Limited liability may have been justifiable in Salomon v Salomon but should never have

been extended to apply to corporate groups. Critically discuss.

Introduction 

In recent years the UK corporate law has attracted substantial criticisms of its policy of
‘limited liability’. The doctrine of limited liability provides an avenue for limiting the capital
invested by shareholders of incorporated companies to serve as bailout in the event of
corporation failure. [1] In clearer terms, the shareholders seeking to benefit from micro-
economies and make profit from their investment will only lose the amount they invested
in any corporate misconduct and when the firm liquidates. However, most of the
criticisms discussion on limited liability focused on the detriments of the policy to the
frontline creditors like banks and other investment companies. Notwithstanding the
importance of a proper reasoning of various analyses on this topic, this essay will take a
different view from wider academic discussions that attributes the burden of corporate
default of limited liability to the most notably creditors. By doing so, this article provides
an insight into the benefits of limited liability and argues that the protection of
shareholders’ interests exposes company owners, creditors, agents and the civil
population to potential harm in the outcome of corporation failure.

In what follows, the scope of identifying a company as a legal entity dates back to the
case of Salomon v Salomon & Co. Ltd. [2] The legal entity status weaved limited
liability into corporate model business with provisions that any default binds the
incorporated company and not the shareholders who owe their obligation to the state
and their conscience to some extent. The judicial provision gradually crystallized to the
statutes CA 2006, s. 3(2) [3] and provided for coded legislation on limited liability. This
provision casts a veil between the company and its human constituents, ‘the corporate
veil’. This veil can be pierced for the purpose of imposing some form of liability on a
company’s shareholders and / or directors as it would be viewed later in some cases.

1Company Law, Study Material Executive Programme Company Law Module 1 Paper 2
1<http://www.coursehero.com/file/45764906/companyLawpdf.
2 [1897] AC 22.
3 Company Act 2006, section 3(2)3.
Limited liability on creditors

To parse out, the widespread benefits of limited liability as impetus on corporate

shareholders has been provided and analyzed in detail in academics. This essay,
however, tries to grasp contemporary happenings, therefore, query now, on how
impactful, in the form of lending by the creditors has become a discursive concept to the
extent that, many arguments often concern the detrimental ban of limited liability on
creditors. Nevertheless, as corporate law is developing, there are reasons that the
creditors do not operate in a single limited form but in corporate groups and also take
advantage of corporate entities. In fact, Hans Degryse et al. (2019) in their appraisal,
also provides a holistic view, allowing to identify trends that banks and other financial
institutions creditors operate under shared assets security of the borrowed capital by
shareholders as outsourced to fund a functional corporation.[4] However, while the
concern about the encroachment of limited liability on the creditors could be understood
to an extent more importantly if the capital borrowed is unsecured by creating a charge,
it is, however, pertinent to note that there is now a provision.[ 5] So, some criticisms
levelled are somewhat restrictive in nature. Thus, the essay thereby focuses only on
contractual participants to a conversion on other stakeholders as would be argued later.

However, it is also reasonable to examine that many of the cases concerning limited
liability and reasons for its exemption have involved two components arguably, issues
of, (i) construction on severing obligation from tort trend, a concept that allows an
obligation norms on moral with which it would be wrong for the court not to comply, in
essence of Opkpabi & Others v Royal Dutch Shell Plc &Others,[6] where the
corporation veil was pierced and the holding companies was held liable for its
subsidiaries actions in Nigeria, in the action or omission in relation to breach of statutory

4 Hans Degryse, Artashes Karapetyan and Sudipto Karmakar, To ask or not to ask: bank capital requirements and
loan collateralization Staff Working Paper No. 778 Published on 01 February 2019 P 27.
5 Insolvency Act 1986.
6 [2018] EWCA Civ 191.
duty, a health and safety requirement, and negligence that had leveraged the
inhabitants of Niger-Delta into environmental hazard as a result of oil exploration in their
communities. The case had attracted Supreme Court intervention in the UK, with the
decision that serves as precautionary measures for lowering reliance on ‘limited liability’
by corporations.

