Salomon v Salomon Case: Impact on Corporate Law

This report discusses the impact of Salomon v Salomon case on corporate law. It covers the facts of the case, prior law, decision, and effect on corporate law. The report also includes advantages and disadvantages of corporate personality and the concept of lifting of piercing of veil.

LAW201 Corporate
Law

Table of Contents
INTRODUCTION...........................................................................................................................4
TASK...............................................................................................................................................4
Facts of Salomon v Salomon Case...................................................................................................4
Prior law ..........................................................................................................................................5
Decision .........................................................................................................................................5
Effect................................................................................................................................................6
REFERENCES................................................................................................................................8

INTRODUCTION
Corporate law is also recognise as enterprise, company law or business law. It consider as
a body law which govern the conduct of person, their rights and relations in company,
establishments, organization or businesses. It is a implementation of corporate law in companies.
There are five features of corporation in legal world in dealing with business affairs such as jural
personality, constricted liability, easy transfer of shares, delegated management and last
ownership of investors. Salomon v. Salomon is one of the leading case in corporate world in
which first time lifting of veil principle was laid down (Beebeejaun, 2020). In UK it is consider
as landmark case in company law and specifically state about doctrine of separate legal entity as
corporate personality which can sue or sued. So, share holders are not personally liable of
company's insolvency. This report discuss in briefly about facts of case, prior law of UK, reason
of decision and impart of it on corporate law.
TASK
Facts of Salomon v Salomon Case
Arson Salomon was a sole proprietor of shoe manufacturing company in Britain.
Later on Mr. Salomon incorporate it as Salomon and Co. Ltd worth of £39,0000 by selling as
separate legal personality. By converting his business into company by making a member of it as
wife and 5 children and Mr. Salomon in memorandum of association. As the deal was was made
of £39,0000 which decided to pay in mode of cash and debenture which was consider as
maximum value of his business. Debenture of cost of 10000 pound issued to Mr. Salomon which
he mortgage as security to Mr. Broderip worth of 5000 pound. Mr. Salomon taken 20,007 shares
of company as a amount of selling his previous business. Due to unsuccessful running of
company it declare as insolvent and order for winding up of it. With the debt of £ 7,773 of
unsecured creditors (Bowley & Hill, 2022).Liquidator impose allegations that the company is a
fake one so, step must be taken against the Salomon for indemnity of debt of company.
And issue arose whether shareholders imposed unlimited liability on it and made Mr. Salomon
personally liable for it.

Prior law
Before the Salomon case concept of limited liability exist which was covered under
Limited Liability Act 1855 which allowed corporation of limited liability was established by
common public in UK. This act having various sort coming like a formation of corporation was
made under British royal charter and Acts of parliament only. Previously the formation of
company through subscription of members and by particulars registered under central registry.
Such changes were beneficial for individual who was incorporating the company which was
consider as individuals avoiding expected debt by converting their business into incorporation of
company.
Decision
This matter came in front of high court later on court of appeal which declare that
company was fake one and the formation of it against the Companies Act, 1862 and consider
company as a agent of Mr. Salomon which make him liable for paying debts of arose during the
transactions of company.
Later on Mr. Salomon appealed against the decision laid down by above courts in House
of Lords. And examine the statement of Court of Appeal as Company was merely an agent of
Mr. Salomon for carrying out of business. Here House of Lords mention soundly about
companies existence. Existence of company was in question whether it exist or not. If the
formation of it is by an act. It consider as legal personality having its personal business which not
relates to Salomon and actual existence of company is not their then it consider as fake one
which have no basis to work as representative of company. The lower court decision consider as
a likeness to the evidence of liquidator as the amount paid to Salomon by the company against
the selling of business which was in excess. But it was also consider as at the time the of selling
of business it was in good situation running in surplus (Brand, 2018).
So, court held that there was no point of discussion regarding formation of company was
legal or not. And further clarify by the Court that as the formation of company was as per law of
land and consider as a separate person who not depend on others in the eye of law. This conclude
that Mr. arson not liable personally for paying company's debt and constituted 'corporate veil'
among company and companies proprietor and shareholders. As per this theory corporate

