One of the cornerstones of modern company law is the case of Salomon v Salomon. This case established three principles:
2) Its members enjoy limited liability;
3) Provided the correct procedures were followed, incorporation was open to all, irrespective of how large or small the business was.
In Salomon, Lord MacNaughten said:
“The company attains maturity on its birth. There is no period of minority – no interval of incapacity…The company is at law a different person altogether from the subscribers to the memorandum; and though it may be that after incorporation the business is precisely the same as was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act.”
Similarly, Lord Halsbury said:
“It seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person with its rights and liability 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.”
The Corporate Veil
A natural consequence of the decision in Salomon is that the members and directors are separate from the company itself. Therefore, it is the company itself that deals with outsiders, including bringing and defending lawsuits. This separation is often referred to as the corporate veil, which hangs between the company on the one side, and the members and directors on the other.
This provides a high degree of protection to the members and directors. Normally, they will not be liable for any wrong committed by the company and outsiders cannot look behind the veil to identify these people.
However, obviously this opens up the possibility of abusing the corporate form and so a necessary part of company law is to allow the court to ‘lift’ the veil when appropriate.
Lifting The Corporate Veil
The courts have been extremely protective of the Salomon principle, and it is only in extreme circumstances that they will consider lifting the veil. Over the years, they have taken an inconsistent approach and so categorising the situations is difficult.
Fraud, Sham or Façade
Gilford Motor Co. v Horne
Facts: Mr Horne was employed by the plaintiff and in his contract it was stated that should he leave their employment he could not solicit customers of Gilford. However, on leaving the company, Mr Horne set up a second company and attempted to entice Gilford’s customers to his new company.
Held: The company was a sham, a simple attempt to avoid a contractual liability (a restraint of trade clause). Accordingly, the veil of incorporation was pierced. The company was still recognised as incorporated, but the veil was pierced to recognise Mr Horne’s liability for a breach of contract.
Jones v Lipman
Facts: Lipman agreed to sell land to Jones, but before completion he instead transferred it to a company which he set up in order to avoid the sale.
Held: “The defendant company is the creature of the defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity”.
As a consequence, the veil was lifted and specific performance was ordered.