And (ii) an obligation that forbids actions which would not be right to perform by the
company/owner, and whether there has been any ambiguity that warrants exposing
shareholders to such economic mishap by piercing the veil that protected them. This is
witness in the case of Guildford Motor Co. Ltd v Horne, [7] where the court needs to
strike a delicate balance between aiding fraudulent companies to protect the owner of
such a company and/or the assets of the company be depleted to the detriment of the
company owner. In Guilford, Horne was the director, but his contractual obligations
forbid him from enlisting the existing customers of Gilford for his future gain. Mr. Horne
on leaving Gilford operates his own company as a modification to compete and gain the
existing customers that has not been granted to him by Gilford. Hence, the fraudulent
act necessitated the court needing to shred the veil indicating that the actions of Horne
were not the actions of the company as a body corporate. In another English High Court
case of Jones v Lipman, [8] the corporate veil was also pieced, and the company was
labelled a ‘sham or a façade ‘by the court, that Mr. Lipman used to evade pre-existing
legal obligation towards Mr. Jones. These two cases of Gilford v Horne and Lipman,
were trapped in the plaque-ridden fraud doctrine that resulted in piercing the corporate
veil by the court.

 In the injury case of Adams v Cape Industries plc, [9] the difficult question of whether
the flexible standard to pierce the veil and promotes an appropriate balance between
sole owner entity and subsidiaries invoked in legal pursuit. The case remains
controversial as the court refused to remove the veil and continued to protect the Cape
Industries as the holding company, saying that it could not be held liable as it was a

7 [1993] Ch 935.
8 [1962] 1 W.L.R. 832.
9 [1990] Ch 433.
separate legal entity from its subsidiaries. The case from evolutionary stand-alone entity
operation perspectives to a trend litigation on fraud doctrine of most economic
disruptions sheds light on which firms are likely to fail, and have their corporate veil
removed, which ones may survive, and which ones could thrive in the wake of limited
liability principle. However, in relation three different routes in the handling of corporate
misconduct were highlighted. The propositions endorsed the importance of well-
calibrated principles to cure the contemporary clamor for veil of incorporation removal
and protect the future of the common limited liability doctrine.

In another development to restore confidence of limited liability protection, and in the

interest of future occurrences on the topic, the Supreme Court in Petrodel Resources
Ltd v Prest [10] decided to provide dicta on disregarding corporate personality. Lord
Sumption’s dicta perception of his own stands become clouded, owing to the normal
tendency to avoid insights which damage the armor of limited liability as he was
tempted to conclude the understandings of disorders which correspond negatively to the
approach lacking the trait of limited liability. In the case their lordship depicts as Lord
Sumption stated, ‘that there is only one instance in which the courts will pierce the
corporate veil, namely where the company is disavowal or neglect of contractual
obligation often involves. [11] The potential pitfalls to be encountered from participating in
litigations when deciding to utilise piercing limited liability for commercial disputes were
also highlighted.  

The essay argues that the consensus outcome from these cases flagged two
contradictory principles imperatives: on the one hand, the ultimate control ironically to
the shareholder security apparatus is relaxing; and, on the other, it seems implicitly to
acknowledge that corporate governance systems is gaining ground, so to say (not just
the private interests of the shareholder class). However, for several reasons these

10 [2013] UKSC 34.

11 Ibid, at para. [35].
cases shows that the clamoring for piercing the corporate veil would continue to be far
from achievable in an expanding scope, more importantly on the less popular creditors’
detrimental perspectives. More so, another scholarly author with similar tastes for the
subject matter (Olalekan Bello, 2021), gives a hint on a proper level of consciousness
that most settled cases on limited liability involves ‘duty of care’ involving parent
companies and its subsidiaries, and piercing the veil of incorporation are still subject to
stringent limitations.[12] Therefore, the essay argues that the superior shareholder’s
economic protection jurisdictions in which this convergence policy operates still
dominates, unsurprisingly, the legislation only considers the shareholders’ interest as
paramount importance. Robin Gardner (2021), for instance, asserted that, “UK company
law has taken the position that the shareholders should be the sole beneficiaries of
company law protection because they are affected most by fluctuations in corporate
performance”. [13]

At this juncture, it is reasonable to examine the contours of potential abuse of limited

liability by some investors. However, AJ Ford et, al. (1997) asserted that the majority of
persons who choose to incorporate a business do so in order to acquire limited liability.
[14] In his view, the duty to submit shareholders to a limited amount of money invested
provides for shareholders to share in the gains of corporate growth without risking more
than their initial investment,[ 15] investment is made on the basis that those in charge will
take risks in order to pursue and exploit potentially lucrative projects and ventures.[ 16]
Alon Beck, Anat (2020) argued that the detrimental effect has little effects on
principal company’s creditors like banks and similar financial creditors who have the
potential of protecting their borrowing capital investment to body corporate owners
unlike other types of vulnerable intermediary beneficiaries of corporate ventures in

12 Olalekan Bello (2021). Jettisoning Limited Liability: Okpabi, and Four Nigerian Farmers v Royal Dutch Shell Plc as
the Reckoning for Oil Multinationals’ Environmental Harm in Frontier Oil Provinces? Academia Letters, Article
3119. http://doi.org/10.20935/AL3119.
13 Robin Gardner, ‘Company Law (2021) p 11.
14 HAJ Ford, RP Austin and IM Ramsay, Ford’s Principle of Incorporation Act (8 th edn, Butterworths, Sydney,1997) p
101.
15 Ibid.
16 Ibid.
relation to suppliers, employees, traded customers and consumers alike with whom the
company also had essential contractual relations.[ 17] The learned authors’ comments
inter alia set the tone of this carefully compiled bit, and thus, of course the essay argues
that the limited liability as provided for by the law is a panoply of something overlapping,
something conflicting.

