DOCTRINE OF SEPARATE LEGAL PERSONALITY IN COMPANY LAW

Someone sent me the following question for my reflections:
The decision in Salomon v A Salomon & Co Ltd [1897] AC 22 (HL) firmly established that if a company was validly incorporated the concepts of separate legal personality and limited liability applied notwithstanding the size of the company or the number of its members. However, the Courts have seen fit, on numerous occasions since, to “lift the veil of incorporation” and restrict these rights. Do you think Salomon is still valid law? My reflections are as follows:
MY REFLECTIONS:
The 1862 Companies Act which created the concept of ‘SEPARATE LEGAL PERSONALITY’ for incorporated companies with seven or more subscribers (members) was a piece of legislation that has shaped the landscape of the English company law. What was set out in statute was later affirmed in the courts through the decision in Salomon v A Salomon & Co Ltd [1897] AC 22 (HL) ; which created a landmark principle that a company validly incorporated possesses a separate legal personality regardless of the number of its members. This principle, I will call The Salomon Doctrine has endured till this day despite all the trimming at the edges that has been done by statutes and common law. It is great tribute to their Lordships in Salomon that after over 100years; this doctrine still stands and the Salomon case is still being cited in courts today.

The courts have through various cases (before and after Salomon) affirmed the separateness of an incorporated company over the last century. In Metropolitan Saloon Omnibus Co Ltd v Hawkins (1859); the court held that a company can sue directly for any defamatory statement made against it as a separate legal personality. That case also affirmed that a company could even sue its own members for libel. The courts have also stated that a company’s property belongs to it as a separate legal personality and not to its members in Macaura v Northern Assurance Co Ltd [1925] AC 619.

Later on in Farrar v Farrars Ltd (1888) 40 ChD 395; the court held that because a company is separate from its members; it can enter into transaction with its members. This principle of separation have been further entrenched by more recent cases when the court found for instance that a company could employ any of its members as an employer; ( Lee v Lee’s Air Farming Ltd [1961] AC 12). And in a case in Australia, (Re Noel Tedman Holdings Pty [1967] QdR 561), it was held that a company can survive the death of its members. All the foregoing cases have established the Salomon doctrine of separate legal personality without a shadow of doubt, as the hallmark of our company legal framework. Thus making a company an association of its members and a person separate from its members.

However; over the years; there have been cases when the courts have lifted the corporate veil (so to speak, by ignoring the separate legal person of the company) and made directors and shareholders personally liable for corporate wrong or obligations. These exceptions that have been granted by the courts are so diverse that categorising them into any fixed logical and conclusive group will be difficult.

The Piercing of the corporate veil has not just been as a result of common law precedents (through court pronouncements); but also through public policy-driven statutory instruments such as in cases of fraudulent and wrongful trading, under s 213 and 214 of the Insolvency Act 1986. Some of the instance are:
FRAUD
The courts have held that they are prepared to pierce the corporate veil and will not allow (where it is clearly established) for an Incorporated Company be used for the purpose of fraud or as a tool contrived to evade contractual or other legal obligations. This is to further the interest of justice. In Standard Chartered Bank v Pakistan National Shipping Corporation [2003] 1 A.C. 959; the court established that fraudulent representation was on its own enough to lift the veil. In this case, the court was at pain to make clear that liability arose from taking part in fraudulent activities and not as a result of being a director.

SHAM OR FACADE COMPANY
This is the most notable basis the courts have demonstrated they are willing to lift the corporate veil. The court’s thinking was exposed long ago in Gilford Motor Co Ltd v Horne [1933] Ch. 935 (CA) ; a case involving a man trying to escape the provisions of a restrictive covenant he signed. Case law has shown that the reason of sham or façade company formation has been a popular basis for piercing the corporate veil. Jones v Lipman [1962] 1 WLR 832; Albert Locke (1940) Ltd v Winsford Urban District Council (1973) 71 LGR 308 are some of the popular cases in this regard. It can however be argued that in many of these cases (like in the Gilford Motors and Lipman cases); the court made orders against BOTH the company and the individuals involved thus (in some way) recognizing the company as a distinct personality rather than denying it. I do not therefore see these judgments as a big challenge for the Salomon doctrine; due to the need to protect society and the need for national laws to be read in harmony with each other.

AGENCY AND SINGLE ECONOMIC ENTITY EXCEPTION
In Smith, Stone & Knight Ltd v Birmingham Corp [1939]; the court showed that it was willing to lift the corporate veil if it seems that a subsidiary is operating as an agent of the parent company as a pretense to avoid existing legal obligations. It seems the focus of the court in this case was the appearance a set up to avoid “existing” liabilities. The court however strengthened Salomon Doctrine again when it came to schemes by companies that will lead to reduction in “future” potential liabilities as was the case in Adams & Others v Cape Industries plc and another [1990] BCLC 479

The other element the court has relied on in cases of subsidiary companies is the Control factor. The more control a parent company has over its subsidiary; the more it seems the court is willing to make it liable for the actions of the subsidiary. In Woolfson v Strathclyde Regional Council [1978] SC (HL) 90 HL (Sc), the court recognised that the issue of Control is a significant matter when considering if the corporate veil should be lifted.

STATUTORY EXCEPTIONS.
The most far-reaching breach of the Salomon Doctrine had actually been from statutes rather than common law. Section 213 and 214 of the Insolvency Act 1986 allows for the veil to be lifted if there is a demonstrated case of fraudulent and wrongful trading. Also, disqualified directors who register a company or act in that capacity in a company will be held personally jointly liable and cannot rely on Salomon defence (The Company Directors Disqualification Act 1986). In addition; employees transferred from one company to a subsidiary within the same group have protected rights of continuous employment based on The Employment Rights Act 1986. And after the big revision to the companies act in the Companies Act 2006; directors operating a company without a trading certificate are jointly liable personally.

FINALLY
I believe the Salomon doctrine has not been fatally undermined as the backbone of English company law; despite the periodic decisions of the courts to pierce the veil. The greater danger however is through statutes and legislative actions as there are many public policy inspired breaches of the Salomon doctrine on the statutes book. Many of these are reasonable and expected in a democratic society so that one law will nor be read in breach of another for the sake of equity and fairness.

And I concur with the profoundly stated sentiment in Mayson S., French D., and Ryan C. Mayson, French & Ryan on Company Law (29th Ed.); Page 128, which noted that: “ Whenever it is claimed that a court decision ignores a company’s separate personality, the question that should be asked is: Would the decision have been the same if the company had been a human being? If the answer is yes, the company is being treated as a person and no principle of company law has been over-ridden. If the answer is no, the company is being treated in some way differently from other persons”. Based on this analogy; I conclude that the Salomon doctrine is still intact and remains the backbone of English (and Common Law jurisdictions) company law.