The main issue in the questions entails a discussion relates to corporate entity or personality. As noted a key feature of the company is that is a legal person with a separate existence from the company’s members+ or its directors. It is an artificial person in the eye of law that exist independently and separate from any other entity associated with the company. As a consequences a company can enter into contracts with its own shareholders and own property in its own right. Beside that, a company can sue and be sued and taxed in its own name and it can hold its own property and is actually liable for its own debts.
This idea refers to the fact that the shareholders hold limited liability, and therefore, is not liable for the debts that belong to the company. The decision of House of Lord’s in the case of Salomon V A Salomon & Co Ltd, which now referred to as the ‘Salomon’ principle established this principal of separate identity of the company. Aaron Salomon and his boot and shoe business have done for company law what Mrs.. Cargill and her smoke ball done for the law of contract and what Mrs.. Donahue and her adulterated ginger beer done for the law of tort.
The case of Salomon is a case, which puts in a good view of how corporate personality and limited liability@ closely connected to each other. In the case of Salomon, because of the formation of a new company Mr.. Salomon was no longer liable for the debts of the company. Nevertheless, he became the managing director of the company. It granted himself a secured charge over all the company’s assets. Thus, if the company failed, not only would Mr.. Salomon have no liability for the debts of the company, but also whatever assets were left WOUld be claimed by him to pay off the company’s debt to him.
This is because of the ownership of the debentures, when the company went into liquidation, the owner won was paid off because he has more priority than the other creditors. This is because compared to others debt, his secured debt ranked at a higher priority. The facts of this case were that were that Aaron Salomon, a sole proprietor, was a successful leather merchant, manufacturing leather boots. He ran his business for a quite a few years and then by 1892 his sons joined hands with him and started working with him.
It was then that Salomon decided to turn his business onto a Limited company, Salomon & Co. Ltd. As per the legal requirement then, Salomon subscribed seven people as shareholders of the company. He being the managing director himself, he appointed two of his four sons as directors, and his wife, his daughter, and two other sons were the other shareholders. Mr.. Salomon owned 20,001 of the company’s 20,007 shares – the remaining six were shared individually between the other six shareholders. Mr.. Salomon sold his business to the new corporation for almost ?39,000, of which E 10,000 was a debt to him.
Therefore, he became the company’s main hardcore and as well as its principal creditor. Soon afterwards, the business did not go according to plan with the leather business and Mr.. Salomon sold debentures to save his business@. There was a case of insolvent liquidation for the company.. The Court of Appeal agreed with the liquidator and then the House of Lords disapproved the conclusions of the lower courts and put forward some facts. One of them was that the fact that some of the shareholders are only holding shares as a technicality was irrelevant@.
The other fact was that when a company is formed with conformity with the rules and regulations of the Companies Act, it is a separate legal entity and not the agent or trustee of its shareholders. Therefore, the debts of the company were only its own debts and not those of its members. The shareholders only had a limited liability on the amount of investment they had made on the business. This opposing view from the House of Lords now confirmed that the debentures+ rather that shares would further protect investors.
In stressing the independent nature of corporate personality, the House of Lords legitimated the practice of the corporate form@, which do not seek to raise capital from he public but are anxious to interject an entity between themselves and their creditors. They concluded that once a company is registered in the required format of the Companies Act, it’d form a separate legal entity. Moreover, the court put forward the fact that the shareholders cannot only limit their liability on their investment but they can avoid any further risks on it by opting to subscribe for debentures rather than shares.
In the case of Salomon, according to the House of Lords the company was not an agent of the owner. However, Mr. Salomon was the person who was fully controlling the company. Therefore, the company can be treated by a business, which is carried by a single proprietor, not by separate entities. A registered company is a body corporate and legal person separate from the shareholders. The company is at law a different person altogether from the subscribers to the memorandum: and the company is not in law the agent of the subscribers or trustee for them.
The ‘veil of incorporation’ separates the incorporation from the company; in a group context it operates to make each company in the group a separate legal entity with no liability for the debts or liabilities of other group companies.. The result of Salomon has been applied over a wide range of cases in England and Ireland. Generally, its implications mean that the courts will not go behind the separate personality of the company to get at members. However, the principle of Salomon has also generated the exceptions to it.
