“A law is valuable not because it is law, but because there is right in it.” – Henry Beecher. To define ‘standing the test of time’, it refers to something which is continuing to be effective, successful, strong or popular for a long period of time. (Cambridge Dictionary, n.d.) In 1896, the case of Salomon , firmly established the main principle of separate legal personality in very clear terms by the House of Lords. It is stating that under the concept of limited liability, the participants of a company, such as the shareholders, are not liable for the company’s debts and hence led to the veil of incorporation. Until now, the courts have maintained this central concept and have applied it to a wide range of various cases over the centuries.
However, in certain situations, the statute may be said to lift the ‘veil of incorporation’, which means there will be access to the members’ personal assets for the company’s actions or liabilities. This is adversarial to the principle, in other words, Salomon is no longer the central principle in corporate law cases. However, in all these situations, the veils are not really being lifted as they are simply under special circumstances such as wrongful or fraudulent trading, sham and during wartime. Further, the aforementioned can provide an exception, meaning, the statute can ignore the separate legal personality of a company.
Under normal circumstances, the courts still follow the concept of a company’s separate legal personality that is recognised in Salomon for recent cases. This applies even after a century, and therefore Salomon has stood the test of time.
In Salomon, the sole trader incorporated his business by issuing shares and debentures to himself. Later, the business failed and he had nothing left to pay to the unsecured trade creditors. They argued that it was unfair because Mr Salomon and the company were actually one and the same. However, the House of Lords held that Mr Salomon was not liable for the company’s debts because the company and himself were two separate entities. Therefore, even when Mr Salomon’s business failed and he had nothing left to pay, his private assets were still protected and did not need to personally pay the unsecured trade creditors. Since then, the principle of a company having its own separate legal personality which is distinct from its shareholders, was established by this case and widely applied to various cases in the following years.
One example of such a case is Macaura v Northern Assurance in 1925. The court followed Salomon principle and held that since the assets that were lost in a fire were in Mr Macaura’s own name, and not in the company’s, he had no interest in property belonging to the company. Therefore, even Mr Macaura, who was the sole shareholder of the company, could not claim for the loss of the company.
Later in 1960, there was another example that the court followed the rule of Salomon, in the case of Lee’s Air Farming . The court held that since Mr Lee and his company were two distinct legal entities, Mrs Lee could still be entitled to the compensation of the death of Mr Lee due to the his status of an employee in relation to his own company, despite the fact that Mr Lee was his own ‘boss’.
From these two cases, it has been clearly illustrated how the Salomon principle has been effectively applied as well as how it has importantly influenced the relationship between the company’s separate legal identity and its distinct members over the decades. The courts held them under the fundamental of the Salomon’s principle and the general rule remained as the central rule in corporate law. Although the consequences of the cases were both good and bad, as it was beneficial to the owner of the company while the other was not, it is suggested that the principle of Salomon is neutral. The fairness of the general rule is also another key reason why it has thus far, stood the test of time.
Even though all these three cases mentioned they were all a ‘one man company’ – where an employee is also a majority shareholder, sole director and employer – when applying this idea to any modern business such as multinational companies, the concept will still work. In the case of VTB Capital , Lord Neuberger said: ‘A company should be treated as being a person by the law in the same way as a human being.’ (Sheikh, 2016) Therefore, the identity and the number of incorporators are irrelevant as once the company is registered under the Companies Act, it is a separate legal entity in law (Oladotun, 2016), and thus the Salomon principle remains a fundamental part of company law today.
Furthermore, Salomon has stood the test of time because it allows company to have practical utility. (LawTeacher, n.d.) A company can ‘live’ long to keep the business going without concerning about biological death of participants so it can reach the achievements made by generations.
However, the Salomon principle has been challenged under some situations over the years. In addition, it was said to have been eroded and therefore not to have stood the test of time. The corporate veil has said to be lifted when Salomon has been ignored by the court, which means the members of the company are held responsible for the company’s actions or liabilities by being gained access to reach their personal assets.
One of the special circumstances when statute might ignore the separate legal personality of a company is under Wrongful or Fraudulent Trading ss213-215 IA 1986; which clearly stated that directors can be personally liable to pay for the compensation. In this case, the members must take responsibility for their own unlawful wrongdoings or fraud and not in the name of the company’s actions. In the similar situation of sham, if the company is found a sham, the owners need to bear the responsibility as well. The related party must stand out from the corporate shield in this special circumstance, otherwise it will encourage the dishonesty, deception and the abuse of corporate forms in incorporation. Therefore, it is irrational to say that the ‘veil’ is being lifted in this situation.
Another special circumstance when statute might ignore the separate legal personality is the connection between members and the company. The ‘veil’ may be said to be lifted when the identity of the members is important to assess the character of the company. In the case of Daimler Co Ltd (1916), when England was at war with Germany, the company was incorporated in the UK, however all the shareholders and directors, with one exception, were German. Daimler was sued for an unpaid debt, but the court held that Daimler did not have to pay the debt due to the reason of national emergency as to avoid further funds going towards Germany’s war efforts. It was said that the veil was being lifted because the case was held by the nationality or identity of the members behind the company. However, during the condition of being prohibited to trade with enemies under wartime is an unusual circumstance. Under the normal circumstance, international trade will not be forbidden, hence, companies can freely trade with other foreign companies. Therefore, in general this cannot be considered to be a case of the corporate veil being lifted under the normal conditions in corporate law.
In the case of Prest , the court held that the properties could not be legally transferred to Mrs Prest, but she could lay claim to Mr Prest’s beneficial entitlement. This was said that the ‘veil’ was being lifted, because in the principle of Salomon, members do not own the assets or properties of the companies. So, if the properties were in the name of various companies, Mr Prest, one of the members of the company, should not have paid Mrs Prest the beneficial entitlement.
However, this case is a divorce case rather than an actual corporate law case, so this should not be taken as an example of lifting the veil in the world of corporate law. The properties were held on resulting trust for Mr Prest and so his equitable interest under that resulting trust was actually owned by him. (Lexology, 2013) Besides, with the fact that the properties did not legally transferred to Mrs Prest as she was only got the beneficial entitlement as remedy. (Gotts, 2013) So arguably the company was not really liable for the transfer of the properties. Therefore, the relatedness of the case is being doubted in terms of the ‘Lifting the corporate veil’ as the court did not really lift the corporate veil and thus Salomon is still intact.
‘You must keep your mind on the objective, not on the obstacle.’ – William Hearst. In conclusion, there were some challenges of the Salomon principle over the years in which courts ignored the legal corporate personality due to some juridical justifications and so members were held liable for the companies’ debts. This will only occur under special circumstances, for example, wrongful or fraudulent trading, sham and during instances of war. However, it has to be clarified that under the normal circumstances, members such as shareholders or directors of the company are not responsible or liable for the obligations of the company, apart from the aggregate of their unpaid shares. These concepts of separate legal personality in limited liability companies have been effectively applied over a wide range of cases over the decades, for example the case of Lee’s Air Farming and Macaura v Northern Assurance.
Today, the principle of separate legal identity recognised in Salomon still remains central and has become the fundamental concept in corporate law despite several challenges. Therefore, I believe that Salomon has stood the test of time over the years.
‘It’s every lawyer’s dream to help shape the law, not just react to it.’ – Alan Dershowitz. When it faces the growth of economy and the emergence of more modern businesses, there may be increasing challenges for the principle of Salomon. Furthermore, many more different cases may be needed to be considered separately under various circumstances, however, this will only reinforce the principle in a more specific way. The development and improvement of the rule will make it more comprehensive to apply to different situations in the future.