1 shares and ‘owing’ him a further

£10,000 which was secured over the company’s assets by the terms of the debenture (a document

which evidences a loan to a company and specifies any security granted). In short, he

incorporated his existing business with himself as the main shareholder and a major creditor.

Within twelve months the business became insolvent, and the company went into insolvent

liquidation owing £10,000 to Mr. Salomon and a lot of money to other creditors. At first the

liquidator of Salomon and Co Ltd refused to acknowledge the validity of Mr. Salomon’s security

arguing that, in effect, Mr. Salomon and the company were one and the same as he owned

20,001 of the 20,007 issued shares. As a result Mr. Salomon had to sue his own company which

was now under the control of the liquidators to establish the validity of his security. In fact, Mr.

Salomon lost in every court until the case reached the House of Lords which held that Mr.

Salomon was entitled to his security. The House of Lords came to this conclusion by establishing

that Mr. Salomon and the company were two separate legal persons at law. In addition nothing

1
[1897] AC 22.
2
[1897] AC 22.

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fraudulent had happened in this case. The company did owe Mr Salomon £10,000 as part of the

purchase price of the footwear business and the fact that he had a debenture which granted him

security was properly registered and published so that those dealing with the company were

aware of that fact. Equally in the case of Lee (Catherine) v. Lee’s Air Farming Ltd3; in 1954

the appellant’s husband, L, formed the respondent company for the purpose of carrying on the

business of aerial top-dressing. Of the three thousand £1 shares forming the nominal share

capital of the company, L was allotted 2,999 shares. He was appointed governing director of the

respondent company and pursuant to art 33 of the articles of association was employed as chief

pilot of the company at a salary arranged by him. Article 33 provided that in respect of such

employment the rules of law applicable to the relationship of master and servant should apply

between the company and him. In his capacity as governing director and controlling

shareholder, L exercised full and unrestricted control of the affairs of the respondent company

and made all decisions relating to contracts for aerial top-dressings. Different forms of insurance

cover for the benefit of the respondent company and its employees were arranged by the

company secretary, and certain personal accident policies were taken out in favour of L, the

premiums in respect of which were paid by the respondent company and debited to L’s personal

account in the books of the company. The respondent company owned an aircraft equipped for

top-dressing and L was a duly qualified pilot. In March, 1956, L was killed while piloting the

aircraft during the course of aerial top-dressing and the appellant claimed compensation under

the New Zealand Workers’ Compensation Act, 1922, s 3(1) a, under which, if personal injury by

accident arising out of and in the course of any employment to which the Act applied was caused

to a worker, the employer was liable to pay compensation. By s 2 of that Act, “worker” was

defined as “any person who has entered into or works under a contract of service … with an
3
[1960] 3 AII ER 420.

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employer, whether by way of manual labour, clerical work, or otherwise, and whether

remunerated by wages, salary, or otherwise”. In Associated Chemicals Ltd v. Hill & Delamain

Zambia Ltd & Ellis & Company (As a Law Firm)4; The respondent company took out a writ

to recover money owed for services rendered at the instance and request of the appellant

company. The claim was that between October, 1992 and November, 1993, the respondent

cleared and forwarded the appellant's goods from Dar es Salaam in Tanzania to Ndola. The

defence at the time was simply a denial that the appellant had entered into any such transaction

with the respondent. When the trial opened, the witness for the respondent testified how they

had been verbally instructed and also given some documents concerning the shipment of the

goods and how the cargo was cleared and forwarded to Ndola. The appellant's lawyers of record

at the time sought adjournments, one of which was for the purpose of attempting an out of court

settlement. As the learned trial judge observed, the then advocates - the proposed third parties -

even wrote to their opponents accepting liability on behalf of their client. Later the appellant's

new lawyers sought to add Ellis and Company as parties to the suit. It was held that it is wrong in

principle to distinguish between old and new shareholders or between new and old management

or treat business transactions giving rise to the claim as one essentially between individuals. A

principal of the law which is now entrenched is that a company is a distinct legal person different

from its members or shareholders.

The fact that the separate corporate personality of a company prevents outsiders from taking

action against its members (even though the outsider can find out who they are and how many

shares they hold) has led to comparison with a veil. The corporate personality is the veil, and the

members are shielded behind this ‘veil of incorporation’. However, the internal affairs of the

4
(1998) S.J. 7 (S.C.).

