Critically evaluate, with reference to relevant case law and statute, how far this statement accurately reflects the current law relating to lifting the veil of incorporation.
Salomon v Salomon involved the principle of separate corporate personality. This states that as a general rule a limited company’s shareholders are not liable for the company’s debts beyond the nominal value of their shares. However, in certain situations courts have ignored this principle. Courts have done this under statute, during wartime, where there is an agency or trust arrangement, where the company was a sham, or when dealing with groups of companies. Recent decisions such as Adams v Cape Industries plc and Prest v Petrodel Resources Ltd have reaffirmed the principle in Salomon. However, courts have still been willing to ignore the Salomon principle, most notably in Chandler v Cape plc.
Salmon v Salomon is an important case, as it established the principle that a limited company has a separate legal personality from its members. This is enshrined in s.74(2) Insolvency Act 1986, which states that in a company limited by shares, no member (or shareholder) is liable for any of the company’s debts other than the amount (if any) on any unpaid shares. This is a great incentive for investors, who know that even if a limited company in which they own shares, owes millions of pounds in debts, their own personal assets are safe. In Salomon a sole trader incorporated his business into a limited company. When the company failed, the liquidators argued that Salomon and the company were effectively one and the same. However, the House of Lords said that the company was a legal entity distinct from its members. Therefore, Salomon himself was not liable for the company’s debts. This separation between members and company is called the ‘corporate veil’. Corporate personality means that a company can sue and be sued in its own right and be a party to contracts, and exist after the death of its shareholders. This was recognised by the House of Lords in VTB Capital v Nutritek Intl Corpn where Lord Neuberger said: ‘A company should be treated as being a person by the law in the same way as a human being.’ Therefore, the Salomon principle remains an important part of corporate law today.
However, there are several exceptions to this principle. In these cases courts ‘lift the corporate veil’ to make members liable for the actions of the company. This undermines the notion that Salomon occupies the centre stage in corporate law today.
s.213 Insolvency Act 1986 states that if, while winding up a company, the company’s business is carried on with intent to defraud the company’s creditors,
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