The fact that Mr Salomon paid off existing creditors before incorporating his business is of imperative importance. Due to this it was accepted that his intentions for incorporation were neither fraudulent nor intended to avoid existing legal obligations. Yet inherent within the separate entity and limited liability principles is potential for abuse by shrewd entrepreneurs. It becomes possible to use the corporate vehicle as a means for avoiding liabilities and duties. In a modern age whereby the corporate group is in existence, it also becomes possible for a parent company to set up a subsidiary company in order to transfer its liabilities, and then declare the subsidiary company bankrupt thereby leaving creditors out in the cold. It is this potential for injustice and abuse of the corporate form that has led to the mitigation of the Salomon principle by what has become known as 'lifting the corporate veil.'
A flood of case law permeates this area of company law. Academics such as Farrar argue that lifting the veil of incorporation has not been done in any sort of systematic way; and that despite there being broad policy reasons for refusing to recognise some companies as separate entities there is no one unifying principle underlying all of this. Whereas Gallagher and Zeigler (1990) argue that all interventionist judgements that lift the corporate veil are in actual fact based on the courts perception of justice and its refusal to allow injustice occur by adoption of the corporate form. The Salomon principle was (as mentioned earlier) based on good faith, and thus it is not logically possible that the House of Lords intended to establish a means for legal fraud. Thereby it is of no surprise that the veil has been lifted in circumstances where recognition of the separate entity principle would be used as an engine of fraud. This has further been consolidated by legislation in the form of the fraudulent and wrongful trading provisions of the Insolvency Act 1986.
The Salomon principle has led to a lot of debate with regards to what has become known as the single economic unit. Sometimes corporate groups with various subsidiaries that are in essence all separate legal entities will not be considered as such. Instead the court will have regard to the economic framework of the group as a whole. As per Goff LJ, as he was then, the court will look to the 'realities of the situation' to pierce the corporate veil. Yet the decision here in DHN Foods to disregard the separate legal identity of all companies involved and to recognise them as one main company, based mainly on economic arguments has not been followed enthusiastically by the Courts. Indeed the Court of Appeal in the later case of Multinational Gas and Petroleum Co v Multinational Gas and Petroleum Services Ltd indicates that DHN Foods was an aberration. This question was considered further in Adams v Cape Industrieswhere it was decided that each company in a group is a separate legal entity unless there was some justification for the single economic unit argument in the wording of a particular statute or contract. This 'conservative' restatement of the separate entity principle shows the courts willingness to stick by Salomon's principle. Further cases have reasserted the importance of the separate entity principle as enunciated in Salomon v Salomon and reasserted in Adams v Cape Industries, notably the decisions in Re Polly Peck International Plc (In Administration), Yukong Line Ltd of Korea v Rendsberg, and Ord v Belhaven. Inherent within these decisions and undoubtedly linked to the question of corporate group structure is the question of justice.
In 1985 the Court of Appeal told us in Re A Company that the Court will pierce the corporate veil in order to achieve justice. However there seems to be a change of attitude and direction by the 1990's, whereby Adams v Cape Industries seems to resist further attempts to erode the Salomon principle, promoting certainty at the expense of justice. We are informed that '..save in cases which turn on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon merely because it considers that justice so requires.' The judgements in Re Polly Peck, and Yukong v Rendsberg reiterate this non-interventionist stance despite scope for perceived injustice. The earlier case of Creasey v Beachwood Motors Ltdthat saw the corporate veil being lifted in order to prevent a company's attempt at avoiding to settle an unfair dismissal claim, was set aside in Ord v Belhaven. The case of Williams v Natural Life Health Foods serves to reiterate the separate entity and limited liability principles, by highlighting the difficulty in lifting the corporate veil in order to sue the Managing Director. Thus we see a return in the 1990's to the Salomon principle and its ardour for certainty.
Of paramount importance to this certainty is the detail of timing: timing in relation to the setting up of new corporations and timing in relation to switching assets around between these corporations. It becomes apparent that asset restructuring is of no problem whatsoever as long as it is clear that its purpose is not to evade pre existing legal duties. Thus if asset restructuring is planned and its timing does not appear cunning, then the courts will not consider the corporate group as one legal entity.
One recent anomaly must however be mentioned. The decision in Connelly v RTZ seems to disregard all of this and the corporate veil is lifted in favour of justice. It is my contention that following recent case law such as Re Polly Peck andYukong v Rendsberg, the Connelly v RTZ decision is merely an aberration and notice must be had to the composition of the House of Lords at this time. Undoubtedly future judicial decisions will in fact clarify the situation, however I am of the belief that this case, with its departure from the commercial principle of certainty is not likely to be followed.
Thus recent case law points to the importance of the Salomon principle in that companies will be regarded as separate legal entities with their own liabilities and obligations unless there seem obvious reasons to disregard the corporate veil. When I say obvious I refer to reasoning that would allow fraud. Judicial decisions have varied with time, choosing to follow Salomon, then disregard it by lifting the corporate veil and now more recently to show their allegiance to Salomon once more. Legislative measures are in fact based on technicalities or the prevention of wrongdoing i.e. fraud. Inextricably linked within this is a concern for justice; yet I feel this only extends as far as to include notions of commercial wrongdoing that strategically plan to defraud others by evading liabilities and obligations. For surely the whole notion of incorporation carries with it notions of risk taking and it would be impossible to protect against all of this. The judicial emphasis on certainty is the right one, for in a commercial world full of risky transactions the notion of justice becomes a subjective one and thus the clearer notion of certainty becomes more important. Corporations are therefore separate legal entities of their own as far as logically possible and this corporate veil will only be lifted in times of necessity to expose 'sham' companies and wrongful dealing. Since Salomon v Salomon the courts and the legislature have not stood still, yet rather than eroding this cornerstone they have merely reinforced its importance for modern company law and fortified its foundations by not allowing it to be used to evade legal obligations.
Bibliography
Farrar, Farrar's Company Law 1996
Gallagher & Zeigler, "Lifting the corporate veil in pursuit of justice" [1990] JBL 292
Ireland et al, "The Conceptual Foundations of modern Company Law" (1987) 14 Journal of Law and Society 149.
McGhee and Williams, The business of Company Law 1995
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Sealy, Company Law Cases and Materials, 6th Ed. 1996
[1897] AC 22
Sealy (1996) p54
[1925] AC 619
[1961] AC 12
P. Ireland et al (1987) 14 JLS 149
P.Ireland supra.
Farrar (1998) chap. 7
Salomon v Salomon
Lennards Carrying Co Ltd v Asiatic Petroleum Co.[1915] AC 153
As occurred in Daimler v Continental Tyres [1915] 1 KB 893.
As quoted by F. Moghadam in QMWLJ 1 p36.
e.g. Gilford Motor Co. v Horne [1933] Ch.935
S.213
S.214
D.H.N Food Distributors v Tower Hamlets L.B.C ([1976] 3 All ER 462)
[1983] 3 WLR 492.
cf. Gallagher and Zeigler 1990
[1991] 1 All ER 929
Farrar
[1996] 2 All ER 433
[1998] 1 All ER 929
[1998] BCLC 447
[1985] BCLC 333 at p337.
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[1993] BCLC 480
[1998] 1 WLR 830
Cf Ord v Belhaven.
[1998] AC 854
Cf S.24 Companies Act 1985
cf. S213, 214 Insolvency Act 1986.
