University Corporations Law Report: Salomon Case and Corporate Veil

This report delves into the core principles of corporations law, focusing on the doctrine of corporate personality and limited liability as established by the landmark Salomon v A Salomon & Co Ltd case. It explores the evolution of the corporate veil and its implications, including the separation of co...Read More

Running head: CORPORATIONS LAW
Corporations Law
Name of the Student
Name of the University
Author Note

1CORPORATIONS LAW
1.
From the decision given in the concerned case, the doctrine of corporate personality
as well as the doctrine of limited liability has evolved. These two doctrines provided the
foundation of the pillar on which the modern day corporate law stands and the courts have
always tried to preserve them in spite of numerous attacks and criticisms on them. this led to
the evolution of the concept of corporate veil that separates the company personality from
company member’s personality.
Undoubtedly the decision of this case has established the separate personality of legal
nature of the company, but with time it is observed that the courts have deviated from it. In
such cases the courts do not consider the separate entity pertaining to legal character of the
company has been lifted. Hence there always lies a debate regarding whether the decision of
Salomon case will be the same if it was decided in the present day. However the legislation of
the country in this regard can ignore the corporate legal character of the company and get the
veil to be lifted in order to identify the legal liability of some members and the directors if it
is observed that construing to the decision of the case will result into injustice damage or
inconvenience.
The principle enumerated in the case of Salomon v. Salomon & Co. Ltd., had been
widely followed and incorporated during making decision of various cases later on. In
Macaura v. Northern Assurance Co. Ltd. [1925] A.C. 619, the principle of corporate veil was
discussed.
3.
In this case of Salomon v A Salomon & Co Ltd [1897] AC 22, the issue before the
court was whether a company having a distinct personality from Mr Salomon. The court

2CORPORATIONS LAW
decided that the company was validly established as per the provisions enumerated in the
then Companies Act of UK. During that time, under the relevant Act the main necessity
required to be satisfied for creating a company is that minimum seven members must be there
and such each of them must possess a share of any valuation. In order to comply with this
provision Mr Salomon along with his wife and 5 children turned shareholders of the
company. Though in the lower court argued that Salomon had acted against the provision of
the Act by creating a company with being the sole shareholders who had the chief controlling
power of the company, it was denied by the Appellate court. It stated that the minimum
criterion laid by the then Act was properly satisfied by Salomon.
The court did not consider such company of Salomon as the sham company as it held
that being a separate entity the company can earn money by issuing debentures which cannot
be done by any other trader. This was again followed in Jones v Lipman [1962] 1 WLR 832.
The member of a company has the power to hold the debentures like any other external
creditor provided the member has acted in good faith. Considering the company not be a
sham, the appellate court further justified it that the debts incurred by the company do not
signify that such debt is incurred by its members as they form two separate identities. Similar
observation was made in Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners
(1923) AC 723 at 740 – 741 on the basis of the decision given in Salomon’s case.
4.
From the decision given in the concerned case, the doctrine of corporate personality
as well as the doctrine of limited liability has evolved. These two doctrines non only
provided the foundation of the pillar on which the modern day corporate law stands by also
supplied various legal results of which three will be discussed in this part of the assignment.

3CORPORATIONS LAW
The first one is the separation of debts of the company from its members. It means
that when members of the company had acted in good faith, then they will not be held liable
for the debts incurred by the company. In this respect, judgment of Adams v Cape Industries
plc [1990] Ch 433 can be referred.
The second one is the separation of assets of a company from that of its members. It
means that the assets of the members cannot be mixed with that of the company. Moreover
the assets of the members cannot be encroached to give away the debts of the company
provided members of the company had acted in good faith. This has been discussed in Re
Hunting Lodges Limited [1985] ILRM 75. Similarly in Macaura v. Northern Assurance Co.
Ltd. [1925] A.C. 619, it was held that members do not have any interest in the assets and
property of the company.
The third one is that a company can even contract with its members as laid in Rayfield
v Hands [1960] Ch 1.
7.
Section 588G of the Corporations Act 2001 (Cth) provides the duty of the directors
belonging to a company to stop insolvent trading. He has such duty when a debt is incurred
during his tenure as a director of the company due to which the company may turn or
already turns insolvent due to such debt accrued. When the director cannot prevent it, he
said to commit an offence if the reason behind such failure is his dishonest intention. This
section somehow contravenes the separate legal entity principle of the company which
protect the interest of the directors in case any debt is incurred by such company. Under the
principle given in Salomon’s case, the directors cannot be held personally liable for any debt
incurred by the company or even if it turned insolvent. But as per section 588G if such debt
accruing or insolvency occurred due to the dishonest or malafide intention of the director

4CORPORATIONS LAW
then in that case he will be held liable. This was observed in ASIC v Rich (2003) 44 ACSR
341. This forms an additional duty of the directors of a company to prevent insolvent trading
which if not exercised will pierce the doctrine of separate entuty of the company and make
the directors liable for it.

5CORPORATIONS LAW
References:
Adams v Cape Industries plc [1990] Ch 433
ASIC v Rich (2003) 44 ACSR 341
Corporations Act 2001 (Cth)
Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners (1923) AC 723 at 740 –
741
Jones v Lipman [1962] 1 WLR 832
Macaura v. Northern Assurance Co. Ltd. [1925] A.C. 619
Rayfield v Hands [1960] Ch 1.
Re Hunting Lodges Limited [1985] ILRM 75
Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22.