Salomon vs Salomon

Topics: Corporation, Legal entities, Types of companies Pages: 5 (1544 words) Published: May 30, 2010
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 states on termination of the current tenancy the landlord intends to occupy the holding for such purposes of a business to be carried on by him therein, would lead to absurd results, in which an absent landlord could resist the grant of a new tenancy upon proof of his intention to occupy for that purpose or do so through an agent.

Also section 24 of the Companies Act 1985 (CA 1985), as amended by Companies (Single Member Private Limited Companies) Regulations 1992 states that where a public or unlimited company’s membership falls below the prescribed minimum, being two members for more than six months, any person being the sole remaining member is jointly and severally liable for the debts of the company, which takes away the separate legal identity.

Furthermore, the Company Directors Disqualification Act 1986, states that a person being the director of a company or concerned in the management of it whilst being an undischarged bankrupt or being subject to a court order not to exercise such capacities, is jointly and severally liable with the company. These provisions widen the net for claimants wishing to bring actions against such companies. In the context of taxation legislation, a complex and detailed area, an example relates to sections 703 to 709 Income and Corporation Taxes Act 1988 , which enables the Inland Revenue to counteract tax advantages obtained through specific transactions in securities.

The context of paramount public interest has been a previous consideration, as demonstrated by Daimler Co Limited v Continental Tyre and Rubber Company (Great Britain) Limited 6, in which the German directors of a company could not sue even though the company was incorporated in England as the company was regarded as an ‘alien enemy’, though this and some subsequent cases illustrated the then political situation.

The principle that the company acts as agent for its shareholders or in relation to another (parent) company was mentioned in Smith, Stone...
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