personality provides elementary principal on which law of incorporation founded. The reason of
such decision by house of lord understand with the help of following:
Advantages
 Reducing of personal liabilities - With the help of separate legal identity and limited
liability the liability of directors and share holders become limited towards company by
shares or guarantee.
 Helps in improving tax related planing and efficacious - such companies paying lower tax
as compare to sole proprietors and they are more flexible in taxation strategy.
 Provide protection to company's name – the name of company provides a distinct identity
through which business of company recognise from others.
 Helps in building positive image – incorporation creates different image of profession
which build integrity and frame to business which opens various opportunity (Mujuzi,
2021).
Disadvantage
 Limitation on company's name – Restriction on at the time of incorporation made when
they select company's name. Like company on similar name which was already registered
can not register.
 Fewer discrete – once company incorporated fee required to pay and information of
company consider as public record.
 Adherence of strict regulation – company has to follow regulations strictly like filing of
tax return, maintain records of minute of meetings, decision of directors including
shareholders in meeting and annual accounts of company.
Effect
After Salomon case two principle was emerged doctrine of limited liability and corporate
personality. These principles having relevance in recent company law as it consider as twin
pillars of modern corporate law and court constantly protect from irresistible attack.
The principle property of corporate personality is that company is legal entity which is
different from its members. So, it can have rights and duties but not similar to its members which
they enjoy. As per this doctrine corporation is an artificial person alike from natural being which

is registered under the company act. Corporation different personality from person which is
formed by its corporators. So when the important formality under the company act complied as a
registration of company. It consider as legal entity in law from persons who are called as its
members. In short once all the formalities regarding formation of company fulfil it consider as
body corporate as per section 41 of company act (now sec. 37).
as per section 41 some important characteristics derived for incorporation like corporate entity or
personality, perpetuality (perpetual succession) and limited liability in some cases.
The impact of this section is that its specify that the persons who laid down a corporation
are consider as important person at the time of incorporation. They are consider as group or
collection of persons in partnership cases. As Salomon case create history it opens new
opportunity for corporate lawyers and commercial world. Its not only establishes the legality of
single person company, small partnerships and to giant public companies but also disclose that
trader not merely liable to its limits in terms of money use in company. For avoiding major risk
debentures are subscribe instead of shares (Outa & Kutubi, 2021).
After this case Lee v. Lee's Air Farming Ltd. Laid down that one of share in corporation
was appointive the acting director and important person of the establishment on a remuneration.
Mr. Lee died in plane crash at that time he was working for company. Mr. Lee's widow claim
compensation and took a plea that both Mr. Lee and Lee's farming co. was a one person. Privy
council by applying Salomon case decide that Mr. lee and company are both different person and
compensation should be payable.
And the concept of lifting of piercing of veil was introduce which mention about liability
of officer's of company against debt and in which situation veil will be lifted these are as follow:
 Illegal trading – it occurs when officer's of company know that company going to
become insolvent and they did not take an appropriate steps for minimizing losses of
creditors.
 Fraudulent act – if company commit fraud for avoiding personal liabilities on the name of
some one consider as fraudulent action.
 Deception of legal duty – corporate veil never protect company's officer against legal
right as independent merely for avoiding personal liabilities.

 Bureau – company function as a agent for its members and the act of individual are liable
as an act of company. So company's officials are personally liable as an agent of
company (Williams & Biggemann 2020).

REFERENCES
Books and Journals
Beebeejaun, A. (2020). Piercing the corporate veil for environmental torts in Mauritius: a
comparative study. Journal of Financial Crime.
Bowley, T., & Hill, J. G. (2022). Shareholder inspection rights: lessons from Australia. Journal
of Corporate Law Studies, 1-30.
Brand, V. (2018). Ethics and corporate whistleblowing rewards in Australia. Australian Journal
of Corporate Law, 33(3), 402-424.
Mujuzi, J. D. (2021). Piercing/lifting the corporate veil to combat economic crimes in
Uganda. Commonwealth Law Bulletin, 47(2), 251-285.
Outa, E. R., & Kutubi, S. (2021). Bank corporate governance in Australia: Is there a conflict
between the existing corporate culture and the Anglo‐Saxon model of corporate
governance?. Journal of Corporate Accounting & Finance, 32(1), 145-150.
Williams, M., & Biggemann, S. (2020). Corporate Art Collections in Australia: The Influence of
Aboriginal Art on Corporate Identity. International Journal of Business
Communication, 2329488420958112.