Magoosh GRE

“The doctrine of ‘separate legal personality’, as embodied in Salomon v Salomon & Co Ltd [1897] AC 22, has been fatally undermined by the number of subsequent exceptions to it.” Discuss this statement, stating whether you agree or disagree, in whole or in part, and why.

| October 30, 2012 | 0 Comments

 

The purpose of this essay will be to argue that the doctrine of separate legal personality has only been partly but not wholly undermined by the exceptions to it.

The doctrine of separate legal personality comprises of two elements. Firstly, a company’s property belongs to it and not to its directors and secondly, a company is responsible for its own debts and liabilities.[1] This means that shareholders and directors are not responsible for paying a company’s creditors back in the event that it becomes insolvent. This principle was established in Salomon v Salomon & Co Ltd.[2]

The facts of Salomon were such that Aron Salomon, from being a sole proprietor made his business into a limited company and in compliance with the law at that time made sure at least seven persons had subscribed as shareholders or members.[3] The company later became insolvent and despite the Court of Appeal holding that this move by Aron Salomon was tactical to benefit him with limited liability, the House of Lords held different.  Despite the other shareholders of the company being Aron Salomon’s family members, the members of a company would not automatically be entitled to the benefits or automatically liable for its troubles.[4] This created the doctrine of separate legal personality.

However, several exceptions to the principle have come about in case law and statute. In these cases, the veil separating the members of a company from the company itself is said to have pierced. This means that the liabilities and assets of a company are treating in the same way as those of its members.[5]

There are specific categories which have formed in the instance of which the corporate veil is pierced. Firstly, if a company is created as a sham or facade, courts have pierced the veil. This is a situation where a company is formed merely to cover up or disguise the real purpose of the corporate controller.[6]

Secondly, when a parent company and subsidiaries are involved, at times the veil has been pierced. In DHN Ltd v Tower Hamlets BC[7] the veil was lifted and the court held that a company whose premises where facing a compulsory purchase order, which was owned by another company, could get compensation as a whole. The parent and subsidiaries were held to be a single economic unit.[8] Thirdly, if a company was set up in order to a carry out an act of fraud, the corporate veil can be pierced in that situation as a clear exception to the Salomon principle.[9]

Fourthly, there exist some statutory exceptions to the Salomon principle for example section 214 of the Insolvency Act 1986 which states that company directors must contribute to payment of company debts in the event of winding up if they kept the business running up more debt when they ought to have known there was no reasonable prospect of avoiding insolvency.[10]

However, despite these exceptions, the doctrine of separate corporate personality is only partially undermined. The policies behind the existence of the doctrine need to be balanced against the policies justifying piercing the veil.[11] English law is of such a nature that judges have decided to pierce the veil on a case by case basis. Furthermore, it has been noted that the exceptions as discussed during the course of this essay are very inelastic.[12] The veil is only pierced where “the corporate form is being used for some manifestly improper or fraudulent purpose.”[13]

It should not be ignored that in many cases the corporate veil has not been pierced and judges have emphasised the sacrosanct nature of the Salomon principle.[14] In Ord v Belhaven Pubs Ltd,[15] not only was the corporate veil not pierced but Creasey v Breachwood Motors Ltd[16] was overruled. In the former, it was held that a restructuring of the company and its subsidiaries was not done in a manner such as to disadvantage the claimant who claimed for damages in contract and tort from Belhaven Pubs Ltd which had become insolvent.[17] Therefore in this case of insolvency, the Salomon principle was upheld.

The latter case involved a claim for the wrongful dismissal of the claimant by the company. Here, the veil was pierced as the court was of the view that the company had deliberately shifted its assets to another company to evade the claimant’s claim. However, the fact that this case was overruled suggests that the corporate veil may not be pierced even in the presence of a strong inference that a company has transferred assets to another so as to avoid liability.[18]

In conclusion, it is apparent that the Salomon principle in the context of the facts of the Salomon case was relevant to insolvency as Aron Salomon’s company had gone insolvent at the time the case went to court. The exceptions to the doctrine of separate legal personality as discussed above are not related to insolvency.[19] Therefore, the Salomon principle has only been partly and not fully undermined by the exceptions to it and relevant cases have continued to uphold the doctrine of separate legal personality.[20]

Bibliography

Acts of Parliament

Insolvency Act 1986 c.45

Cases

Adams vCapeIndustries[1990] Ch 433

Atlas Maritime Co SA v Avalon Maritime Ltd (No 1) [1991] 4 All ER 769

Creasey v Breachwood Motors Ltd [1993] BCLC 480

DHN Ltd v Tower Hamlets BC (1976) 1 WLR 852

Ord v Belhaven Pubs Ltd [1998] BCC 607

Salomon v Salomon & Co Ltd [1897] AC 22

Sharrment Pty Ltd v Official Trustee in Bankruptcy (Unreported: Federal court, 3rd June 1988)

Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830

Journal Articles

MOHANTY, S AND BHANDARI, V “The evolution of the separate legal personality doctrine and its exceptions: a comparative analysis” Company Lawyer 2011

WALTERS, A “Corporate Veil” Company Lawyer 1998

Web Links

http://www.out-law.com/page-8197 accessed on 1st August 2012

http://www.llrx.com/features/veildoctrine.htm accessed on 2nd August 2012



[1] http://www.out-law.com/page-8197

[2] [1897] AC 22

[3] http://www.llrx.com/features/veildoctrine.htm

[4] Ibid

[5] LJ Staughton Atlas Maritime Co SA v Avalon Maritime Ltd (No 1) [1991] 4 All ER 769

[6] Sharrment Pty Ltd v Official Trustee in Bankruptcy (Unreported: Federal court, 3rd June 1988)

[7] (1976) 1 WLR 852

[8] Ibid

[9] Adams vCapeIndustries [1990] Ch 433

[10] Insolvency Act 1986 c.45 section 214

[11] MOHANTY, S AND BHANDARI, V “The evolution of the separate legal personality doctrine and its exceptions: a comparative analysis” Company Lawyer 2011, p 194

[12] Ibid p 202

[13] Ibid

[14] Ord v Belhaven Pubs Ltd [1998] BCC 607, CA, and Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830, HL

[15] [1998] BCC 607

[16] [1993] BCLC 480

[17] WALTERS, A “Corporate Veil” Company Lawyer 1998, p 226

[18] Ibid p 227

 

[19] MOHANTY, S AND BHANDARI, V “The evolution of the separate legal personality doctrine and its exceptions: a comparative analysis” Company Lawyer 2011,  p 205

[20] Ord v Belhaven Pubs Ltd [1998] BCC 607

Tags:

Category: Essay & Dissertation Samples, Law Essay Examples

Ask a question about this article

You must be logged in to post a comment.