Salomon vs Salomon - Limited Liability of Incorporated Companies, the Doctrine of Corporate Veil - Case Study Example

Salomon v Salomon The decision in Salomon v Salomon made it amply clear that companies run by single persons or one – man companies could also obtain protection under the doctrine of corporate veil. In other words, a clear distinction was observed by the courts between the owners of a company and the company itself (Salomon v Salomon & Co Ltd, 1897). Limited liability had been provided under the Limited Liability Act 1855. In the Salomon v Salomon case, the Court of Appeal made Salomon personally liable for the debts of the company. However, their Lordships set aside this decision and established that a company and its owners were distinct entities (Bourne, 2011, p. 15). The doctrine of corporate veil was aimed at preventing injustice and emerged as an exception to the doctrine of limited liability (Cheng, 2011, p. 330). A balance between policy considerations and equity is demanded vociferously by justice. In the absence of exceptional circumstances, the courts in the UK do not pierce the corporate veil (Cheng, 2011, p. 331). This marked reluctance to lift the corporate veil became prominent after the 1970s. Prior to the 1970s, the courts, whenever required by justice, had been quite willing to pierce the corporate veil. In this context, a single economic unit theory had been put forth by Lord Denning, whereby the courts treated a parent company and its subsidiaries as one unit (Cheng, 2011, p. 331). Subsequent to incorporation, a company obtains the benefit of limited liability, or protection under the doctrine of corporate veil. This is a corporate device that accords protection to the investors of a limited company. Such incorporation has the cardinal benefit of making capital available for major industrial development (Muchlinski, 2010, p. 917). The investors are at risk of unlimited personal liability, in the absence of such protection. Moreover, the limited liability of incorporated companies increased investments from small and large investors. In fact, limited liability has enacted a major role in promoting industrial development and the growth of the modern economy. Consequent to limited liability, investors need not fear for their investments or be apprehensive that they could be rendered accountable for the liabilities of their company (Muchlinski, 2010, p. 917). It would not be far off the mark to declare that the mainstay of corporate law is limited shareholder liability. In this regard, it has come to be accepted that distinct corporations and even parent and subsidiary corporations are discrete entities. Such presumptions have prevailed in corporate law, since its early stages (Smith, 2008, p. 1169). The outcome of this manner of thinking is that according protection to shareholders via the corporate mechanism has been part and parcel of the economic and legal systems of the UK. Undoubtedly, limited liability in the context of corporate form has been instrumental in developing industry, trade and commerce. The judiciary and legislature have always been firmly convinced that capital formation is best achieved, via promotion of shareholder investment with limited liability (Smith, 2008, p. 1169). Consequently, limited liability is well ensconced in the corporate world. This concept provides the basis for major undertakings. In addition, it constitutes the conviction behind launching vast enterprises and for the investment of massive amounts of capital. Thus, limited liability is well ingrained into the corporate culture of the UK. Therefore, there is a near onerous burden on a party that seeks to pierce the corporate veil (Smith, 2008, p. 1170). Not surprisingly, the courts exhibit a marked distaste for ignoring the corporate form and making affiliated corporate entities liable. Under these circumstances, a party seeking to bring about disregard for the corporate form has to establish that the subsidiary was formed in order to enable the parent corporate to evade liability and that it was merely a façade for the latter (Smith, 2008, p. 1170). No single factor is taken into consideration by the courts, while establishing liability. Thus, several factors are taken into account by the court. It is the general tendency for these factors to ascertain whether more basic conditions have been satisfied. On establishing that an affiliate or parent entity had dominated or controlled the entity at issue, there was fraud or abuse of the corporate form, and that such abuse had resulted in tangible injury (Smith, 2008, p. 1171). Subsequent to the decision in Salomon, the courts undertook the task of piercing the corporate veil with great enthusiasm. Some of the cases where this was discernible are St. Louis Breweries v Apthorpe and Apthorpe v Peter Schoenhofen Brewing. In these cases, the courts did not take cognisance of the corporate personality of the company concerned and isolated the true owners of the company. These individuals had donned a corporate persona, in order to address issues related to taxation. This veil piercing activity of the courts was extended to even the multiple shareholder companies, and was not restricted to the single shareholder companies. The twentieth century was witness to several instances of veil piercing by the courts. Some of these examples are Gilford Motor Co Ltd v Horne, Trebanog Working Men’s Club v MacDonald, and Rainham Chemical Works Ltd v Belvedere Fish Guano Co. The Salomon principle