The main issue relates to corporate entity or personality, a company being a legal entity independent of its members, can enter into contracts and own property in its own right, can sue and be sued and also taxed in its own name. The principle of corporate entity was established in the case of Salomon v A. Salomon , now referred to as the ‘Salomon’ principle.
The facts of this case were that the owner of a business sold it to a company he had formed, in return for fully paid-up shares to himself and members of his family, and secured debentures. When the company went into liquidation, the owner, because of the ownership of the debentures, won his claim to be paid off in priority to other creditors, as the secured debt ranked at a higher priority to those debts and successfully proved that he did not have to indemnify the company in respect of its debts, as it had a separate legal personality.
The House of Lords affirmed this principle, and stated that the company was also not to be regarded as an agent of the owner, as stated by Lord Macnaughten in the House of Lords as 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 a trustee for them. 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 contrary to it upon various grounds.
This is termed as ‘piercing the corporate veil’. Instances where the Salomon principle has been set aside by statute include section 30(3) of the Landlord and Tenant Act 1954, which states that where a landlord has a controlling interest in a company, the business of the company can be treated as a business carried on by the landlord, instead of two separate legal entities.
This legislation amended the problem shown in Tunstall v Steigmann , in which it was stated that a direct application of section 30(1)(g) LTA 1954, which states on termination of the current tenancy the landlord intends to occupy the holding for such purposes of a business to be carried on by him therein, would lead to absurd results, in which an absent landlord could resist the grant of a new tenancy upon proof of his intention to occupy for that purpose or do so through an agent.
Also section 24 of the Companies Act 1985 (CA 1985), as amended by Companies (Single Member Private Limited Companies) Regulations 1992 states that where a public or unlimited company’s membership falls below the prescribed minimum, being two members for more than six months, any person being the sole remaining member is jointly and severally liable for the debts of the company, which takes away the separate legal identity.
Furthermore, the Company Directors Disqualification Act 1986, states that a person being the director of a company or concerned in the management of it whilst being an undischarged bankrupt or being subject to a court order not to exercise such capacities, is jointly and severally liable with the company.
These provisions widen the net for claimants wishing to bring actions against such companies. In the context of taxation legislation, a complex and detailed area, an example relates to sections 703 to 709 Income and Corporation Taxes Act 1988 , which enables the Inland Revenue to counteract tax advantages obtained through specific transactions in securities.
The context of paramount public interest has been a previous consideration, as demonstrated by Daimler Co Limited v Continental Tyre and Rubber Company (Great Britain) Limited 6, in which the German directors of a company could not sue even though the company was incorporated in England as the company was regarded as an ‘alien enemy’, though this and some subsequent cases illustrated the then political situation.
The principle that the company acts as agent for its shareholders or in relation to another (parent) company was mentioned in Smith, Stone & Knight v Birmingham Corporation 7 in which it was decided that the subsidiary company was an agent of the parent company and therefore compensation was payable. Also, in DHN Food Distributors Limited v London Borough of Tower Hamlets 8, it was held that a parent company could sue the subsidiary and was entitled to compensation for the disturbance of a business and was not precluded from this by the fact that the premises where he business was carried on belonged to the same group of companies. The ‘agency’ principle was adopted in revenue cases, such as Firestone Tyre and Rubber Company Limited v Lewellin 9 in which it was held that an American company was carrying on business in England through its English subsidiary and therefore liable to pay English income tax. However, in Adams v Cape Industries plc, it was held that an agency cannot be implied just because a parent company owns all or most of a subsidiary’s shares.
The purpose of achieving justice as a justification for ‘piercing the veil’ was mentioned in Re A Company in which it was considered that the Salomon principle was of prima facie application, and that the court would take its own decision whether to follow the principle or ‘pierce the corporate veil’ based upon the circumstances and to achieve justice. This was firmly rejected in Adams, in which the court stated that there was only one instance when the corporate veil could be pierced, where special circumstances exist indicating it (the company) is a mere facade concealing the true facts.
The question of whether a company is a facade or a sham and therefore an evasion of legal obligations occurred was raised in Gilford Motor Company Limited v Horne, in which the defendant attempted to evade his obligations under a contract not to compete with the claimants, but carried on a competing business with a company in which all shares were owned by his wife. It was held that that company was a sham used to try to evade the contractual obligations.
In Jones v Lipman in which a defendant decided not to sell some land to the claimants, but to a company in which he owned most of the shares, and it was held that that company was a facade, and specific performance of that contract was awarded in favour of the claimants. In Woolfson v Strathclyde DC the House of Lords reiterated that the corporate veil could only be lifted if the company was a ‘facade’, therefore compensation was not payable.
Also, in Creasey v Breachwood 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 judgement as the creation of it was purely an evasion attempt, though the principle was lifting the veil for the purpose of achieving justice, which is contrary to the principle of a facade being necessary.
However, the decision in Creasey was overruled in Ord v Belhaven Pubs Limited, in which the claimants in an action against a defendant company tried to substitute the defendant company in their claim for any other company in the group, but 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 Polly Peck International plc, 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 the interests of justice. In Yukong Lines Limited of Korea v Rendsberg Investments Corps 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.
The conclusion that can be drawn from the above case law and legislation is that although the Salomon principle was set over 100 years ago, from latest case law, it appears that it is only if the facade test is satisfied that the corporate veil can be pierced and the principle set aside, and the principle continues to be strictly applied. (1436 words) BIBLIOGRAPHY LS Sealy 2001 Cases and Materials in Company Law pp 41-75. Butterworths Ben Pettet 2001 Company Law pp 25-30.
Longman Professor Pennington 2001 Pennington’s Company Law pp 36-60. Butterworths Sweet & Maxwell 1998 Practical Company Law pp1-3. Mark Stamp Jordans1995 Sourcebook of Company Law pp 65-150. Harry Rajak APPENDIX A – QUESTION The principle of law laid down in Salomon v Salomon & Co  is not always applied. Give the facts of this case and give its principle of law and discuss in detail when the common law will not take account of that principle. (20 MARKS)