A SALOMON V. A SALOMON AND COMPANY – [1896] U.K.H.L.

11

ABSTRACT
This English House of Lords Appeal Case is the Landmark Judgement in Corporate and
Company Laws, for pioneering the “Separate Legal Entity” principle of an Incorporated
Company. The Case reasons the rationale behind such concept. However, it fails to capture into
Perspective the fact that in Modern times, it is easier and convenient to avoid liability towards
an individual by exploiting Loopholes in law, that favour Corporations instead. Thereby, the
law needed to account the true reason behind the Companies affairs, and to question, Whether
the Company is a mere front or a puppet in order to fulfil the Individual’s self-centered wants
and needs? This is propounded as the theory of “Lifting the corporate Veil” and is established
by law both in terms of Statue and as held by the Judiciary. This landmark case law is only half
appreciated today for the “Separate Legal Entity” principle, but criticized for not including any
framework for assigning liability towards Individuals in exceptional Cases.

INTRODUCTION
This case from the British House of lords in 1896 helped cement the important concept of
“Separate Legal Entity” and its situation, the ratio and its Significance have helped every aspect
of Company law as we know it.

BACKGROUND OF THE CASE

Aron Salomon, was a leather and shoe manufacturer and he converted his business into a
company and named the company Solomon Company Ltd. The Company was limited by shares
and had a share capital of £40,000 of £1 each which was bought and subscribed by Solomon
himself, and his family with his 2 eldest sons as Directors, who were to run the business. When
he transferred the business Solomon took 20,000 shares of £1 each and debentures worth
£10,000. His wife, daughter and 4 sons had 1 share of £1 each.

A year after incorporation the company went into liquidation, due to general market depression
and the failure of the Business. It was assessed that there were assets worth £6,000 and

1
A Salomon v. A Salomon and Company, [1896] U.K.H.L. 1.

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liabilities consisting of unsecured creditors £7,000 and debentures held by Solomon worth
£10,000.

LEGAL ISSUES AND RATIO OF THE JUDGEMENT

The unsecured creditors did not receive any liquidation proceeds as all the money went to the
debenture holders, as per the sequence. Mr. Broderip was one such unsecured creditors, who
along with other unsecured creditors, sued for recovery. Mr. Broderip, however was paid off
but the other Unsecured creditors raised the contention that the company was incorporated but
the company did not have a separate legal existence as Solomon himself ran the company. It
was argued that The company was a sham playing fraud and also contravened the intent of the
company and its object as under the British Companies Act. This contention by the unsecured
creditors was rejected completely by the courts. They held that on the incorporation of the
company under the Companies Act, the company has a separate legal existence. Thus even
though the debenture holder was Solomon himself, he was entitled to get priority in payment
over the unsecured creditors of the company. Thereby upholding the principles of “Separate
Legal Entity”. However, it is to be noted that the previous instance of the Salomon case, the
Court of Appeals did hold the individual liable.2

The same was applied in erstwhile British India as well, in the case of Kondali Tea Company3.
This approach continued in all further Company Law statues as has been observed by the JJ
Irani Committee Law Report.4

CRITICAL ANALYSIS OF THE JUDGEMENT

The Judgement of the House of Lords in 1897, while ground-breaking at the time, has not aged
well. In today’s circumstances, it is certainly not the only authority to be cited in an issue
pertaining to Individual-Corporate liability.

SIGNIFICANCE

The Judgement given by the House of Lords carries Paramount Importance in this present day
as it interprets the statute, understands the legislative intent and applies logic and reason to a
seemingly obvious statute. The company may have had a separate Legal entity, but this form
of corporate masquerade should not be misused, and that is what this case has in its essence. 5

2
Broderip v. Salomon, [1895] 2 Ch. 323.
3
In Re: The Kondali Tea Company Limited v. Unknown, (1886) ILR 13 Cal 43.
4
Report on Company Law, Part I, p. 6 (2005).
5
Murray Pickering, The Company as a Separate Legal Entity, 31 THE MODERN LAW REVIEW 481, 483 (1966).