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company are never completely concealed from the public since publicity has always

accompanied incorporation. In addition there are several situations when the law is prepared to

lift the veil of incorporation to either go behind the corporate personality to the individual

members, or to ignore the separate personality of several companies in a group in favour of the

economic entity constituted by the group as a whole.5

Therefore it is a serious misdirection of both law and facts to suggest that the Salomon decision

is a disreputable one and unleashed a tidal wave of unruliness because the principle of separate

legal entity is not absolute but there are exceptions. This simply means that in as much as a

company is a separate legal entity there are circumstances in which the shareholders or directors

may be held personally liable for the debts of the company or any other activity that was done by

the company. This is known as piercing the corporate veil or lifting the veil. The following are

some of the ways in which the corporate veil may be lifted: by (i) judicial intervention; (ii)

statutory provisions.

FRAUDULENT TRADING

According to section 360 of the Companies Act it states that: “A person who, while an officer of

a company which is subsequently ordered to be wound-up by the court or which subsequently

passes a resolution for voluntary winding-up- (a) induced any person to give credit to the

company by false pretences or by means of any other fraud; (b) with intent to defraud creditors

of the company, made or caused to be made any gift or transfer of charges on, or caused or

connived at the levying of any execution against, the property of the company; or (c) with intent

to defraud creditors of the company, concealed or removed any part of the property of the

5
Abbott, K., Pendlebury, N., and Wardman, K., (2007), Business Law (8th ed.). Hampshire: Cengage Learning. p.
355.

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company within two months before the date of any unsatisfied judgement or order for payment of

money obtained against the company; shall be guilty of an offence, and shall be liable on

conviction to a fine not exceeding two thousand monetary units or to imprisonment for a period

not exceeding two years, or to both.” 6 This entails that separate legal personality does not

necessarily give a licence to the directors of the company to start fraudulent trading. If it is

proved that they have conducted themselves in a fraudulent manner the corporate veil can be

pierced and they can be held personally liable.

One area of general consensus is that the courts will lift the veil to prevent the use of the

registered company for fraudulent purposes or for evading a contractual obligation or liability. 7

In the Zambian case of Ethiopian Airlines Ltd v. Sunbird Safaris Ltd & Others8; this appeal

arises from the decision of the High Court in which the appellant had petitioned for the winding

up of the 1st respondent and sought that the 2nd and 3rd respondents be liable personally for the

debt of the 1st respondent. The facts of the case were that the 3rd respondent incorporated both

the 1st and 2nd respondent companies. The 3rd respondent was the Managing Director of both

companies. The 1st respondent had a long standing business relationship with the appellant and

was involved in the supply of air tickets to the 1st respondent and the 1st respondent sold the

tickets on behalf of the appellant and remitted the proceeds less the agreed commission. In due

course, the 1st respondent failed to account for a sum of US$ 399, 902=00. Although the 1st

respondent disputed this figure, this was confirmed in a court action commenced by the appellant

against the 1st respondent to recover the same. An attempt to execute the judgment was made by

way of writ of fieri facias. The execution failed as the 1st respondent was reported to be non

6
The Companies Act Chapter 388 of the Laws of Zambia.
7
Goulding, S. (1999), Company Law (2nd ed.). London: Cavendish Publishing Ltd. p.
8
(2007) S.C.Z. JUDGMENT No. 26.

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operational. As a result of the failure to execute, the appellant petitioned the High Court for the

winding up of the first respondent and also requested that the 2nd and 3rd respondents be

personally liable for the debt of the 1st respondent under section 382 (1) of the Companies Act.

After the trial, the trial judge found the 1st respondent insolvent and ordered it’s winding up.

The trial judge however declined to hold the 3rd respondent personally liable for the 1st

respondent under section 383 (1) of the Companies Act. It is against the refusal to hold the 3rd

respondent personally liable that gave rise to this appeal. The court held inter alia that the 3rd

respondent fraudulently allowed the 1st respondent to continue to trade and therefore was

personally liable for the debt to the 1st respondent. Similarly in Adams v. Cape Industries Plc9;

the Court of Appeal was prepared to accept, for the purpose of that case, that the veil could be

lifted where a defendant used the corporate form to evade: (a) limitations imposed on his

conduct; and (b) such rights of relief against him as a third parties already possess.

