Separate Legal Personality Salomon V Salomon
In his in-depth judgment, Lord Sumption examined two cases most often associated with the piercing of the corporate veil in the strict sense, in which the circumvention principle was applied. In the first, Gilford v. Horne  CH 935, the defendant sought to avoid an obligation not to compete with the plaintiff by arranging for his wife to form a partnership for that purpose. As Lord Hanworth MR pointed out in the case, the company was a “device, a strategy” used to conceal Mr Horne`s actual conduct of the business. The company was impeded in order to deprive Mr. Horne of the advantage he would have derived from the separate legal personality of the company. However, Lord Sumption speculated that even this case could have been decided for other reasons. This would not have meant breaking the corporate veil, such as attributing knowledge to the company in order to make its conduct unscrupulous or tortious.  In Jones v Lipman  1 WLR 832, the defendant entered into a contract for the sale of his house. He attempted to evade his obligations by transferring ownership to a corporation of which he and a representative appointed by him controlled all the shares and were its directors. Russell J.
noted that the company was “a mask that [Mr. Lipman] holds in front of his face to avoid seeing the eye of fairness” and that the company had the same obligation to transfer ownership to the plaintiff as Mr. Lipman, even though it was not a party to the purchase agreement. Now that we have identified what limited liability is, its historical foundations, how it is created, i.e. the veil of incorporation and separate legal personality and their exceptions, we will examine the advantages and disadvantages of limited liability. Under section 30(3) of the Landlords and Tenants Act 1954, where the owner holds a majority of the shares in a company which controls its business, he is deemed to be carrying on the business himself as opposed to the business. That provision does not recognise the existence of two different legal persons in the present case. The historical basis for limited liability existed long before Salomon v. Solomon, but it was this above-mentioned case that led to the emergence of the concept of limited liability and separate legal personality as a central element of company law.
Despite the strengthening of the concept of limited liability by Salomon, it is subject to exceptions, like any other legal concept. These exceptions are called “lifting” or “piercing” the corporate veil. In Smith, Stone & Knight v. Birmingham Corporation,1 the court ordered compensation to be paid to the parent company by the subsidiary. In this case, the subsidiary should be considered as the representative of the parent company. Also in DHN Food Distributors Limited v. London Borough of Tower Hamlets,2 the court ruled against the parent company`s application to bring an action against the subsidiary. The court`s decision also provides for compensation from the subsidiary to the parent company. The concept of limited liability is, as some modern corporate lawyers believe, as important an invention as electricity and the steam engine. This may be too extreme a comparison, but the importance of limited liability in corporate, legal and even international trade cannot be denied.
In this case, the company`s largest shareholder insured the company`s assets in his own name and in flames, destroying the assets claimed under the policy against his unsecured debts to the company. It was decided that the shareholder had no insurable interest. Since he could have insured himself either as a creditor or as a shareholder of the corporation, there is no insurable interest in an asset held by the corporation in either case. Indeed, the company is an independent legal entity and can therefore hold real estate in its own name, unencumbered by the creditor or shareholder (Wild & Weinstein, n.d.). Solomon`s case still represents the orthodox notion of a separate legal entity in English law, although a number of exceptions have developed since then. In Williams & Humbert v W & H Trade Marks  AC 368 at 429B, Lord Templeman called the suggestion to ignore this principle “heretical”. In E.B.M. Co Limited v Dominion Bank  3 All ER 555 at 564, Lord Russell of Killowen stated that the principle was of “supreme importance”. In Adams v Cape Industries plc  Ch 433 Slade LJ stated: “The court is not free to disregard the principle of Salomon v A Salomon & Co Ltd  AC 22 simply because it considers that justice requires it. For better or worse, our law recognizes the creation of subsidiaries which, while in some way creatures of their parent companies, are nevertheless treated under general law as separate legal entities with all the rights and responsibilities that would normally be associated with separate legal entities.
In Prest v Petrodel Resources Ltd  UKSC 34,  2 AC 415, paragraph 66, Lord Neuberger described Salomon as “a clear and principled decision that has not been challenged for more than a century”. So what is limited liability? Limited liability can be defined as a legal structure of an organization or corporation where a business loss does not exceed the amount invested in the organization. This essentially means that the private assets of the directors/shareholders of the company are safe in the event of bankruptcy of the company. Solomon vs. Solomon Co. Ltd gained prominence as it was the recognition of the company as a separate entity from the people who formed the company. Salomon worked for a long time as a leather merchant and boot manufacturer. At some point, he founded a company and sold his private company to the company. Salomon and his family members were the shareholders of the Company, with Solomon holding the majority of the Company`s shares (Chapter 3, 2006). Salomon received the shares as part of the consideration for the sale of his company to the company.
He also received bonds from the company, which provided collateral for the other party of the counterparty. The company complied with all legal registration requirements and operated profitably. The company continued for a while and eventually went bankrupt. When the company went bankrupt, Solomon demanded that he receive the balance of his sale price before paying the secured creditors, as he was secured by the bonds. The Court of Appeal considered the creation of the company as a plan to limit liability and put Salomon`s claim ahead of that of creditors. However, the House of Lords confirmed that Salomon & Co. Ltd had been legally incorporated to meet all requirements and was therefore considered a separate legal entity. No evidence of deception or fraud was found. Salomon also proved that he did not have to compensate the company for its debts, as it had its own legal personality. In the decades since Salomon, various exceptional circumstances in England and elsewhere (including Ireland) have been described by the legislature and the judiciary, in which courts may legitimately ignore the separate legal personality of a company, for example where crimes or fraud have been committed.
Whether the same decision would be made if the same facts were taken into account in the modern legal environment is therefore the subject of much debate, given the decisions of the House of Lords in Pepper v. Hart and Re Spectrum Plus Ltd and the Privy Council in Attorney General of Belize v. Belize Telecom Ltd, which require a resolute approach to the interpretation of legislation. In 2013, there was a systematic review of these powers in Prest v. Petrodel Resources Ltd and Lord Sumption distinguished between cases where the corporate veil had actually been breached and situations where the company was essentially an agent for a perpetrator or held trust property.  Although Lady Hale and Lord Mance were less willing than Lord Sumption to draw clear distinctions between cases of concealment or circumvention, or to exclude all possible future situations, Petrodel brings much-needed limits and clarity to the doctrine of breaking the corporate veil.  In fact, Lord Walker explained that this was not a doctrine at all, but simply a label used to describe the various cases in which the court had ignored or exempted the principle of distinct personality. Petrodel may signal a more conservative use of the term by the courts in the future. The incorporation of the company cannot be challenged (see p.
18 of the Companies Act 1862). The question whether the Court could annul the instrument of incorporation by a procedure such as facial scire is a question which has never been examined and on which I do not rule, but in any event, in an action such as the present one, the validity of the certificate cannot be challenged. The company must therefore be regarded as a corporation, but as a corporation constituted for an illegitimate purpose.