Salomon Case and Evolution of the Principle

The important disputed issue in English company law is: when will a court be justified in disregarding the autonomous legal personality of a registered company?

The main rule establishing this issue is that if a company is legally incorporated and properly administered, it will be determined to be an independent legal entity with the ability to own property, hold rights and obligations, and exist separately from its founders and the individuals limiting its operations.1

With regard to Salomon v A. Salomon & Co Ltd, the House of Lords demonstrated the importance of the separate legal personality of a company, which will be recognized by the court, despite any economic reasons that suggest treating a registered company as merely an extension of its parent companies.2 The basic principle in the Salomon case was expanded by the Court of Appeal to decide more complicated circumstances of a multinational inter-corporate enterprise group that faces situations of controlling parent companies operated by smaller subsidiaries.3 In addition, the courts determined the problems of legality of traders utilizing the legal framework of separate corporate personality, along with limited liability of members, with the purpose of reducing their personal liability towards creditors.4

Throughout the 20th century, the courts have attempted to make several exceptions to the general principle in Salomon, which recognizes a company as a separate legal entity.5 There are three periods regarding the corporate veil, starting with the Salomon case as stated above, and extending to the Second World War, while implementing diverse approaches to the principle.

The second period, a duration from the Second World War to Woolfson v Strathclyde [1978] SLT 159 case, is explained as the courts applying flexibility through consideration with the corporate veil principle.7 In the case of DHN, which involved a holding company and its subsidiaries, the court applied an exception to the principle of separate corporate identity and disregarded the separate corporate identity principle.8

The third period, starting with the Woolfson case and extending to Petrodel Resources Ltd v Prest [2013], saw the courts adopt a cautious approach towards piercing the corporate veil. In the Petrodel Resources Ltd v Prest case, the court examined whether the corporate veil could be lifted and the assets of the companies attributed to the husband, and ruled that the corporate veil could not be pierced in this case.9

In the post-Prest environment, as some academics suggest, the current law is located in a fourth period, where the court attempts to apply corporate veil principles into categories of fraud or sham, agency, and single economic unit.10 I will further discuss this in the following posts.

References

  1. Charles Wild, Stuart Weinstein, Smith & Keenan’s Company Law (Pearson 2019, 18th edn) p.78
  2. Salomon v A Salomon and Co Ltd [1897] AC 22
  3. Ibid
  4. Ibid
  5. Marc Moore, "A temple built on faulty foundations": piercing the corporate veil and the legacy of Salomon v Salomon J.B.L.180-203 (March, 2006), accessed 13 May 2023
  6. Ibid
  7. Woolfson v Strathclyde [1978] SLT 159
  8. DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852
  9. Prest v Petrodel Resources Ltd & Others [2013] UKSC 34
  10. Ibid