Effects of the Corporate Veil / basic features of company

1. Company becomes a corporate body (Corporate personality distinct

form its members)

(Salomon v. Salomon & Co 1897) Salomon was running leather

business as sole proprietorship. In U. K, After the enactment of
Limited Liability Company Act, 1855; Salomon converted his business
into company, named Salomon & Co. Ltd. in 1892.The requirement of
Act was seven members, accordingly, Salomon, his wife and five of his
children incorporated the company and Salomon was managing
director of the company. The net worth value of the company was
calculated 39,000 pounds. The price was satisfied 10,000 pound in
debentures, conferring a charge over all the company's assets, 20,000
pound in fully paid 1 pound each shares and his family members and
balance in cash.
The result was that Salomon held 20,001 of the 20,007 shares, and
each of the remaining six shares was held by a member of his family,
obviously as a nominee for him. But unfortunately, the company within
a year ran into difficulties and went into Liquidation. On winding up,
the state of affairs was broadly something like this; Assets 6000
pound, liabilities - Salomon as debenture holder 10,000 pound and
unsecured creditors 7000 pound. Thus after paying off the debenture
holder nothing would be left for the unsecured creditors. The
unsecured creditors suited against the Salomon claiming that the
company never had an independent existence; it was in fact Salomon
under another name.; he was managing director; the other directors
being his sons and under his control. The Salomon holding majority
shares made him absolute master. The business was solely his,
conducted solely for and by him and the company was a mere sham
and fraud.

The House of lords held that Salomon & Co Ltd. was a real company
fulfilling all the legal requirements. It must be treated as a company.
The Act merely required seven members holding at least one share
each. It said nothing about their being independent, or that they should
take a substantial interest in the undertaking, or that they should have
a mind and will of their own, or that there should be anything like a
balance of power in the constitution of the company. Hence the
business belonged to the company and not to Salomon and Salomon
was its agent. (Company Act, 2063 section 7)