As Salomon prevents an enquiry into the motivations of persons setting up a company before a company is incorporated, this means that people can create companies for a wrongful purpose. Since then the courts have generated exceptions to this principle where the clear purpose of a company is to evade an obligation or to omit a fraud. In practice, the fact that a company is deemed a separate entity from its owners can have certain implications. For example, in Lee V Lee’s Air Farming Ltd where the plaintiffs deceased husband held all but one of the defendant company’s shares and was its governing director for life.
The articles also declared him a salaried employee. He was killed while carrying out work for the company and his widow claimed for social welfare compensation which was only available to “workers”. The authorities refused on the basis that he was not an employee. The Privy Council rejected this on the grounds that, following Salomon, one person could function in dual capacities and the fact that the deceased could control the company “did not alter the fact that the company and [he] were two separate and distinct persons”.
However, the implications of the veil mean that there can be certain unfavorable consequences for shareholders. For example, in Mascara V Northern Assurance Co Ltd, the plaintiff transferred his business to a company he controlled but inadvertently allowed the insurance policy on the company’s stock to remain in his own name. The stock was subsequently destroyed in a fire. It was held that he could not claim on the insurance policy because he did not possess the requisite insurable interest in that stock. The stock belonged to his company and not to him.
Similarly, happened in Tarantulas V Esteeming. ,.. However, the notion of limited liability and the doctrine of separate legal entity are well entrenched@ and it is futile to argue against their applications. There are occasions when it seems that the Salomon principle may be unfair, and then the courts are under pressure to review the principle and make decisions monetary to it upon various grounds. This is termed as ‘piercing the corporate veil’. However, the courts have not always applied the principal laid down in the case of Salomon.
In a number of circumstances, the court will pierce the corporate veil or will ignore the corporate veil to reach the person behind the veil or reveal the true form and character of the concerned company. The rationale behind this is probably that the law will not allow the corporate form to be misused or for the purposes which is set out in the statute. In those circumstances in which the court feels that the corporate forms are being issued it will rip through the corporate veil and expose its true character and nature disregarding the Salomon principal as laid down by the House of Lords.
There are therefore numerous exceptions to the rules defined by Salomon. These can be implemented by statutory and judicial@ intervention. As corporate affairs became more complex and group structures emerged the Companies Acts began to recognize that treating each company in a group as separate was misleading. Over time, a number of provisions@were introduced to recognize this fact. However, it was the possibility of using the corporate arm to commit fraud that prompted the introduction of a number of civil and criminal provisions.
These provisions operate to negate the effect of corporate personality and limited liability. Instances where the Salomon principle has been set aside by statute include Section 213 and Section 214 of the Insolvency Act 19860. For example, section 214, which were designed to deal with situations where the corporate form was used as a vehicle for fraud. It is known as the ‘fraudulent trading’ provisions In Re Todd Ltd@, for example, a director was found liable to contribute over EYE,OHO to the debts of the company because of his activities. There is also the possibility that criminal liability.
While the criminal penalty was intended to act as a strong deterrent to fraudulent behavior, it proved to have the unfortunate effect of neutralizing the effectiveness of section 213 as the courts set a very high standard of proof for ‘intent to defraud’ because of the possibility of a criminal charge also arising. Wrongful trading does not require proving intent to defraud+. Section 214 of the Insolvency Act 1986, operates on the basis that at some time before the company entered insolvent liquidation there will have been a point where the directors knew@ it was hopeless and the company could not trade out of the situation.
If he does continue to trade, he risks having to contribute to the debts of the company under section 214. In Re Produce Marketing Consortium Ltd, over a period of seven years the company slowly drifted into insolvency. The two directors involved did nothing wrong except that they did not put the company into liquidation after the point of no return became apparent. They were therefore liable under s. 214 to contribute EYE,000 to the debts of the company. The Courts overcome the difficulties posed by the Salomon principle, by either piercing through or circumventing the corporate veil, to give effect to the realities underpinning it.
Generally, prior to the Court of Appeal in Adam V Cape Industries PICO, these judicial methods were agency, trust@, and fraud. There are a series of cases where the courts have been prepared to infer the existence of agency between a company and its owner or shareholders, particularly where the owner or shareholder is itself another company. In Smith Stone & Knight V Birmingham Corporation, a holding company was the owner f property in which one of its subsidiaries was carrying on business.
When the local corporation compulsorily acquired this property, the holding company was held entitled to compensation for disturbance to the business, which arose from the need to relocate. Atkinson J took the view that the subsidiary was carrying on business as the agent of the holding company. He listed the following factors, all based on the control over day-today operations, to be taken into account. Another strand of this exception is the view that one cannot use the corporate veil with a view to evading a legal obligation.
