Salomon Doctrine

This essay expounds the doctrine of ‘separate legal personality’ and analyses the rationale behind the fears that it has become irrevocably undermined, due to the plethora of exceptions that have heretofore arisen. In order to provide a thorough analysis of the situation, the doctrine and the exceptions, both statutory and judicial shall be analysed to explain how they have not undermined the doctrine, but instead merely sculpted it to fit with the practices of the modern commercial world.

Introduction

The doctrine of ‘separate legal personality’ continues to be of paramount importance to English company law, although arguably the doctrine may have lost some of its importance due to the number of exceptions that have arisen. This essay argues however, that these exceptions do not undermine the doctrine but are necessary for its functionality and that if the doctrine had no exceptions to it then this would be a more fatal undermining of the doctrine than any of its exceptions.

Separate legal personality

The doctrine of ‘separate legal personality’ is an essential principle of English company law and an intrinsic part of the act of incorporation. The doctrine, as founded by the House of Lords decision in Salomon v Salomon & Co Ltd (1897), elucidates that an incorporated company gains a separate legal personality quite distinct from that of its members and consequently renders it inter alia, capable of bearing its own obligations and rights. Although the Courts have been noticeably keen to uphold this doctrine, it has been necessary from time to time to deviate from this by ‘lifting the corporate veil’ (Wild and Weinstein, 2011). However, on analysis it does appear that while the Courts have allowed exceptions to the doctrine, it is also keen to remove exceptions that are no longer needed, as can be seen with the now defunct ‘interests of justice’ exception (Moore, 2006).

Facade

In the case of Gilford Motor Co Ltd v Horne (1933) the Courts developed the first exception to the doctrine of ‘separate legal personality’ wherein it was found that if a company is being used as a facade to conceal the true facts of a matter then the veil of incorporation shall be lifted. Interestingly, this principle was also reconfirmed recently in Linsen v Humpuss (2012: 680), in which the Court of Appeal explained that the corporate veil will indeed be pierced when it is being used as a facade. Thus, it is clear to see that the Courts take a strong line against fraud, which is to be expected as the law should not be utilised for the advantage of a rogue or the unjust. It is therefore evident that this exception does not undermine the doctrine but is instead a logical exception which is required in the interests of justice (Adams v Cape 1990: 534) and hence the ‘course of action is necessary to give legal effect to the “realities” of the business situation’ (Moore, 2006: 194).

Agency

This exception is used when it appears that a subsidiary company is in fact carrying out business simply as the agent of the parent company to avoid existing legal obligations. There were fears at first centring on the single economic entity argument as proposed in DHN v Tower Hamlets (1976) that it would severely undermine the doctrine of ‘separate legal personality’ by making redundant the distinction between parent company and subsidiary. However, Adams v Cape (1990: 532) clarified that the separate legal personality of a company can be disregarded only if a subsidiary is merely an agent of the parent company explaining that there is no general principle that all companies in a corporate group of companies are regarded as one. Thus, on analysis this exception can be seen to be yet another reasonable exception that does little to undermine the doctrine of ‘separate legal personality’ but merely assists the Court in getting to the bottom of certain matters.

Statutory provisions

It is arguable, that statutory provisions most fatally undermine the doctrine of ‘separate legal personality’. The variety of taxation legislation, the Companies Act 2006 and the Insolvency Act 1986 can all be seen to illustrate this and how the circumstances under which the corporate veil can be lifted are now agreed to a certain extent.

To demonstrate this, sections 213 and 214 of the Insolvency Act 1986 explicitly allow that the veil of incorporation can be lifted and that the separate legal personality of the company may be discarded. Indeed, section 213 states that this will happen in the event of fraudulent dealings. However, as the onus of proof is dependent upon the person seeking to rely upon it, this exception can be hard to prove and thus it is not commonly used. A further example of statutory exceptions are found in the Companies Act 2006, which also requires that company directors trading without a trading certificate will be personally responsible, despite the separate legal personality of the company.

Sealy and Worthington (2010) have expressed though that they do not consider making a company’s director liable quite the same as piercing the corporate veil. Accordingly, this essay agrees with this assessment and argues that statutory exceptions do not fatally undermine the doctrine of ‘separate legal personality’ as many do not in fact directly concern the doctrine.

Conclusion

It is clear that the doctrine of ‘separate legal personality’ as first espoused in the case of Salomon (1897) is one of the cardinal doctrines of company law regardless of the number of exceptions that have arisen since its inception. The doctrine is always upheld unless there is a necessity in a specific certain situation to pierce the corporate veil in the interests of justice. This essay argues that the judicial exceptions do not even undermine the doctrine but merely fine tune it to demonstrate when the doctrine applies and when it does not. Further, if these exceptions were not allowed then there would be a presumption that the doctrine of ‘separate legal personality’ can be used for unjust activities and this would be a fatal undermining of the doctrine. Accordingly, the doctrine of ‘separate legal personality’ has not been fatally undermined by the number of exceptions because the doctrine, for the most part, remains a fundamental principle of company law and the exceptions are necessary to the doctrines functionality in the modern commercial world.

References

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15. Salomon v A. Salomon & Co Ltd [1897] A.C. 22 (HL)