General rule – separate corporate personality
Case law – Salomon v Salomon
Judgments:
High court
It was held (Vaughan Williams J) that the company was a mere ‘alias’ or agent for Mr Salomon,
and based on the agent-principal analysis Salomon is required to indemnify the company for
the losses sustained. His Lordship propounded that the company was a mere nominee for
Salomon because the shareholders, who are his family members, were not given real interest in
the company. (Page 329). Consequently, the company being a mere nominee of Salomon acts
as his servant or agent when selling the company. (Page 329-330) His Lordship also argued that
since the business was Salomon’s business rather than that of the company and since he chose
to use the company as his agent, he is bound to indemnify the agent (the company). As a result,
the agent has a lien over the company’s assets, which overrides Salomon’s claim. (Page 331-
332).
Court of appeal (appealed by Salomon)
It was held (Lindley LJ) that the company was trustee and Salomon was beneficiary and the
trustee was improperly brought into existence. His Lordship also propounded that the
incorporation under the Companies Act 1862 was done for a purpose in contrary to the
legislature’s intention. The legislature was to encourage trade of a relatively small number of
persons, with a limited risk. But the legislature never contemplated an extension of limited
liability to sole traders or to a fewer number than seven. Six of the members exist simply to
enable the seventh member (Salomon) to carry on business with limited liability. Therefore, the
object of the arrangement was in contrary to the legislature’s intention. Even though the
company is a valid corporation, it was created for an illegitimate purpose. (Page 337). His
Lordship regards the sale of the business to the company as a ‘mere sham’, which can be set
aside by the company in the interests of its creditors. (page 339-340).
House of Lords
A literal interpretation of the Companies Act was taken, and as such the company was validly
incorporated as there are seven members. Lord Halsbury contended that the court refuses to
‘fill in the gaps’ in determining the legislature’s intention, and that it is impossible to read from
the statute of such intention (Pages 32, 33 and 34).
Moreover, there was nothing in the Act about bona fides. The motives of the shareholders were
irrelevant unless there was fraud involved, and in this case there was no fraudulent motive. The
business thus belonged to the company and not to Salomon, pursuant to the doctrine of
corporate separate personality. Lord Macnaghten enunciated that the company is at law a
different person altogether from the subscribers, and the latter are not liable for the company’s
debts.
, Exception: Piercing the corporate veil
Case law: Prest v Petrodel
Definition of PCV :
Piercing the corporate veil is an exception to the rule of separate corporate personality laid
down in Salomon where the court disregards the corporate form and go behind it to hold the
individuals – directors and shareholders liable.
Prest v Petrodel:
This is a family case, involving divorce and allocation of matrimonial assets. The wife sought
possession of the husband’s properties, including the matrimonial home, on the basis that they
were held on trust by the company (owned by the husband) for him.
This landmark case acknowledges that corporate veil can be pierced with Lord Sumption
delivering a ratio of the distinction between evasion and concealment principles. Concealment
does not pierce the veil, but evasion does. Concealment principle involves cases where the
company had been used to hide the identity of the real actors. Evasion principle describes cases
where a person takes control of a company, subject to a legal right, and puts a company
between himself and the legal right.
Concealment principle Evasion principle
As Lord Sumption explained at This is the only situation in which the
paragraph 31, the court will not be protection provided by limited liability
deterred by the legal personality of a will actually be impugned or pierced.
company from enquiring into the It rests on the principle of an
legal relationship between a company individual being under an existing
and an individual. Importantly, the obligation that he seeks to avoid
concealment principle does not rest through the use of a corporate
or rely on a finding of impropriety, personality under his control. The
simply the fact of concealment. simple fact that a corporate
personality is used to incur a liability
This principle will apply where a and shield the individual is not
company is acting as agent or sufficient; it must be to protect the
nominee of an individual and individual from a claim (or
receiving property on their behalf. A enforcement of a claim) pre-dating
common example will be a director the involvement of the company.
setting up a limited company to
receive secret profits, or moneys Example – Jones v Lipman
obtained in breach of fiduciary duty.