LIABILITY FOR USE OF NAME IN INCORRECT FORM

According to section 194 (3) of the Companies Act provides that: “ If any officer of the company

or other person signs, endorses or authorises the signing or endorsement on behalf of the

company of any negotiable instrument or order for money, goods or services that does not

comply with paragraph (b) of subsection (1), the person shall be personally liable to discharge

the obligation thereby incurred unless it is duly discharged by the company or otherwise, but

without prejudice to any right of indemnity which the person may have against the company or

any other person.” In Penrose v. Martyr,10 a company secretary accepted a bill of exchange

drawn on the company on which its name was incorrectly written by omitting the word ‘limited’

9
[1990] Ch 433.
10
(1858) Q.B 499.

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from the name. The company defaulted and the court held the secretary personally liable on the

bill. In Durham Fancy Goods Ltd v. Michael Jackson (Fancy Goods) Ltd,11a creditor draw a

bill on and wrote on it a form acceptance that did not state the correct name of the company (it

used ‘M Jackson’ instead of ‘Michael Jackson’ in full). The defendant signed the acceptance for

the company. The court held the defendant liable since the error had been introduced by the

plaintiff. But for the fact he would have been liable.

Therefore if the company decides to enter into a legally binding agreement or trade using an

incorrect name with clients, it means the person that entered into the contract on behalf of the

company such as the Director, Company Secretary can be held personally liable.

ENVASION OF LEGAL OBLIGATIONS IMPOSED BY LAW

A company may be identified with those who control it, for instance to determine its residence

for tax purposes. The courts may also ignore the distinction between a company and its members

and managers if the latter use that distinction to evade legal obligations.12 In Gilford Co. Ltd v.

Horne,13 the defendant had been employed by the plaintiff company under a contract, which

forbade him after leaving its service to solicit its customers. After the termination of is

employment he formed a company which his wife and an employee were the sole directors and

shareholders. But he managed the company and through it evaded the covenant by which he

himself was prevented from soliciting customers for his former employers the plaintiffs. It was

held that an injunction requiring observance of the covenant would be made both against the

defendant and the company which had formed as ‘a mare cloak or sham’. In Jones v.

11
(1968) 2 Q.B. 839.
12
Mandhu, F. (2008), Company Law Module LL24 ( 1st ed.). Lusaka: Zaou Press. p. 26.
13
(1933) Ch 935.

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Lipman,14a vendor of land wished to evade an order of specific performance of a contract for

sale of land. He purchased the share capital of a company formed by third parties, registered the

shares in the name of himself and a nominee, and had himself and the director appointed as

directors. He conveyed land to the company. The court that the acquisition of the company and

the conveyance of the land to it was a mare cloak or sham for the evasion of the contract.

Specific performance was ordered against the company.

The concept of separate legal personality espoused in the Salomon case does not in any way act

as a shield to protect business personnel in breaching or abrogating there legal obligations,

statutory law or judicial precedent comes in to remedy this defect.

PUBLIC INTEREST

In time of war it is not permitted to trade with ‘enemy aliens’. The courts may draw aside the veil

if, despite a company being registered in Zambia, it is suspected that it is being controlled by

aliens. The court may then determine the owners’ nationality. In Daimer Co. Ltd v. Continental

Tyre & Rubber Co Ltd, 15 the defendant, a UK incorporated company, was owned by 5

individuals and a company incorporated in Germany and only one individual was British who

held one share. The court held that the plaintiffs need not discharge a debt to the defendants since

effective control of the latter was in enemy hands and hence to do so would be to trade with the

enemy.

EVASION OF TAXATION

14
(1962) 1 AII E.R. 442.
15
(1916) 2 A.C. 307.

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The use of the corporate form in order to evade tax will always result in the court piercing the

veil once the Inland Revenue maintains it has revealed a probable case of tax evasion.16 In Unit

Construction Co Ltd v. Bullock,17 three companies were wholly owned by a UK company, but

registered in Kenya. Although the companies’ constitutions required a board to be held in Kenya,

all three were in fact managed entirely by the holding company. The court held companies were

resident in the UK and liable to pay UK tax. The Kenyan connection was a sham, the question

being not where they ought to have been managed, but where they were managed.

