JAI NARAIN VYAS UNIVERSITY,

JODHPUR
SOLOMON V. SOLOMON

SUBMITTED TO – PAMILA SHAH

NAME – WASIM AKRAM
BA.LL.B. (Hons)
17BAL51073
SEM – VII
ACKNOWEDGEMNET
I would like to express my profound sense of gratitude towards the almighty
for providing me with the authentic circumstances which were mandatory for
the completion of my project.
I am highly indebted to Pamila Shah Ma’am for providing me with constant
encouragement and guidance through the preparation of this project.
My cardinal thanks are also to my parents, friends and all teachers of law
department in our college who have always been the source of my inspiration
and motivation without which I would have never been able to unabridged my
project.
TABLE OF CONTENT
• INTRODUCTION
• FACTS
• ISSUES
• RULINGS
• IMPLICATIONS
• MARCH BACK TO SOLOMON RULE
• CONCLUSION
• BIBLIOGRAPHY
INTRODUCTION
Separate Legal Personality is the basic tenet on which company law is
premised. Establishing the foundation of how a company exists and functions,
it is perceived as, perhaps, the most profound and steady rule of corporate
jurisprudence. Contrastingly, the rule of “SLP” has experienced much
turbulence historically, and is one of the most litigated aspects within and
across jurisdictions.1 Nonetheless, this principle, established in the epic case of
Salomon v Salomon,2 is still much prevalent, and is conventionally celebrated
as forming the core of, not only the English company law, but of the universal
commercial law regime.

FACTS
Aaron Salomon was a successful leather merchant who specialized in
manufacturing leather boots. For many years he ran his business as a sole
trader. By 1892, his sons had become interested in taking part in the business.
Salomon decided to incorporate his business as a Limited company, Salomon &
Co. Ltd.
At the time the legal requirement for incorporation was that at least seven
persons subscribe as members of a company i.e. as shareholders. Mr. Salomon
himself was managing director. Mr. Salomon owned 20,001 of the company's
20,007 shares - the remaining six were shared individually between the other
six shareholders (wife, daughter and four sons). Mr. Salomon sold his business
to the new corporation for almost £39,000, of which £10,000 was a debt to
him. He was thus simultaneously the company's principal shareholder and its
principal creditor.
When the company went into liquidation, the liquidator argued that the
debentures used by Mr. Salomon as security for the debt were invalid, on the
grounds of fraud. The judge, Vaughan Williams J. accepted this argument,
ruling that since Mr. Salomon had created the company solely to transfer his
business to it, the company was in reality his agent and he as principal was
liable for debts to unsecured creditors.
High Court
The judge, Vaughan Williams J. accepted this argument, ruling that since Mr.
Salomon had created the company solely to transfer his business to it, then the
company and Salomon were one unit; the company was in reality his agent and
he as principal was liable for debts to unsecured creditors.
The appeal
The Court of Appeal also ruled against Mr. Salomon, on the grounds that Mr.
Salomon had abused the privileges of incorporation and limited liability, which
the Legislature had intended only to confer on "independent bona fide
shareholders, who had a mind and will of their own and were not mere
puppets". The lord justices of appeal variously described the company as a
myth and a fiction and said that the incorporation of the business by Mr.
Salomon had been a mere scheme to enable him to carry on as before but with
limited liability.

The Lords
The House of Lords unanimously overturned this decision, rejecting the
arguments from agency and fraud.
Salomon followed the required procedures to set the company; shares and
debentures were issued. The House of Lords held that the company has been
validly formed since the Act merely required 7 members holding at least one
share each.
There was no fraud as the company was a genuine creature of the Companies
Act as there was compliance and it was in line with the requirements of the
Registrar of Companies.
The Company is at law a separate person. The 1862 Act created limited
liability companies as legal persons separate and distinct from the
shareholders. They held that there was nothing in the Act about whether the
subscribers (i.e. the shareholders) should be independent of the majority
shareholder. It was held that: "Either the limited company was a legal entity or
it was not. If it were, the business belonged to it and not to Mr Salomon. If it
was not, there was no person and nothing to be an agent [of] at all; and it is
impossible to say at the same time that there is a company and there is not."
Hence the business belonged to the company and not to Salomon, and
Salomon was its agent.
The House further noted:
"The company is at law a different person altogether from the [shareholders]
...; and, though it may be that after incorporation the business is precisely the
same as it was before, and the same persons are managers, and the same
hands received the profits, the company is not in law the agent of the
[shareholders] or trustee for them. Nor are the [shareholders], as members,
liable in any shape or form, except to the extent and in the manner provided
for by the Act."
ISSUE
The case concerned claims of certain unsecured creditors in the liquidation
process of Salomon Ltd., a company in which Salomon was the majority
shareholder, and accordingly, was sought to be made personally liable for the
company’s debt. Hence, the issue was whether, regardless of the separate
legal identity of a company, a shareholder/controller could be held liable for its
debt, over and above the capital contribution, so as to expose such member to
unlimited personal liability.

