Salomon's Case and its Legacy

This assignment analyzes the landmark case of Salomon v A. Salomon & Co Ltd, focusing on its establishment of the separate legal entity doctrine for companies. It delves into the implications of this doctrine, including limited liability and exceptions like piercing the corporate veil. The assignment also considers the evolution of company law since Salomon's case and whether changes are necessary in light of modern business practices.

Running head: CORPORATION LAW
Corporation Law
Name of the Student
Name of the University
Author Note

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Table of Contents
Salomon v A. Salomon & Co Ltd [1897] AC 22............................................................................2
Impact of Salomon principle on Company law...............................................................................3
Lifting the Corporate Veil...............................................................................................................5
Future of company law....................................................................................................................6
Whether change is necessary in the present law..............................................................................7
Reference list...................................................................................................................................8

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Companies are said to be an artificial legal person
The incorporation of a company as artificial legal person is recognized as a legal person
by law that exists independently with rights and liabilities. This implies that a company is treated
as a separate person from the participants of the company. In the legal context, there are two
types of persons, namely, artificial and natural (Jackson 2015). The former refers to human
beings which law recognized as having rights and duties whereas the latter is recognized as
human beings. Corporations are recognized as artificial person as it possess the right to purchase
and sell any property or the right to sue or be sued against the third party.
The separate legal entity of the company as an artificial person has resulted in the feature
of perpetual succession. A company has perpetual succession which implies that it cannot
affected by disability, insolvency, death or disagreement of shareholder. The principle that a
company is an artificial person and has a separate legal entity, which is perceived as the steadiest
rule of corporate jurisprudence. This principle has been established in the case of Salomon v
Salomon that only laid foundation of the English Company Law but of the commercial law
regime universally.
Salomon v A. Salomon & Co Ltd [1897] AC 22
Facts
Salomon initially operated as sole proprietorship business but transferred his boot making
business to a company (Salomon Ltd) that included himself and his family as the members of the
company. Salomon received the price for such transfer as shares and debentures with a security
against debt on the company assets. Later, when the company failed and liquidated, the right of
Salomon to claim for recovering securities against the debentures became a priority for the

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creditors who were unsecured and would not have received anything from the proceeds of the
liquidation. In order to avert such undue exclusion, the liquidator alleged on behalf of the
unsecured creditors that the company was a fraud (Schall 2016). He stated that the company was
an agent of Salomon who was personally liable for its debt being the principal. In other words,
the liquidator did not consider that Salomon Ltd has different identity from its member Salomon
only to make Salomon personally liable for the company debt as if he carried on the business as a
sole trader persistently.
Issue
This case dealt with the issue whether a controller/shareholder be liable for its debt
irrespective of the separate legal identity of the company higher than the capital contribution to
subject such person to unlimited personal liability.
Ruling
The House of Lords held that since the company was incorporated, it may be considered
as an independent artificial person having its own liabilities and rights. It is irrelevant to consider
the motives of those who took part in the promotion of the company regarding the rights and
liabilities. Thus, the decision in the Salomon’s case created a legal fiction of ‘corporate veil’
between the owners or controller and their companies.
Impact of Salomon principle on Company law
Principle enunciated in the case
The decision of the House of Lords given in the Salomon’s case gives rise to two
essential principles- the doctrine of limited liability and the doctrine of separate legal personality

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o corporate personality. The rule of separate legal entity established in the Salomon’s case has
been observed in cases like Lee v Lee’s Air Farming Limited and Macaura v Northern
Assurance’s cases. In the legal parlance, a corporation is considered as a distinct or separate
person with its own personality that is independent of the persons forming such company,
investing money into the company and managing the operations of such company. It is
established from the decision that the rights and duties of the corporation shall not be considered
as the rights and duties of the directors or the members of the corporation that are ambiguous
pertaining to the corporate veil that is surrounding the company (Hannigan 2015).
According to the decision in the Salomon’s case, the legal consequences that follow from
such decision ar5e as follows. Firstly, a registered company as a separate legal person is capable
of suing or being sued as was observed in Foss v Harbottle. Secondly, incorporation of a
company enables perpetual succession where company operations are not affected due to the
death of any director or member of the company. Thirdly, the distinct identity of a company
permits it to enter into contracts in its own name. Fourthly, a business corporation becomes
empowered to hold, acquire and dispose of any property as was observed in Macaura v
Northern Assurance Co Ltd.
Further, the other attributes that a company acquires after being incorporated and
becoming a separate legal entity includes its power to contract with its controlling member and
can be the creditor, debtor or a surety of the member as was ruled in Salomon’s case followed by
the decision in Lee v Lee’s Air Farming Ltd. The decision in Salomon’s case established that
lawfulness of a one-man company and established that incorporation was available for large
public company from sole trader and small private partnership.