QUASI PARTNERSHIP

An application to wind up a company on the ‘just and equitable’ ground under section 272 of the

Companies Act may involve the court piercing the veil to reveal the company as a quasi-

partnership. 18 In Ebrahimi v. Westbourne Galleries Ltd, 19 the plaintiff and N carried on

business together for 25 years, originally as had 500 shares. They were the first directors and

shared the profits as directors’ remuneration. No dividends were paid. When N’s son joined the

business he became a third director and the plaintiff and N each transferred 100 shares to N’s

son. The court held that the company should be wound up. N and his son were within their legal

rights in removing the plaintiff from his directorship, but past relationships made is ‘unjust or

inequitable’ to insist on legal rights and the court could intervene on equitable principles to order

liquidation.

16
Talbot, L.E. (2008), Critical Company Law. Oxford: Routledge-Cavendish. p. 36.
17
(1957) 1 AII E.R. 561.
18
Mandhu, F. (2008), Company Law Module LL 24 (1st ed.). Lusaka: Zaou Press. p. 27.
19
(1973) AC 360.

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CORPORATE GROUPS

A holding company must ordinarily produce group accounts in which profits or losses, assets and

liabilities of subsidiary companies are consolidated or treated as if they belonged to the holding

company. There is no general rule that commercial activities of a subsidiary are to be treated as

acts of the holding company merely because of the relationship of holding company and agent or

trustee of the other, or they both involved in carrying on what amounts to a single business. 20 In

Littlewoods Mail Order Stores Ltd v. IRC,21 Lord Denning MR lifted the veil between parent

and subsidiary in an income tax case.

The court may in its discretion lift the veil of incorporation on economic grounds. In the case of

University of Zambia Council & Another v. Professor Siwela & Others,22 the corporate veil

was lifted on economic grounds.

CONCLUSION

This essay has been discussing the principle of separate legal entity. It was stated that

immediately after a company has been incorporated it possesses separate legal personality. This

means that the company is different from the directors and owners and hence can only sue and be

sued in its own name. It was further submitted that the case of Salomon v. Salomon is not a

disreputable one and that it did not unleash a tidal wave of unruliness in the business community

because the veil of incorporation can be pierced either statutorily or by judicial intervention on

the following grounds: fraudulent trading; liability for the use of the name in incorrect form;

evasion of legal obligations; public interest; quasi partnership; and corporate groups.

20
ibid. p. 28.
21
[1969] 1 WLR 1241.
22
(CAUSE No. 1997/HP/2729)

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BIBLIOGRAPHY

Abbott, K., Pendlebury, N., and Wardman, K. (2007), Business Law (8th ed.). Hampshire:

Cengage Learning.

Goulding, S. (1999), Company Law (2nd ed.). London: Cavendish Publishing Ltd.

Mandhu, F. (2008), Company Law Module LL 24 (1st ed.). Lusaka: Zaou Press.

Talbot, L.E. (2008), Critical Company Law. Oxford: Routledge-Cavendish.

STATUTE REFERRED TO:

The Companies Act Chapter 388 of the Laws of Zambia.

CASES CITED:

1. Adams v. Cape Industries Plc [1990] Ch 433.

2. Associated Chemicals Ltd v. Hill & Delamain & Ellis & Company (1998) S.J. 7 (S.C.).

3. Daimer Co Ltd v. Continental Tyre & Rubber Co Ltd (1916) 2 A.C. 307.

4. Durham Fancy Goods Ltd v. Michael Jacson (Fancy Goods) Ltd (1968) 2 Q.B. 839.

5. Ebrahimi v. Westbourne Galleries Ltd (1973) AC 360.

6. Ethiopian Airlines Ltd v. Sunbird Safaris Ltd & Others (2007) S.C.Z. JUDGMENT No.

26.

7. Gilford Co Ltd v. Horne (1933) Ch 935.

8. Jones v. Lipman (1962) I AII E.R. 442.

9. Lee (Catherine) v. Lee’s Air Farming Ltd [1960] 3 AII E.R. 420.

10. Littlewoods Mail Order Stores Ltd v. IRC [1969] I W.L.R 1241.

11. Penrose v. Martyr [1858] Q.B. 499. Salomon v. Salomon & Co. Ltd [1897] AC 22.

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12. Salomon v. Salomon & Co. Ltd [1897] AC 22.

13. Unit Construction Co Ltd v. Bullock [1957] I AII E.R. 561.

14. University of Zambia Council & Another v. Professor Siwela & Others (CASE No.

1997/HP/2729.

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