A Discussion of ‘Salomon v A Salomon & Co Ltd’ with Reference to Modern English Company Law
Written by Sean Walkden.
Posted at youthlaw.co.uk…
Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22 is a founding case in UK corporate law as it introduced the concepts of separate legal personality and veil-piercing. Both of these legal principles have stood the test of time due to the judiciaries’ obedience to Salomon. Veil piercing is when the courts disregard the limited liability of a company’s directors or shareholders in order to find individuals accountable the corporation’s actions. Separate legal personality is a fundamental concept in company law, and the fact that the judgement in Salomon attempts to define these concepts with unintelligible metaphors is unsatisfactory. Salomon seemed to introduce deeply important foundations for company law, but as it is outdated and cryptic statutory intervention may be an accessible solution.
The usage of nomenclature in Salomon has made separate legal personality a much debated area of company law as its metaphorical language highlights the difficulty of defining when a corporate veil should be pierced[1]. The awkwardness of these concepts has limited the development of the law, which could have caused injustices due to the obedience to Salomon’s principles. Modern company law cases have continued to use metaphorical language, with terminology such as “sham” describing companies which are attempting to “avoid recognition from the eye of equity”[2][3]. Professor Gower attempted to directly address issues with defining separate legal personality by addressing the exceptions to the rule, as he believed that the continuous use of nomenclature hindered the development of the law and could result in the law developing irrationally[4]. Gower believed that there must be rules created to highlight the circumstances when the courts must disregard the corporate veil. Wedderburn shows that there is a desire for principles to be “injected in this area of law”, suggesting that there is a desire within common law for an alternative of Salomon[5]. The decision in Salomon is seen as highly insufficient by Gower and at Common Law as the usage of nomenclature has given the courts too much unwanted discretion. The fact that for nearly 60 years some courts have been unhappy with the law on separate legal personality suggests that the law should have been developed a while ago and that there could have potentially been a large quantity of injustices in this area of company law.
Some academics believe that separate corporate personality is a concept that is indefinable legally, but in practice it is a concept everyone must understand when coming in contact with it[6]. Without a coherent test for how to establish when the corporate veil must be pierced, the court has more room for injustices created by the lack of a statutory definition. This shows that even though Salomon is the leading example on when to pierce the corporate veil, it does not even define veil-piercing in understandable, literal English. Stating that separate legal personality is indefinable but understandable when in contact shows that the concept is overdue a definition. Smith & Keenan attempted to give a literal definition for veil piercing, interpreting it as “a tactic used by the judiciary in a flexible way to counter fraud, sharp practice, oppression and illegality”, which indicates what it is, but in no way lays out a test for when the courts should apply this definition[7]. The academic debate surrounding separate legal personality shows that there is a large support for an update on the rule of veil-piercing.
The Company Act 2006 is an important document but barely touches on the issue of veil-piercing. The act shows that a company becomes a separate legal personality upon incorporation and is the closest modern statutory reference to separate legal personality, but makes no attempt at defining it[8]. It indicates that the company is separate from the shareholders and can have its own rights and responsibilities alongside having perpetual succession. This shows that a company shares similar legal rights to natural persons due to separate legal personality, but companies have the right to limit the liability of its members if the company declares it within their constitution[9]. The judgement in Salomon is supported by the Company Act 2006 as the concept of separate legal liability is assigned to a company as the company becomes incorporated. Unfortunately the Company Act 2006 does not supply any form of rule for how to establish when the corporate veil can be pierced, leaving Salomon as the main reference point for any form of rule. Alongside this, there seems to be reluctance from the court to pierce the corporate veil, as highlighted by Lord Justice Slade as he found that a subsidiary should be treated as its own legal entity[10], further enforcing the separate legal personality principle from Salomon. Adams v Cape shows that the spectre of Salomon still lingers and has maintained a general reluctance from the courts to pierce the corporate veil.
Lord Sumpton attempted to give a new rule on how to approach veil piercing in Prest v Petrodel (2013), but found it to be insufficient as Lord Sumpton’s concealment and evasion principles struggled to make the exceptions to veil piercing more coherent. Lord Neurberger stated in the same case that “it is impossible to discern any coherent approach” in relation to separate legal personalities[11]. This is potentially due to the already disjointed approach to the defining when exceptions can be made to separate legal personality. Although in Prest v Petrodel the concealment and evasion principles attempted to modernise the law surrounding veil-piercing, Lady Hale stated that not all previous cases could be classified into these principles, which suggests that prior to Prest v Petrodel there must have been a series of injustices as a result of the exceptions to the Salomon rule.