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The line between actual Corporate freedoms, powers and immunities as against that of an
individual. At the end of the day, a company is still controlled by humans, where the company
and its actions and responsibilities have some face and brains behind them, being the directors
of the Company.

ANALYSIS WITH RELEVANCE TO MODERN STATUTE

This Judgement stated with Authority that the Statue (erstwhile British Companies Act) must
be interpreted literally in such way that the statue originally intended to serve and accomplish.

The principle of Separate Legal Entity is embodied in the Companies Act of India, 2014 under
its Section 96 which explains, what happens when a Company is incorporated. It reads

“9. Effect of registration.— From the date of incorporation mentioned in the certificate
of incorporation, such subscribers to the memorandum and all other persons, as may,
from time to time, become members of the company, shall be a body corporate by the
name contained in the memorandum, capable of exercising all the functions of an
incorporated company under this Act and having perpetual succession with power to
acquire, hold and dispose of property, both movable and immovable, tangible and
intangible, to contract and to sue and be sued, by the said name.”

Emphasis is laid on the latter half of the definition, where the principle of Separate Legal Entity
is incorporated into the definition.

The definition also talks about “Perpetual Succession” which lays down that – A company will
survive even if all its members die.7

THEORY OF PIERCING/LIFTING THE CORPORATE VEIL

The Rationale behind the theory of Piercing the Corporate Veil is that there are situations where
it is necessary that the Actual humans behind the Mask/veil of the Corporate must be looked.
A mere “Ltd.” suffix does not justify the maleficent intentions behind an action. Therefore, it
is the right, just and equitable thing to do to therefore look into the brains behind the operations.
Violating the principle of Separate Legal entity is justified because the company is now a mere
puppet in the hands of its masters, the Directors, the Board and the Signatories, who are the
final decision-makers under the Company’s name.

6
Companies Act 2013, s. 9.
7
In Re: K/9 Meat Supplies (Guildford) Ltd, [1966] 1 W.L.R. 1112.

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In the very judgement, while discussing the actual law behind the case, many Lords have also
pointed out the obvious potential for misuse of this legal status assigned to a Company. In its
obiter, the same was raised by lord MacNaughten and it reads8

“I cannot understand how a body corporate thus made “capable” by statute can lose
its individuality by issuing the bulk of its capital to one person, whether he be a
subscriber to the memorandum or not.”

Note – Lord MacNaughten’s statement must be understood also in the concept of a One-person
Company9 as in today’s context.

This is the lacuna of the Salomon Judgement. It fails to take into account that Companies are
run by humans who have a different agenda to push than that of the company itself and
sometimes misuse the Company for their own needs.

Consequently, the sanctity of the Separateness of the company is upheld today more than ever.
However, in today’s context, this principle is recognized and well applied. It is both Statutorily
and Judicially upheld and includes many scenarios.

One example of this is in the Companies Act, under Section 2(60), where the Act pinpoints a
single Person in relation to an Action that is taken by the Company. It is clearly stated that,

“(60) ―officer who is in default, for the purpose of any provision in this Act which
enacts that an officer of the company who is in default shall be liable to any penalty or
punishment by way of imprisonment, fine or otherwise, means any of the following
officers of a company of a company”

This definition recognizes that an Officer of the Company who is at fault must be subject to
law associated with that wrong, and is to be punished for the same. The officer, by nature of
this definition cannot hide behind the Company for the consequences of the employee.

Even the Apex authority of India has also upheld this statement by saying in the landmark
judgement, LIC v. Escorts Corporation10, where Justice O. Chinappa Reddy states:

“The corporate veil may be lifted, the corporate personality may be ignored and the
individual members recognized for who they are in certain exceptional circumstances”

8
Lord MacNaughten in A Salomon v. A Salomon and Company, [1896] U.K.H.L. 1.
9
Companies Act 2013, s. 2(62).
10
Life Insurance Corporation of India vs Escorts Ltd., 1986 (1) SCC 264.

