Radhika Sharma

BALLB SEM 5
PSDA Company law
Company and a partnership rm are both types of business structures, but they have several key
di erences. Some of the main di erences between a company and a partnership rm are:

Legal entity: A company is a separate legal entity, meaning it can enter into contracts, own
property, and assets, and be held liable for its actions. A partnership rm, on the other hand, does
not have a separate legal identity, and partners are personally liable for the debts and obligations
of the partnership.
Liability: Shareholders in a company have limited liability, meaning their nancial liability is limited
to the amount of capital they have invested. In a partnership rm, partners have unlimited
personal liability, meaning they can be held responsible for the entire amount of the partnership's
debts and liabilities.
Management: A company is usually managed by a board of directors, while a partnership rm is
managed by the partners.
Ownership: A company is owned by shareholders, while a partnership rm is owned by the
partners.
Continuity of existence: A company has perpetual existence, meaning it continues to exist until it
is dissolved, while the continuity of a partnership rm depends on the terms of the partnership
agreement.
Raising capital: A company can raise capital through the sale of shares, while a partnership rm's
ability to raise capital is generally limited to the partners' capital.
Taxation: Companies are taxed on their income and also shareholders are taxed on dividends and
capital gains. In partnership rms, partners are taxed on their share of the partnership income.

FACTS IN SALOMON V SALOMON

Salomon transferred his business of boot making, initially run as a sole proprietorship, to a
company (Salomon Ltd.), incorporated with members comprising of himself and his family. The
price for such transfer was paid to Salomon by way of shares, and debentures having a oating
charge (security against debt) on the assets of the company. Later, when the company’s business
failed and it went into liquidation, Salomon’s right of recovery (secured through oating charge)
against the debentures stood aprior to the claims of unsecured creditors, who would, thus, have
recovered nothing from the liquidation proceeds.

To avoid such alleged unjust exclusion, the liquidator, on behalf of the unsecured creditors,
alleged that the company was sham, was essentially an agent of Salomon, and therefore,
Salomon being the principal, was personally liable for its debt. In other words, the liquidator
sought to overlook the separate personality of Salomon Ltd., distinct from its member Salomon,
so as to make Salomon personally liable for the company’s debt as if he continued to conduct the
business as a sole trader.

ISSUE IN SALOMON V SALOMON

The case concerned claims of certain unsecured creditors in the liquidation process of Salomon
Ltd., a company in which Salomon was the majority shareholder, and accordingly, was sought to
be made personally liable for the company’s debt. Hence, the issue was whether, regardless of
the separate legal identity of a company, a shareholder/controller could be held liable for its debt,
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 over and above the capital contribution, so as to expose such member to unlimited personal
liability.

RULING IN SALOMON V SALOMON

The Court of Appeal, declaring the company to be a myth, reasoned that Salomon had
incorporated the company contrary to the true intent of the then Companies Act, 1862, and that
the latter had conducted the business as an agent of Salomon, who should, therefore, be
responsible for the debt incurred in the course of such agency.

The House of Lords, however, upon appeal, reversed the above ruling, and unanimously held that,
as the company was duly incorporated, it is an independent person with its rights and liabilities
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”.3 Thus, the
legal ction of “corporate veil” between the company and its owners/controllers4 was rmly
created by the Salomon case.

IMPLICATIONS OF SALOMON V SALOMON

Commencing with the Salomon case, the rule of SLP has been followed as an uncompromising
precedent5 in several subsequent cases like Macaura v Northern Assurance Co.6, Lee v Lee’s Air
Farming Limited,7 and the Farrar case.8

The legal ction of corporate veil, thus established, enunciates that a company has a legal
personality separate and independent from the identity of its shareholders.9 Hence, any rights,
obligations or liabilities of a company are discrete from those of its shareholders, where the latter
are responsible only to the extent of their capital contributions, known as “limited liability”.10 This
corporate ction was devised to enable groups of individuals to pursue an economic purpose as a
single unit, without exposure to risks or liabilities in one’s personal capacity.11 Accordingly, a
company can own property, execute contracts, raise debt, make investments and assume other
rights and obligations, independent of its members.12 Moreover, as companies can then sue and
be sued on its own name, it facilitates legal course too.13 Lastly, the most striking consequence
of SLP is that a company survives the death of its members.14

The Exception of Veil Piercing

Notably, similar to most legal principles, the overarching rule of SLP applies with exceptions,
where the courts may look through the veil to reach out to the insider members, known as “lifting
or piercing of the corporate veil“.15

It is worthwhile here to refer to the case of Adams v Cape Industries16, which examined the
common law grounds, primarily evolved through case law as an equitable remedy,17 namely- (a)
agency, (b) fraud, (c) façade or sham, (d) group enterprise, and (e) injustice or unfairness. The
exception has been invoked widely by English courts, including in the recent cases of Caterpillar
Financial Services (UK) Limited v Saenz Corp Limited, Mr Karavias, Egerton Corp.18, Beckett
Investment Management Group v Hall,19 Stone & Rolls v Moore Stephens,20 and Akzo Nobel v
The Competition Commission,21 to cite a few. Needless to mention, the journey of English law in
de ning the contours of the SLP doctrine and carving out these exceptions has been quite topsy-
turvy. Moreover, veil piercing is now also rampant as a statutory exception.22

So, considering the gamut of statutory and judge made exceptions above, has the Salomon rule
become redundant?

Conclusion

All in all, the Salomon ruling remains predominant and continues to underpin English company
law. While sham, façade and fraud primarily trigger the invocation of the veil piercing exception in
limited circumstances, these grounds are not exhaustive, and much is left to the discretion and
interpretation of the courts on case-to-case basis.
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