Salomon V a Salomon & Co Ltd 1897 - Separate Legal Entity

Table Content

1. Separate Legal Entity………………………………………………………………………2

1. Case Study: Salomon v A Salomon & Co Ltd 1897………………..……………..3

1. Exception to Separate Legal Entity………………………………………………………..4

1. Judicial Exception……………………..……………………………………………4

1. Sir Dinshaw Maneckjee Petit, Re, AIR 1927…………………………..4
2. Daimler Co. Ltd v Continental Tyre and Rubber Co. Ltd 1916……...5
3. Gilford Motor Co. Ltd v Horne 1933…………………………………...5
4. FG Films Ltd 1953 ………………………………………………………6
5. Darby, ex parte Broughton 1911………………………………………..6
6. Firestone  Tyre & Rubber Co Ltd v Lewellin 1957…………………....7
7. Spreag v Paeson Pty Ltd 1990…………………………………………..7
8. Lee v Lee’s Air Farming Limited 1961…………………………………8
9. Macaura v Northern Assurance Co Ltd 1925 …………………………8

1. Judicial Exception ………………………………………………………………….9

1. Section 123 Company’s financial assistance…..………………………..9
2. Section 131 Dividends not out of profit…………………………………9
3. Section 540 Fraudulent…………………………………………………..9
4. Section539 Wrongful Trading…………………………………………..9
5. Section 140 (1) of the Income Tax Act 1967……………………………9

1. Conclusion…………………………………………………………………………………10

4.0 References…………………………………………………………………………………...11

1. Separate Legal Entity

According to the (Mark & Jeremé, 2013), the principle of ‘separate legal entity’ has long been regarded as the cornerstone of English law, ‘separate legal entity’ also known as separate legal personality or veil of incorporation. There is a separate legal entity between the company and the people who forms the company and create a ‘veil’ between the company and its constituents. Therefore, the company’s directors, employees, shareholders, creditors and anyone else who indeed involved in it would not being affected once the company facing winding up, even if the company holding more than half of the subsidiary’s shares. There is a conceptual structure of company law is essentially.  

It is important for the company function because it is facilitates, and does not require the company law to provide other core features such as transferable shares and limited liability. According to the (Paul, 2010), the act is provided once the company has been registered. The signatories willing to form a company should subscribed the formal registration document which is the memorandum of association, from a collection of individual transformed into a body corporate based on the name stated in the certificate of incorporation, which become the first members of the incorporation. Therefore, the separate legal entity is the inevitable result of the establishment of a company.

1. Case Study: Salomon v A Salomon & Co Ltd 1897

Mr. Salomon conducted a boot and shoe manufacturing business and sold his business to a limited liability company he created. The company’s share capital made up of 40,000 shares and £1 each. Part of the shares was issued upon the formation of the company. Mr. Salomon took 20,001 of the company’s shares and the remaining was held by his wife and their five children. He sold his business and transferred to the company, operates his business as before. Further, the company fell into financial difficulties and facing wound up. As a result, the company’s assets were unable to pay off the creditors. Therefore, the liquidator brought an action against Mr. Salomon should be liable personally.

The House of Lord found out the company was not an alter ego, trustee or agent for the Mr. Salomon; it was created a separate person. Even though the person owned most of the company’s shares and managed the company. Hence, Mr. Salomon was not liable for any debts and obligations for the company.

1. Exception to Separate Legal Entity

According to the (Trisha & Devanshi, 2017), lifting the corporate veil means when some wrongdoings are hidden behind the incorporation. The courts will not allowed the individuals concerned hidden behind the corporate personality, therefore the court will ignore the company’s personality and found out what are the factors and declare the person behind the company who control of the company. If the lifting of corporate veil was implemented, the company and the members are treated as one and same. The court may lift the veil under two ways, judicial exception and statutory exception.

1. Judicial Exception

Under judicial exception, the Supreme Court will insist on the application of this principle in many cases. There have some situation that the court will lift the corporate veil:

1. Determination of Enemy Character
2. For the Income benefit or Tax Evasion
3. Fraud or Misconduct
4. Company used as mere Cloak or Sham
5. Act as an Agent

1. Sir Dinshaw Maneckjee Petit, Re, AIR 1927

In the case from India, Dinshaw was evaluated as a wealthy man who receiving huge dividends and interest from his income. He formed four private companies and transferred his investment to each company as an agent for it. After that, he received the income that transferred from the companies’ account in the form of a pretended loan. The purpose of Dinshaw is to split his income into four parts to avoid the tax dismissing the petition.

The Supreme Court held that, the companies formed by the Dinshaw was purely and simply as a means for tax evasion and the companies were used for assesses himself. There is no business within the companies but were created as legal entities, the companies were receiving the interest and dividend apparently and transferred to the Dinshaw as pretended loan. (Ashish, 2014)

1. Daimler Co. Ltd v Continental Tyre and Rubber Co. Ltd 1916

A Germany company was incorporated a tyres manufactured company in England. The majority shareholders and directors of the company were Germans and the remaining share was held by a British who work as a secretary in the company, thus the German was holding a real control in the company. During the First World War, the company filed a suit to recover trade debts. The question arose whether the company became an enemy company after First World War.