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This Supreme Court Judgement clearly recognizes that the Salomon case has since been
rendered irrelevant, and that instead it is to be clearly demarcated with the theory of
piercing/lifting the Corporate veil.

SITUATIONS WHERE CORPORATE VEIL IS TO BE LIFTED, AS STATUTORILY PROVIDED

The Companies Act along with other statues such as the Securities and Exchange Board of
India Act, 199211 (SEBI Act), The Securitisation and Reconstruction of Financial Assets and
Enforcement of Securities Interest Act, 200212 (SARFAESI Act) and Insolvency and
Bankruptcy Code, 201613 – make explicit provision in them where individual persons in a
company are identified to liable for the actions caused by them under the garb of the company.14

 Section 3A15 as inserted by 2017 Amendment16– When there are less number of
members than prescribed, members are severally liable for debts – Under this
Circumstance it is assumed that when there are lesser number of members than
prescribed, the Act considers it to be a fault of the other members themselves, thereby
assigning liability to them. (Note - Also present in Companies Act 1956 as s. 45)
 Section 39(5)17 – When there has to be refund of Allotment money to share subscribers
is not made on time, the officer (along with the company) is held to liable to a penalty.
 Section 12(8)18 – States that when there is a default with respect to complying with any
error in regards to the name or address of that Company, the person so responsible shall
be subject to a penalty for mis-describing the Company.
 Section 33919 – If and when there is fraudulent trading which has been discovered
during the liquidation, the Official Liquidator has the power to give an Application to
declare any person who knowingly acted fraudulently or with such intent, who is or
was a director, manager or officer to be personally responsible with unlimited liability.
 Sections 3420 and 3521 – When a Prospectus has been issued, if the information
contained it is in any way misleading, incorrect or there is some misleading conclusion

11
The Securities and Exchange Board of India Act 1992, 15 of 1992.
12
The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act 2002,
54 of 2002.
13
Insolvency and Bankruptcy Code 2016, 31 of 2016.
14
N BHATIA & J SETHI, CORPORATE AND COMPENSATION LAWS 6-7 (1st ed. 2012).
15
Companies Act 2013, s. 3A.
16
The Companies (Amendment) Act 2017, 1 of 2018.
17
Companies Act 2013, s. 39(5).
18
Companies Act 2013, s. 39(5).
19
Companies Act 2013, s. 339.
20
Companies Act 2013, s. 34.
21
Companies Act 2013, s. 35.

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 or omission, The Companies Act assigns both, Civil and Criminal liability to any person
who has authorised the Issue of that Prospectus.
 Section 44722 – The Companies Act has laid down the Lifting of the Corporate Veil
principle for fraud committed by adding a provision exclusively assigning criminal
liability on persons who have committed fraud towards any liability including
repayment of debt.

SITUATIONS WHERE CORPORATE VEIL IS TO BE LIFTED, AS JUDICIALLY LAID DOWN

 Escape of Tax Liability – The High Court of Bombay, in this Review23 clearly stated
that the Court will allow to pierce the Corporate Veil when it is found that the Company
has been evading Tax liability, where such evasion is done with explicit intention on
the part of the decision-makers of the Company.
 To analyse the true intent behind formation of a Company – In the case of Jones v.
Lipman24, the defendant had created a company for the specific reason of escaping his
contractual liability owed to the Plaintiff. This Company, it was held by the British
Courts, was therefore subject to be allowed for lifting of the corporate veil.
 Where a Company evades Welfare legislation –A welfare legislation is the Lex Loci of
the State and to avoid certain liability which may be an additional burden or expense
for the person who is responsible for such welfare (usually big corporations), they use
the disguise of a Company to purposefully evade such responsibility and the court
interprets that in such situation, it is crucial to pierce the corporate veil, to analyse the
true rationale and motive behind such action.25 This is justified in order to protect the
Public Policy. As held by the House of Lords in Connors v. Connors,26 the interest of
the State and the Public, including the welfare of its citizens can override that of the
private Company.

