The primary concern pertains to corporate entity or personality. A company, as a separate legal entity from its members, has the ability to engage in contracts, possess property, initiate lawsuits, and be subject to lawsuits and taxes under its own name. The concept of corporate entity was established in the landmark case of Salomon v A. Salomon, commonly known as the ‘Salomon’ principle.
The business owner sold their business to a company they formed, receiving fully paid-up shares and secured debentures for themselves and their family. When the company went bankrupt, the owner asserted priority in being paid off ahead of other creditors based on their ownership of the debentures. Additionally, they demonstrated that they were not liable for the company’s debts as it had its own distinct legal identity.
In the House of Lords, Lord Macnaughten confirmed that the company should not be considered an agent of its owner. He emphasized that the company is a separate legal entity from those who subscribe to its memorandum and is not obligated to act on their behalf or as a trustee for them. Although there are instances where the Salomon principle may seem unjust, this can create pressure on courts to reevaluate and depart from it for various reasons.
The Salomon principle, which refers to the concept of “piercing the corporate veil,” is disregarded by law in certain instances. One such instance can be observed in section 30(3) of the Landlord and Tenant Act 1954. This particular section specifies that if a landlord exercises substantial control over a company, the actions of the company may be considered as those of the landlord, rather than as independent legal entities.
This legislation addressed the issue highlighted in Tunstall v Steigmann, where it was argued that directly applying section 30(1)(g) of the LTA 1954 would result in absurd outcomes. This section states that if a landlord intends to occupy the premises for business purposes upon termination of the current tenancy, they can resist granting a new tenancy based on this intention, even if they are not physically present and delegate this occupation through an agent.
According to Section 24 of the Companies Act 1985 (CA 1985), as amended by Companies (Single Member Private Limited Companies) Regulations 1992, if a public or unlimited company has less than two members for over six months, the sole remaining member is collectively and individually liable for the company’s debts. As a result, this removes its distinct legal identity.
Additionally, under the Company Directors Disqualification Act 1986, individuals who are directors or hold managerial positions in a company while being an undischarged bankrupt or being prohibited by a court order from holding such positions will be accountable along with the company.
The provisions mentioned expand the opportunities for individuals seeking legal action against these companies, especially regarding tax legislation. A specific illustration is present in sections 703 to 709 of the Income and Corporation Taxes Act 1988, which grant authority to the Inland Revenue to nullify tax benefits obtained from specific security transactions.
The case Daimler Co Limited v Continental Tyre and Rubber Company (Great Britain) Limited 6 showed that the consideration of paramount public interest has been a factor in previous cases. In this case, the German directors of a company were unable to sue, despite the company being incorporated in England, because the company was seen as an ‘alien enemy’. This and later cases showcased the political climate at the time.
The idea that a company acts as an agent for its shareholders or in relation to another (parent) company was discussed in Smith, Stone & Knight v Birmingham Corporation 7. The court ruled that the subsidiary company was an agent of the parent company and thus had to pay compensation. Similarly, in DHN Food Distributors Limited v London Borough of Tower Hamlets 8, it was determined that a parent company could sue the subsidiary and receive compensation for disrupting a business, regardless of the fact that the premises were owned by the same group. This agency principle was also applied in revenue cases, like Firestone Tyre and Rubber Company Limited v Lewellin 9, where it was established that an American company was conducting business in England through its English subsidiary and therefore had to pay English income tax. However, in Adams v Cape Industries plc, it was ruled that ownership of all or most of a subsidiary’s shares does not automatically imply agency.
The concept of “piercing the veil” is discussed in Re A Company, where achieving justice is cited as a reason to do so. The court determines whether to follow the Salomon principle or pierce the corporate veil based on the specific circumstances. However, in Adams, it is firmly rejected and stated that the corporate veil can only be pierced in special circumstances where the company is acting as a mere facade.
Gilford Motor Company Limited v Horne raised the issue of whether a company is a facade or a sham, resulting in an evasion of legal obligations. In this case, the defendant attempted to avoid his contractual obligations by engaging in a competing business through a company solely owned by his wife. The court ruled that the said company was a sham utilized to circumvent the contractual obligations.
The case of Jones v Lipman involved a situation where the defendant chose to sell land to a company he had majority shares in, instead of selling it directly to the claimants. The court determined that this company was merely a front, and thus the court granted specific performance of the contract to the claimants. The House of Lords reaffirmed this principle in the case of Woolfson v Strathclyde DC, stating that the corporate veil can only be disregarded if the company is found to be a facade. Therefore, compensation was not awarded in this particular case.
In Creasey v Breachwood Motors Limited, a company attempted to avoid paying damages for wrongful dismissal by establishing a new company and transferring all its assets and liabilities except for the judgment debt. However, the court ruled that the new company was still obligated to pay the judgment since its creation was solely intended to evade accountability. This decision involved lifting the veil of incorporation in order to seek justice, which contradicts the notion that maintaining a facade is essential.
However, the decision in Creasey was overturned in Ord v Belhaven Pubs Limited. In this case, the claimants attempted to replace the defendant company with another company within the group in their claim. The Court of Appeal, however, determined that there was no wrongdoing or attempt to hide information from the claimants. Therefore, there was no facade and it was necessary to present evidence before piercing the corporate veil.
In the case of Polly Peck International plc, it was allowed for a holding company to raise funds by issuing bonds and having them guaranteed by a subsidiary’s repayment obligations. The court decided not to lift the corporate veil in the interests of justice. Similarly, in the case of Yukong Lines Limited of Korea v Rendsberg Investments Corps of Liberia, it was argued that the defendant company, which breached a contract to charter a ship, was not a sham. Additionally, the sole shareholder in that company was not personally responsible 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, established over 100 years ago, still holds true. However, recent case law suggests that the corporate veil can only be pierced and the principle set aside if the facade test is satisfied. Therefore, the Salomon 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 established in Salomon v Salomon & Co  is not universally applied. The case’s facts, its principle of law, and the instances in which common law disregards that principle will be discussed in detail. (20 MARKS)