In Guilford Motor Company V Horns, the defendant had entered into an agreement with Guilford not to canvass their customers after he left the company’s employment. He sought to get around this obligation by forming a company and using it to carry out the canvassing. It was held that he and his company could be stopped from such activities. Similarly, in Jones V Oilman, the defendant who had contracted to sell his house to the plaintiff tried to avoid a claim for specific performance to sell the house. He conveyed the house to a company, which he owned and controlled in an effort to evade the Plaintiffs enforceable contract for sale.
Russell J rejected a defense based on the company being a separate entity, describing the company “The creature of the defendant, a device and a sham, a mask which he holds before his face in attempt to avoid recognition by the eye of equity”. However, it must be remembered that there can be a fine distinction between a legitimate and illegitimate use of the corporate form. The formation of a company, which has no genuinely separate existence, is not of itself unlawful. Similarly, it was held in Adams V Cape Industries PICO that the attempt to avoid potential future liabilities or consequences is not unlawful or fraudulent.
Here the defendant company was a parent of a number of subsidiaries in the LISA. These subsidiaries specialized in the manufacture of asbestos. A large number of the employees in these subsidiaries brought actions claiming their health had been damaged due to exposure to asbestos dust, and it was sought to enforce judgment in the proceedings against the defendant parent company in the I-J. The Court of Appeal found that one of the reasons for setting up the corporate structure in this way was to reduce the risk of the defendant being subject to the jurisdiction of the US courts. However, this was entirely legitimate.
Salad LLC said arrangement of the corporate structure to ensure that legal liability (if any) in respect of particular future activities of the group will fall on another member of the group rather than the defendant company was a right inherent in our corporate law. There are a number of cases, which demonstrate the courts may hold a collection or group of companies to be, for the purpose of a particular legal aim, a single entity. These cases generally centre on the principal that the companies in question are closely related, act in tandem, and that justice of the case so squires them to be treated as one.
The starting point for this analysis stems from the seminal case of DON Food Distributors Limited V Tower Hamlet LBC@. DON had two wholly owned subsidiaries, occupying the property as a licensee. Here the defendant local authority made a compulsory acquisition of property of the land-owning subsidiary. The parent company then sought compensation for disturbance. However, the land tribunal only offered negligible compensation since the business-owning subsidiary had been deprived merely of a revocable license and the property-owning subsidiary had no business to lose.
Dinning LLC stated that courts had a general tendency to look at the economic identity of the whole group and that this particularly applied when the holding company held all the shares in the subsidiary and can control it. He went on to hold that the parent should not be deprived of compensation due to a technical point when it was justly payable, and so the companies in question would be treated as one company. Similar issues were raised in Wolfs V Stretchable Regional Council, House of Lords reiterated that the corporate veil could only be lifted if the company was a ‘facade’, therefore compensation was not payable.
In addition, in Creaser V Breached Motors Limited a company tried to evade a judgment for damages for wrongful dismissal by forming a new company, to which it transferred all its assets and liabilities but for that judgment debt. It was held that the new company was also bound by the judgment, as the creation of it was purely an evasion attempt, though the principle was lifting the veil for achieving justice, which is contrary to the principle of a facade being necessary.
However, the decisions in Creases overruled in Rod V Believed Pubs Limited+, in which the claimants in an action against a defendant company tried o substitute the defendant company in their claim for any other company in the group. However, the Court of Appeal held that there was no impropriety in the transactions by the defendant company and no attempt to conceal anything from the claimants in this instance, therefore no facade, and there had to be some evidence of this before the corporate veil could be pierced.
In Re Poly Peck International PICO, the actions of a holding company raising funds by an issue of bonds loaned and having them guaranteed by a subsidiary’s repayment obligations were allowed as the corporate veil would not be lifted in he interests of justice. Meanwhile, in Yukon Lines Ltd of Korea V Reminders Investments Corporation of Liberia the argument that the defendant company in breach of a contract to charter a ship was not a sham and the sole shareholder in that company was not personally liable for damages as the corporate veil would not be lifted in the interests of justice.
In conclusion, if the Salmon’s principle contains more positives than negatives, is a big question mark in itself. It is too broad a topic to make a conclusive statement on it, but as far as it has been proved, is that the principle of separate gal entity has been quite influential in the development of modern capitalism and has generated massive amounts of social and economic wealth. However, some decisions have had negative effects, but they have been neutralized by joint legislative and judiciary actions.