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It also established that it was possible for a trader to limit the amount of money he invests
into the company but also avert serious risks to the significant amount of that capital by
subscribing to debentures instead of shares. In Lee v lee’s Farming Ltd, Lee held one of the
shares of the company and was governing director of the company who dies in air crash. It was
argued that his widow shall not be compensated as Lee and the company was the same person.
The rule of Salmon’s case was applied and company was held to have distinct identity from Lee.
Thus, this decision establishes separate personality of a company and gives it a judicial
recognition.
Lifting the Corporate Veil
The fundamental advantage of incorporation from which the other legal consequences
follow is, the distinct legal entity of a company. Therefore, it may happen that the corporate
personality of the company is used to perform illegal acts or frauds (Jackson 2015). Since, it is
no possible for the artificial person to commit such illegal conducts or frauds, it becomes
important to remove the pretense of corporate personality in order to recognize the persons guilty
of committing such illegal acts or frauds. This process is known as lifting the corporate veil. The
circumstances under which courts can lift the corporate veil are as follows:
Lifting the corporate veil by statute
The advantages of ‘separate entity’ and ‘limited liability’ may not be permitted under
certain circumstances. Firstly, when the number of members is lower than the statutory minimum
and the company carries on with its operations, the court may lift the corporate veil and hold
persons behind the company liable (Macey and Mitts 2014). Secondly, misrepresentation in
prospectus may hold the director , promoter and every person liable for misrepresentation liable.

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Thirdly, while winding up the company, it appears that the business operations were carried on
to defraud the creditors; the court may hold such persons personally liable for commission of
fraud.
Lifting the corporate veil by courts
The raising of corporate veil by courts often put the judiciary in dilemma, as the courts
cannot disregard the principle of Salomon’s case. However, over the years, judiciary has
transferred from applying the Salomon’s approach in a more interventional manner under
difficult circumstances in order to achieve justice under such difficult situation. The only
exception to maintaining corporate veil is that there must be ambiguity in any document or
statute that would prevent the court from treating the company as a distinct entity from its
members (Schall 2016). Secondly, when the court deems the company as fraud, hence,
establishing an abuse of the corporate form; thirdly, when it is proved that the company is an
authorized representative of its members or controllers.
Future of company law
It can be said that following the decision in the Salomon’s case, the Australian
jurisdictions have incorporated provisions for private companies into their corporate law to
ensure that the benefits arising from limited liability is not restricted to group of business
entrepreneurs. This is evident from the fact that Corporations Act sanctions the registrations of
one-person companies (Macey and Mitts 2014).
The ‘rigid construct’ of company law as is evident from the decision given in the
Salomon v Salomon case, that established the century-old doctrine of separate legal entity of

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companies from their members. This juristic personality of a corporation has given rise to the
legal structure of modern business and the doctrine of corporate veil remains uncontested.
The doctrine established in Salomon’s case has built a strong foundation of company
law, which safeguards the private assets of shareholders and provides a method of limited
liability that is acceptable by company law for facilitating international trade and business
development. In order to prevent controllers from misusing the corporate structure, the courts
have provided several exceptions to the rule of corporate veil thus, addressing relevant issues.
Whether change is necessary in the present law
It can be stated that the basic principles of the judgment in Salomon’s case remain to be
unaltered in the contemporary era that is, a limited liability company is an artificial legal person
that is separate from its members and directors. This principle is still relevant in the modern
company law. To sum up, it can be said that the doctrine of ‘separate legal entity’ is an effective
and justified rule that have been followed and shall be followed in the coming years.
There is no need for the courts to raise the corporate veil with the objective to enforce
liability on a shareholder for the business debts. The courts do not disregard the principle of
limited liability held in the Salomon’s case solely to impose liability on the shareholders of the
company for its debts. Therefore, the principles enunciated from the decisions remains intact
enhancing the efficiency of business activities.

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Reference list
Ayotte, K. and Hansmann, H., 2015. A nexus of contracts theory of legal entities. International
Review of Law and Economics, 42, pp.1-12.
Bainbridge, S., 2015. Corporate Law. West Academic.
Corporations Act 2001 (Cth)
Foss v Harbottle (1843) 67 ER 189
Hannigan, B., 2015. Company law. Oxford University Press, USA.
Jackson, K., 2015. Behind the Corporate Veil. ReVista (Cambridge), 15(1), p.50.
Lee v Lee’s Air Farming Limited [1960] UKPC 33
Macaura v Northern Assurance Co Ltd [1925] AC 619.
Macey, J. and Mitts, J., 2014. Finding order in the morass: The three real justifications for
piercing the corporate veil. Cornell L. Rev., 100, p.99.
Salomon v A. Salomon & Co Ltd [1897] AC 22
Schall, A., 2016. The New Law of Piercing the Corporate Veil in the UK. European Company
and Financial Law Review, 13(4), pp.549-574.