22
Companies Act 2013, s. 447.
23
In Re Sir Dinshaw Manekji Petition, AIR 1927 Bom 371.
24
Jones v. Lipman, (1962) All E.R 442.
25
Workmen Employed in Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd., AIR 1986 SC 1.
26
Connors Bros. Ltd. v. Bernard Connors (Canada), [1940] UKPC 57.

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 CONCLUSION

The Salomon v. Salomon case of the House of Lords being almost 120 years old, has
reverberated and percolated into becoming a Case Law of significant value today in all matters
of Company and Corporate Laws. It is the ingenuity and insight of the Lords who have
recognized the principle that the law grants a company, a separate legal entity, that has its own
Memorandum, Articles and Existence. This status is at par and sometimes beyond a Natural
person. However, the Judgement has not aged well. It was observed by the Lords that the
Company’s entity could and can be misused in the context where it serves the purposes of its
master/member or director and becomes a mere puppet. This has since changed, even in the
House of Lords, as well as in other Jurisdictions. Today, the judgement holds significance for
being the first to recognize “Separate Legal Entity” but it has failed to provide any solid legal
standing for “lifting the Corporate Veil” as the underlying principle is only mentioned in the
Obiter of the Judgement. The Salomon case serves to be the cornerstone of the Separate Legal
Entity Principle which allows the Company as a form of Business to be attractive to all
stakeholders, which in turn has helped the Economy grow significantly ever since, considering
that this Judgement came a t a time of Economic Despair and on the verge of the next Industrial
Revolution.

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 REFERENCES AND BIBLIOGRAPHY

Supreme Court Cases

Life Insurance Corporation of India vs Escorts Ltd., 1986 (1) SCC 264. ................................. 5
Workmen Employed in Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd.,
AIR 1986 SC 1. ...................................................................................................................... 7
House of Lords Cases
A Salomon v. A Salomon and Company, [1896] U.K.H.L. 1. .............................................. 2, 5
Privy Council
Connors Bros. Ltd. v. Bernard Connors (Canada), [1940] UKPC 57 ....................................... 7
U.K. Cases
Broderip v. Salomon, [1895] 2 Ch. 323. .................................................................................... 3
In Re: K/9 Meat Supplies (Guildford) Ltd, [1966] 1 W.L.R. 1112. .......................................... 4
Jones v. Lipman, (1962) All E.R 442. ....................................................................................... 7
High Court Cases
In Re Sir Dinshaw Manekji Petition, AIR 1927 Bom 371. ....................................................... 7
In Re: The Kondali Tea Company Limited v. Unknown, (1886) ILR 13 Cal 43. ..................... 3
Statutes
Companies Act 2013, s. 2(62).................................................................................................... 5
Companies Act 2013, s. 339. ..................................................................................................... 6
Companies Act 2013, s. 34 ........................................................................................................ 6
Companies Act 2013, s. 35. ....................................................................................................... 6
Companies Act 2013, s. 39(5).................................................................................................... 6
Companies Act 2013, s. 3A. ...................................................................................................... 6
Companies Act 2013, s. 447. ..................................................................................................... 7
Companies Act 2013, s. 9 .......................................................................................................... 4
Insolvency and Bankruptcy Code 2016, 31 of 2016. ................................................................. 6
The Companies (Amendment) Act 2017, 1 of 2018. ................................................................. 6
The Securities and Exchange Board of India Act 1992, 15 of 1992.......................................... 6
The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities
Interest Act 2002, 54 of 2002. ............................................................................................... 6
Books
N BHATIA & J SETHI, CORPORATE AND COMPENSATION LAWS 6-7 (1st ed. 2012). .................... 6
Law Committee Reports
Report on Company Law, Part I, p. 6 (2005)............................................................................. 3
Articles
Murray Pickering, The Company as a Separate Legal Entity, 31 THE MODERN LAW REVIEW
481, 483 (1966). ..................................................................................................................... 3

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