The exception relating to façade shows that the obedience to the Salomon judgement has limited the legal development of veil piercing. In Woolfson v Strathclyde (1978), Lord Keith stated that the veil must only be pierced when “special circumstances exist indicating [a company] is a mere façade”[12] suggesting the courts were incredibly reluctant to pierce the corporate veil unless the facts of the case indicate that it was entirely necessary, which showed that the courts rigidly followed the rule of Salomon. Adams v Cape highlights that parent companies are allowed to use subsidiaries in order to limit future liability, suggesting that the courts only wish to pierce the veil when a company has existing liability, suggesting that judicial development in this area is limited by Salomon.
The single economic unit argument suggests that a parent company and its subsidiaries are one economic unit because the subsidiaries are “bound hand and foot” to the parent company[13], a principle which goes directly against the understanding of separate legal personality found in Salomon. This approach received backlash in Adam v Cape Industries as the court disregarded the principles of Salomon, showing how the court has been severely limited by Salomon as new developments in the law have been made, but because of Salomon the court is reluctant to recognise these new developments. There have been a few times where the court has found exceptions where the companies are one single economic unit, but it is due to other regulations and clauses found within contract[14][15]. Generally, if a case uses the single economic unit argument the argument is rejected[16][17], suggesting that this argument is incompatible with Salomon. The law cannot develop in this area with Salomon still accepted as a general principle for separate legal personalities between subsidiaries and parent companies. It is clear to see that Adams v Cape Industries set an example that the courts are reluctant to develop the law as Salomon should be respected as subsidiaries should be treated as separate legal entities.
In the case of Salomon v A Salomon & Co Ltd, both the Court of Appeal and the House of Lords rejected the claim that Salomon Ltd was an agent of Salomon, so it is clear that from the commencement of this area of company law the agency exception was not a exception to veil-piercing. In Re FG (Films) Ltd (1953) the agency exception was successfully used to define when a subsidiary was an agent to the parent[18], but in Adams v Cape Industries the Court of Appeal rejected the agency argument[19]. The Court held this decision as there was insufficient evidence of the subsidiary being able to act on behalf of Cape, suggesting that the courts intentionally make it difficult to pierce the veil as it goes against the principle of separate legal personality.
Another exception for when the veil can be pierced is when it is in the interest of justice “irrespective of the legal efficacy of the corporate structure under consideration”[20]. Although this approach focuses entirely on the interests of justice, it has been regarded as a policy which attempts to “erode established legal principle” which “is not necessarily to be welcomed.”[21] Even though this exception is attempting to further the course of justice, it has been severely limited because of Salomon. On the other hand, this approach could have a flawed sense of justice as when Gallagher and Ziegler examined Re: A Company they discovered that piercing the corporate veil had negative effect on directors’ duties to the company as a whole[22]. This could damage the corporate and thusly cause an injustice to companies that wished to conceal information, which would not give grounds for veil-piercing if one applied Lord Sumpton’s principles in Prest v Petrodel. In congruence with this, the decision in Adams v Cape Industries shows us that the court is “not free to disregard the principle of Salomon”[23], showing that the court must strictly follow the rule of Salomon and there is no room for development even for the supposed interests of justice. This level of rigidity seems as if it is limiting the development of the court for the benefit of justice, and the bitter judgement of Adams v Cape Industries seems to focus more on following the judgement of Salomon rather than focusing on the interests of justice.