(James Wibberley, Guildhall Chambers & Michelle Di Gioia, Gardner Leader)
Case law – Salomon v Salomon
Judgments:
High court
It was held (Vaughan Williams J) that the company was a mere ‘alias’ or agent for Mr Salomon,
and based on the agent-principal analysis Salomon is required to indemnify the company for
the losses sustained. His Lordship propounded that the company was a mere nominee for
Salomon because the shareholders, who are his family members, were not given real interest in
the company. (Page 329). Consequently, the company being a mere nominee of Salomon acts
as his servant or agent when selling the company. (Page 329-330) His Lordship also argued that
since the business was Salomon’s business rather than that of the company and since he chose
to use the company as his agent, he is bound to indemnify the agent (the company). As a result,
the agent has a lien over the company’s assets, which overrides Salomon’s claim. (Page 331-
332).
Court of appeal (appealed by Salomon)
It was held (Lindley LJ) that the company was trustee and Salomon was beneficiary and the
trustee was improperly brought into existence. His Lordship also propounded that the
incorporation under the Companies Act 1862 was done for a purpose in contrary to the
legislature’s intention. The legislature was to encourage trade of a relatively small number of
persons, with a limited risk. But the legislature never contemplated an extension of limited
liability to sole traders or to a fewer number than seven. Six of the members exist simply to
enable the seventh member (Salomon) to carry on business with limited liability. Therefore, the
object of the arrangement was in contrary to the legislature’s intention. Even though the
company is a valid corporation, it was created for an illegitimate purpose. (Page 337). His
Lordship regards the sale of the business to the company as a ‘mere sham’, which can be set
aside by the company in the interests of its creditors. (page 339-340).
House of Lords
A literal interpretation of the Companies Act was taken, and as such the company was validly
incorporated as there are seven members. Lord Halsbury contended that the court refuses to
‘fill in the gaps’ in determining the legislature’s intention, and that it is impossible to read from
the statute of such intention (Pages 32, 33 and 34).
Moreover, there was nothing in the Act about bona fides. The motives of the shareholders were
irrelevant unless there was fraud involved, and in this case there was no fraudulent motive. The
business thus belonged to the company and not to Salomon, pursuant to the doctrine of
corporate separate personality. Lord Macnaghten enunciated that the company is at law a
different person altogether from the subscribers, and the latter are not liable for the company’s
debts.
, Exception: Piercing the corporate veil
Case law: Prest v Petrodel
Definition of PCV :
Piercing the corporate veil is an exception to the rule of separate corporate personality laid
down in Salomon where the court disregards the corporate form and go behind it to hold the
individuals – directors and shareholders liable.
Prest v Petrodel:
This is a family case, involving divorce and allocation of matrimonial assets. The wife sought
possession of the husband’s properties, including the matrimonial home, on the basis that they
were held on trust by the company (owned by the husband) for him.
This landmark case acknowledges that corporate veil can be pierced with Lord Sumption
delivering a ratio of the distinction between evasion and concealment principles. Concealment
does not pierce the veil, but evasion does. Concealment principle involves cases where the
company had been used to hide the identity of the real actors. Evasion principle describes cases
where a person takes control of a company, subject to a legal right, and puts a company
between himself and the legal right.
Concealment principle Evasion principle
As Lord Sumption explained at This is the only situation in which the
paragraph 31, the court will not be protection provided by limited liability
deterred by the legal personality of a will actually be impugned or pierced.
company from enquiring into the It rests on the principle of an
legal relationship between a company individual being under an existing
and an individual. Importantly, the obligation that he seeks to avoid
concealment principle does not rest through the use of a corporate
or rely on a finding of impropriety, personality under his control. The
simply the fact of concealment. simple fact that a corporate
personality is used to incur a liability
This principle will apply where a and shield the individual is not
company is acting as agent or sufficient; it must be to protect the
nominee of an individual and individual from a claim (or
receiving property on their behalf. A enforcement of a claim) pre-dating
common example will be a director the involvement of the company.
setting up a limited company to
receive secret profits, or moneys Example – Jones v Lipman
obtained in breach of fiduciary duty.
(James Wibberley, Guildhall Chambers & Michelle Di Gioia, Gardner Leader)