established in the ruling in Salomon v Salomon, is of great significance to the courts. The latter apply this principle to cases involving the corporate veil. This principle has gained in importance, due to the widespread proliferation of corporate groups (Prentice , 1996, p. 483). The principle of corporate veil permits a company to enjoy a distinct legal personality. In addition, it can transfer liability to one of its subsidiary companies. In the UK, the corporate personality is deemed to be authentic by the courts, and only under certain circumstances, the corporate veil is pierced by the courts. Thus, in re Baglan Hall Colliery Ltd, the separate legal personality of the company was recognised by the court. Thereafter, the court permitted the owners of the company to register it as a limited liability company. These owners were desirous of circumventing liability by registering their company as a limited liability entity. The court held this activity to be legal, as per the provisions of the Companies Act 2006. However, in Jones v Lipman, the defendant transferred the house that was to be sold by him to the plaintiff, to his company. In this case, the court pierced the corporate veil and established that company was a mere façade to avoid the sale of the property. Consequently, specific performance by the defendant was ordered by the court. Similarly, the corporate veil was pierced by the court in Giford Motor Co Ltd v Horne, wherein the defendant was under a restrictive covenant. The latter enjoined upon him to refrain from soliciting the customers of the plaintiff, after the termination of his services with the plaintiff. The defendant formed a limited company and solicited these customers. The court pierced the corporate veil and declared that the company was a mask to violate the covenant. Such piercing of the corporate veil was also evident in Trustor AB v Smallbone. In this case a director of the company transferred funds of the latter to some accounts, in order to satisfy his personal requirements. The court lifted the corporate veil and thereby rendered justice. In Kensington International Ltd v Republic of Congo and others, the respondent attempted to mask sale of oil to the claimant as a sale by private companies. This subterfuge would have allowed the Congolese government to evade the payment of debts that had been awarded in a previous litigation. The court pierced the corporate veil and exposed this iniquity by the government of the Republic of Congo. The corporate veil was also lifted by the court in Gencor v Dalby, ruling that the objective of the defendant behind forming the company was to avoid liability. The court went on to opine that the company was merely the clone of the defendant. Such activity is not restricted to companies and some agencies are not above in indulging in such unethical practices. Thus, in Re FG Films Ltd, the corporate veil was pierced by the court, in order to expose the fraud being perpetrated by the agency. The decision of the House of Lords in Salomon v Salomon, reversing the decision of the lower courts, was of great significance. It established distinct corporate personality, with regard to companies. Thus, a company was deemed to possess a persona that was dissimilar to its owners. However, the courts of the UK adopted the practice of lifting the corporate veil. This initiative of the courts was aimed at establishing the true nature of their constitution. Such activity was at its zenith upto the early 1970s. Subsequently, there has been a marked reluctance on the part of the courts to pierce the corporate veil. Specifically in the year 1989, the House of Lords reasserted the Salomon principle, via their ruling in International Tin Council. Some exceptions to this general trend being companies formed for fraudulent purposes or with the motive of circumventing some existing obligation. To surmise, the UK courts pierce the corporate veil, only if there is an attempt to engage in fraudulent activity or to evade extant obligations, by the directors of a company. List of References Apthorpe v Peter Schoenhofen Brewing (1899) 15 TFR 245. Bourne, N., 2011. Bourne on Company Law. 5 ed. Taylor & Francis. Cheng, T. K., 2011. The Corporate Veil Doctrine Revisited: A Comparative Study of the English and the US Corporate Veil Doctrines. Boston College International and Comparative Law Review, 34(2), p. 329 – 412. Companies Act 2006 (c. 46). Crown copyright. Gencor v Dalby (2000) 2 BCLC 734. Giford Motor Co Ltd v Horne (1933) Ch 935. Jones v Lipman (1962) 1 WLR 832. Kensington International Ltd v Congo (2005) EWHC 2684. Limited Liability Act 1855 (18 & 19 Vict c 133). Crown Copyright. Muchlinski, P., 2010. Limited Liability and Multinational Enterprises: A Case for Reform?. Cambridge Journal of Economics, 34(5), p. 915 – 928. Prentice , D. D., 1996. Veil Piercing and Successor Liability in the United Kingdom. Florida Journal of International Law, Volume 10, p. 469 – 485. Rainham Chemical Works, Ltd v Belvedere Fish Guano Co (1921) 2 AC 465. Re Baglan Hall Colliery Co (1870) 5 Ch App 346. Re FG (Films) Ltd (1953) 1 WLR 483. Re International Tin Council (1987) 2 All ER 890. Salomon v Salomon & Co Ltd (1897) AC 22. Smith, D. G., 2008. Piercing the Corporate Veil in Regulated Industries. Brigham Young University Law Review, 2008(4), p. 1165 – 1211. St. Louis Breweries v Apthorpe (1898) 15 TLR 112. Trebanog Working Men’s Club v MacDonald (1940). Trustor AB v Smallbone (2001) 2 BCLC 436 Chancery Division. Read More