Finally, the impropriety exception is where the veil is pierced when the corporation is restructured for unlawful activity or to avoid the impact of court order. The approach itself is incredibly vague and is very similar for the façade approach but has uncovered exceptions where the company has evaded limitations imposed by the law[24] and when the companies have been structured to evade rights which third parties possess[25]. All of the exceptions to when the corporate veil can be pierced seem incompatible with Salomon and Prest v Petrodel, highlighting that the developments in the law over the last century were severely limited by Salomon as they were not free to disregard the principle of Salomon.[26]
Salomon provided a decent foundation for veil-piercing but important developments have been made from case law and statue. Prest v Petrodel was a groundbreaking opportunity to end the “never ending story” of veil piercing[27]. Lord Sumpton addresses the concealment principle as being “legally banal” as it is an enquiry into the facts of the corporation rather than an attempt at piercing the corporate veil. On the other hand, the evasion principle means the court can disregard the corporate veil if the legal right of the person in control is separate to the company’s involvement, and that the company’s separate legal personality will defeat the company’s right or frustrate its enforcement[28]. Although, Baroness Hale’s judgement highlights highlighting the inadequacy of the two new principles made in this case as they cannot be “neatly” catagorised. Although Prest v Petrodel attempts to address the strict recognition of the principles from Salomon prior to this case, as it previously allowed for misleading outcomes as interested parties had the opportunity to hide behind limited liability[29]. This shows that although Prest v Petrodel is insufficient with their classifications, the addition of the classifications has attempted to make it more and more difficult for parties to hide behind limited liability as there is now more ways of exposing what is behind the corporate veil without piercing it. Although Salomon seems ingrained in English company law, Prest v Petrodel highlighted that minor changes can be made in an attempt to make Salomon less ambiguous.
In conclusion, as the case law is so inconsistent, one might suggest that statutory intervention may be the best way of synergising the policies surrounding separate legal personality. Statute that could provide more specific vocabulary on what would trigger veil piercing would make it so that the court would have less discretion than it currently has with the Salomon rules. The usage of nomenclature has made veil-piercing indefinable legally, and with next to no statutory intervention and poor application of exceptions to common law, it seems the decision in Salomon is due an update. As separate legal personality is considered to be something indefinable but understandable when in contact[30], it suggests that the decision in Salomon most certainly hangs a spectre over modern company law.
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[1] Pickering M, “The Company as a Separate Legal Entity” (1968) 31 MLR 481
[2] Gilford Motor Company v Horne [1933] Ch 935
[3] Jones v Lipman (1962) WLR 832
[4] Gower L.C.B, “The Principles of Modern Company Law” (2nd ed., Stevens & Sons Limited, 1957, 209
[5] Wedderburn KW “A Corporations Ombudsman?” [1960] 23 MLR 663
[6] Pickering M, “The Company as a Separate Legal Entity” (1968) 31 MLR 484
[7] Smith K & Keenan D “Company Law” (7th ed., Financial Times Prentice Hall, 1987, 19)
[8] Companies Act 2006 s16
[9] Companies Act 2006 s3
[10] Adams v Cape Industries plc [1990] Ch 433
[11] Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415
[12] Woolfson v Strathclyde Regional Council [1978] UKHL 5
[13] DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852
[14] Samengo-Turner and others v J & H Marsh & McLennan (Services) Ltd and others [2007] EWCA Civ 723; [2008] IRLR 237
[15] Beckett Investment Management Group Limited and others v Hall and others [2007] EWCA Civ 613; [2007] IRLR 793
[16] Millam v Print Factory (London) 1991 Ltd [2007] EWCA Civ 322; [2007] IRLR 526
[17] Hashem v Shayif & Anor [2008] EWHC 2380 (Fam)
[18] Re FG (Films) Ltd [1953] 1 WLR 483
[19] Adams v Cape Industries plc [1990] Ch 433
[20] Re: A Company [1985] BCLC 333
[21] Lowry J “Lifting the Corporate Veil” (1993) JBL 41
[22] Gallagher L & Ziegler P “Lifting the corporate veil in the pursuit of justice” (1990) JBL 292–313
[23] Adams v Cape Industries plc [1990] Ch 433
[24] Gilford Motor Company v Horne [1933] Ch 935
[25] Trustor AB v Smallbone (No 2) [2001] EWHC 703 (Ch)
[26] Adams v Cape Industries plc [1990] Ch 433
[27] Linklater L “‘Piercing the Corporate Veil’: The Never Ending Story?” (2006) 27 Company Lawyer 65
[28] Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415
[29] Kahn-Freund, “Some Reflections on Company Law Reform” (1944) 7 MLR 54
[30] Pickering M, “The Company as a Separate Legal Entity” (1968) 31 MLR 481
