Introduction
The establishment of a company as a legal entity distinct from its owners is a cornerstone of modern company law in England and Wales. This principle, famously solidified in Salomon v A Salomon & Co Ltd [1897], creates a ‘veil of incorporation’ between the company and its shareholders, affording them significant protection, most notably limited liability. This essay will argue that while this principle is indeed fundamental, the protection it provides is not absolute. The essay will first outline the principle and its main consequences. It will then discuss the circumstances, both statutory and at common law, where courts have been willing to ‘lift the corporate veil’ and disregard the company’s separate personality, paying particular attention to the clarification of the law in recent case law.
The Principle of Separate Legal Personality
The House of Lords' decision in Salomon v A Salomon & Co Ltd [1897] is the definitive authority for separate legal personality. Mr Salomon, a sole trader, incorporated his business, complying with the procedural requirements of the then Companies Act. He and his family members were the shareholders, and he was the managing director. When the company became insolvent, the liquidator argued that the company was a sham and that Mr Salomon should be personally liable for its debts. The House of Lords rejected this, holding that the company was a separate legal person, distinct from its members and directors. Lord Macnaghten stated that the company is "at law a different person altogether from the subscribers to the memorandum" (Salomon v A Salomon & Co Ltd [1897], p. 51).
This principle has several important consequences. Firstly, the company owns its own property; the shareholders do not have a direct proprietary interest in it. This was illustrated in Macaura v Northern Assurance Co Ltd [1925], where a shareholder who had insured company timber in his own name could not claim on the policy because he had no insurable interest in the property. Secondly, a company can enter into contracts with its own members. In Lee v Lee’s Air Farming Ltd [1961], the founder and controlling shareholder of a company was also its chief pilot. When he died in a work accident, his widow was able to claim compensation because he was considered an employee under a valid contract with the company. Finally, and most importantly, the company is liable for its own debts. This gives rise to limited liability for shareholders, whose liability is generally limited to any amount unpaid on their shares (Companies Act 2006, s. 3(2)). This encourages investment and entrepreneurship by protecting the personal assets of shareholders from business risks.
Lifting the Corporate Veil
Despite the robustness of the Salomon principle, courts have recognised that it should not be used to facilitate fraud or frustrate the law. In certain exceptional circumstances, the courts will ‘lift’ or ‘pierce’ the corporate veil to look at the reality behind the company and, if necessary, hold the shareholders personally liable. This can happen under statute or at common law.
Statutory provisions for lifting the veil are specific. For example, under section 213 of the Insolvency Act 1986, if during the winding-up of a company it appears that business has been carried on with intent to defraud creditors, a court can declare that any persons who were knowingly parties to the fraud are to be liable to contribute to the company's assets.
The common law grounds for lifting the veil have historically been less clear, with judges sometimes using broad terms like ‘façade’ or ‘sham’. Classic examples include Gilford Motor Co Ltd v Horne [1933], where a company was formed to help a former employee evade a non-compete clause, and Jones v Lipman [1962], where a company was created to avoid a contractual obligation to sell land. In both cases, the court looked through the company to the individual behind it and granted a remedy against them.
The law in this area was significantly clarified by the Supreme Court in Prest v Petrodel Resources Ltd [2013]. Lord Sumption, giving the leading judgment, distinguished between the ‘concealment principle’ and the ‘evasion principle’. The concealment principle allows a court to look behind a company to discover the true facts, but it does not involve disregarding the corporate veil. The evasion principle, however, is the true basis for piercing the veil. This applies only in the very limited circumstances where a person under an existing legal obligation or restriction deliberately uses a company under their control to evade that obligation. Lord Sumption stated that piercing the veil is a remedy of last resort which should only be invoked "when all other, more conventional, remedies have proved to be of no assistance" (Prest v Petrodel Resources Ltd [2013], para 35). This decision has substantially narrowed the circumstances in which the veil can be pierced, reinforcing the strength of the Salomon principle.
Conclusion
In conclusion, the statement that the doctrine of separate legal personality is fundamental but not absolute is an accurate reflection of UK company law. The decision in Salomon established a vital legal principle that underpins corporate activity and encourages economic risk-taking through the protection of limited liability. However, the law has always recognised that this principle should not be abused. While statutory exceptions exist, the common law power to pierce the veil has been shown to be extremely limited. The Supreme Court in Prest confirmed that it is a drastic remedy applicable only in cases of deliberate evasion of existing liabilities, and only when no other legal remedy is available. Therefore, while the protection afforded by the corporate form is not absolute, the veil of incorporation is robust and will only be set aside in rare and specific circumstances, ensuring the Salomon principle remains the default and overriding rule.
References
- Companies Act 2006.
- Dignam, A. and Lowry, J. (2022) Company Law. 12th edn. Oxford University Press.
- Gilford Motor Co Ltd v Horne [1933] Ch 935 (CA).
- Insolvency Act 1986.
- Jones v Lipman [1962] 1 WLR 832 (Ch).
- Lee v Lee’s Air Farming Ltd [1961] AC 12 (PC).
- Macaura v Northern Assurance Co Ltd [1925] AC 619 (HL).
- Prest v Petrodel Resources Ltd [2013] UKSC 34.
- Salomon v A Salomon & Co Ltd [1897] AC 22 (HL).