To deflect the heat generated by a mock use of limited liability by investors, focus
should now be shifted to how far Government policy, including other measures, could
be held responsible for the recovery of those likely to be trapped by the adverse effects
of limited liability. However, it may well be arguable that the generative forces of the law
which rose to meet the problem of abuse of limited liability processes does not
accommodate the challenges of remedying those likely to be affected by the flaw of this
scheme that gives liberty to shareholders. These are, workers with interrupting
employment; contracting agents being handicapped; constrained local customers; the
local people losing control over consumption, inter alia. They are unsecured
intermediaries and the dividends of shareholders and the creditors yield are undeniable
the outcome of their contribution (Kershaw, 2013). [ 18] Moreover, Stout Lynn (2012)
identified these areas of particular concern as stated, he asserted that the policy of
limited liability ignores the strength and vitality of alliance connection of subsidiary
creditors and the philanthropic community consumer to a positive nurturing socio-
economic environment. [19]

Conclusion

17 Anat Alon-Beck, Times They Are a Changin’; When Employees Revolt !80 Maryland Law Review 120 (2020) Case
Legal Studies Research Paper N0. 2020-6 p 120-124.
18 D, Kershaw, Web Chapter A: Disclosure, Accountancy, and Audit, Company Law in Context: Text Material 2 nd
edn. 2013
19 Stout, Lynn A. The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations,
and the Public, Berrett-Koehler Publishers, Incorporated, 2012. ProQuest
Conceptually it is, admittedly it is, and importantly it is believing that limited liability plays
an important role, including the generality stakeholders within the scheme of protection
perhaps reduces any disquiet.

Reference

Adams v Cape Industries plc [1990] Ch 433

Anat Alon-Beck, Times They Are a Changin’; When Employees Revolt !80 Maryland
Law Review 120 (2020) Case Legal Studies Research Paper N0. 2020-6 p 120-124

Bello, O. (2021). Jettisoning Limited Liability: Okpabi, and Four Nigerian Farmers v
Royal Dutch Shell Plc as the Reckoning for Oil Multinationals’ Environmental Harm in
Frontier Oil Provinces? Academia Letters, Article 3119. http://doi.org/10.20935/AL3119.
Bruno Albuquerque, Corporate debt booms, financial constraints and the investment
nexus Published on 13 August 2021 Staff Working Paper No. 935

Gilford Motor Co Ltd v Horne [1993] Ch 935

Griffin, S. ‘Limited Liability –A Necessary Revolution’ (2004) Company Lawyer 99 – 101,

in Dafe, M. Ugbeta, (2021), Corporate Personality and the Doctrine of Lifting the Veil:
Re-thinking Salomon v Salomon in the light of recent UK Supreme Court Decision,
Academia

HAJ Ford, RP Austin, and IM Ramsay, Ford's Principles of Corporations Act (8th ed,
Butterworths, Sydney, 1997)

Hans Degryse, Artashes Karapetyan and Sudipto Karmakar, To ask or not to ask: bank
capital requirements and loan collateralization Staff Working Paper No. 778 Published
on 01 February 2019

Jones v Lipman [1962] 1 W.L.R. 832

Michael Lower, National Corporate Law In A Globalised Market, (David Milman Edward
Elgar Publishing Ltd, 2010)

Petrodel Resources Ltd v Prest [2013] UKSC 34

Stout, L. A, (2012). The Shareholder Value Myth: How Putting Shareholders First
Harms Investors, Corporations, and the Public, Berrett-Koehler Publishers,
Incorporated<https://ebookcentral.proquest.com/lib/sheffield/detail.action?
docID=881726>Accessed on 27 October 2021
Sutherland, D, (2008), Limited Liability Partnerships: all change with the Companies Act
2006? Volume 23 > Issue 7 > Articles > (2008) 7 JIBFL 340

Thomas K. Cheng, The Lifting of Corporate Veil Doctrine in Hong Kong: An Empirical,
Comparative and Development Perspective CLWR 40 3 (207) Common Law World
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