RULING
The Court of Appeal, declaring the company to be a myth, reasoned that
Salomon had incorporated the company contrary to the true intent of the then
Companies Act, 1862, and that the latter had conducted the business as an
agent of Salomon, who should, therefore, be responsible for the debt incurred
in the course of such agency.
The House of Lords, however, upon appeal, reversed the above ruling, and
unanimously held that, as the company was duly incorporated, it is an
independent person with its rights and liabilities appropriate to itself, and that
“the motives of those who took part in the promotion of the company are
absolutely irrelevant in discussing what those rights and liabilities are”.1 Thus,
the legal fiction of “corporate veil” between the company and its
owners/controllers2 was firmly created by the Salomon case.

1
Gas Lighting Improvement Co. Ltd. v Commissioners of Inland Revenue, 1923 AC 723 (Lord Sumner).
2
Jennings v Crown Prosecution Service, 2008 UKHL 29.
IMPLICATIONS
Commencing with the Salomon case, the rule of SLP has been followed as an
uncompromising precedent in several subsequent cases like Macaura v.
Northern Insurance Co. 3, Lee v Lee’s Air Farming Limited,4 and the Farrar case.
The legal fiction of corporate veil, thus established, enunciates that a company
has a legal personality separate and independent from the identity of its
shareholders. Hence, any rights, obligations or liabilities of a company are
discrete from those of its shareholders, where the latter are responsible only
to the extent of their capital contributions, known as “limited liability”. This
corporate fiction was devised to enable groups of individuals to pursue an
economic purpose as a single unit, without exposure to risks or liabilities in
one’s personal capacity. Accordingly, a company can own property, execute
contracts, raise debt, make investments and assume other rights and
obligations, independent of its members. Moreover, as companies can then
sue and be sued on its own name, it facilitates legal course too. Lastly, the
most striking consequence of SLP is that a company survives the death of its
members.

3
1925 AC 619.
4
1961 AC 12.
The Exception of Veil Piercing
Notably, similar to most legal principles, the overarching rule of SLP applies
with exceptions, where the courts may look through the veil to reach out to
the insider members, known as “lifting or piercing of corporate veil”.5
It is worthwhile here to refer to the case of Adams v Cape Industries6, which
examined the common law grounds, primarily evolved through case law as an
equitable remedy,7 namely-
(a) agency,
(b) fraud,
(c) façade or sham,
(d) group enterprise, and
(e) injustice or unfairness.

The exception has been invoked widely by English courts, including in the
recent cases of Caterpillar Financial Services (UK) Limited v Saenz Corp Limited,
Mr Karavias, Egerton Corp.8, Beckett Investment Management Group v
Hall,19 Stone & Rolls v Moore Stephens, and Akzo Nobel v The Competition
Commission, to cite a few. Needless to mention, the journey of English law in
defining the contours of the SLP doctrine and carving out these exceptions has
been quite topsy-turvy. Moreover, veil piercing is now also rampant as a
statutory exception.

5
English courts have, however, differentiated between the terms “lifting” and “piercing”, for instance, in Atlas
Maritime Co SA v Avalon Maritime Ltd (No 1), court stated that “To pierce the corporate veil is an expression
that I would reserve for treating the rights and liabilities or activities of a company as the rights or liabilities or
activities of its shareholders. To lift the corporate veil or look behind it, on the other hand, should mean to
have regard to the shareholding in a company for some legal purpose”,1991, 4 All ER 769, 779, (Staughton LJ).
6
1990 Ch. 433.
7
Peter B.Oh, ‘Veil-Piercing Unbound’ (2013) 93 B.U. L. Rev. 89.
8
2007 I.C.R. 1539 (A.C.).
March back to the Salomon rule
While the Salomon rule appears to have been eroded substantially, a reversal
in the judiciary’s approach, commencing with the Adams case, is now visible.
For instance, in Bank of Tokyo v Karoon, the Court of Appeal rejected the
“single economic unit” theory arguing that “we are concerned not with
economics but with law. The distinction between the two is, in law,
fundamental and cannot here be abridged”. Further, in the case of VTB Capital
Plc v Nutritek International Corporation, the court reiterated the restricted
scope of veil piercing as only a limited equitable remedy.
On a similar note, in the most recent judgment of Prest v. Pestrodel9, Sumption
J. confined the lifting of veil to only two situations, namely,
(a) the “concealment principle”, akin to the sham or façade exception; and
(b) the “evasion principle”, being the fraud exception.
Deciding not to pierce the corporate veil on the facts, this case once again
reinstated the Salomon rule.

9
2013 UKSC 34.
CONCLUSION
All in all, the Salomon ruling remains predominant and continues to underpin
English company law. While sham, façade and fraud primarily trigger the
invocation of the veil piercing exception in limited circumstances, these
grounds are not exhaustive, and much is left to the discretion and
interpretation of the courts on case-to-case basis.
BIBLIOGRAPHY
• Avtar Singh; Company Law; 17th edn., Eastern Book Company.
• AK Majumdar, Company Law & practise, 7th edn.