Salomon vs Salomon
The main issue relates to corporate entity or personality, a company being a legal entity independent of its members, can enter into contracts and own property in its own right, can sue and be sued and also taxed in its own name. The principle of corporate entity was established in the case of Salomon v A. Salomon , now referred to as the ‘Salomon’ principle.
The facts of this case were that the owner of a business sold it to a company he had formed, in return for fully paid-up shares to himself and members of his family, and secured debentures. When the company went into liquidation, the owner, because of the ownership of the debentures, won his claim to be paid off in priority to other creditors, as the secured debt ranked at a higher priority to those debts and successfully proved that he did not have to indemnify the company in respect of its debts, as it had a separate legal personality.
The House of Lords affirmed this principle, and stated that the company was also not to be regarded as an agent of the owner, as stated by Lord Macnaughten in the House of Lords as The company is at law a different person altogether from the subscribers to the memorandum and the company is not in law the agent of the subscribers or a trustee for them. There are occasions when it seems that the Salomon principle may be unfair, and then the courts are under pressure to review the principle and make decisions contrary to it upon various grounds. This is termed as ‘piercing the corporate veil’.
Instances where the Salomon principle has been set aside by statute include section 30(3) of the Landlord and Tenant Act 1954, which states that where a landlord has a controlling interest in a company, the business of the company can be treated as a business carried on by the landlord, instead of two separate legal entities.
This legislation amended the problem shown in Tunstall v Steigmann , in which it was stated that a direct application of section 30(1)(g) LTA 1954, which
The facts of this case were that the owner of a business sold it to a company he had formed, in return for fully paid-up shares to himself and members of his family, and secured debentures. When the company went into liquidation, the owner, because of the ownership of the debentures, won his claim to be paid off in priority to other creditors, as the secured debt ranked at a higher priority to those debts and successfully proved that he did not have to indemnify the company in respect of its debts, as it had a separate legal personality.
The House of Lords affirmed this principle, and stated that the company was also not to be regarded as an agent of the owner, as stated by Lord Macnaughten in the House of Lords as The company is at law a different person altogether from the subscribers to the memorandum and the company is not in law the agent of the subscribers or a trustee for them. There are occasions when it seems that the Salomon principle may be unfair, and then the courts are under pressure to review the principle and make decisions contrary to it upon various grounds. This is termed as ‘piercing the corporate veil’.
Instances where the Salomon principle has been set aside by statute include section 30(3) of the Landlord and Tenant Act 1954, which states that where a landlord has a controlling interest in a company, the business of the company can be treated as a business carried on by the landlord, instead of two separate legal entities.
This legislation amended the problem shown in Tunstall v Steigmann , in which it was stated that a direct application of section 30(1)(g) LTA 1954, which
Bibliography: LS Sealy 2001 Cases and Materials in Company Law pp 41-75. Butterworths Ben Pettet 2001 Company Law pp 25-30.Longman Professor Pennington 2001 Pennington’s Company Law pp 36-60. Butterworths Sweet & Maxwell 1998 Practical Company Law pp1-3.Mark Stamp Jordans1995 Sourcebook of Company Law pp 65-150. Harry Rajak APPENDIX A - QUESTION The principle of law laid down in Salomon v Salomon & Co [1897] is not always applied. Give the facts of this case and give its principle of law and discuss in detail when the common law will not take account of that principle. (20 MARKS)