ABSTRACT
This paper seeks to scrutinize the enduring relevance of the Soloman v. Soloman case today. By exploring and delving into the critique of the case, the judgement’s impact, the evolving principle of corporate veil, this paper sets out to reveal a brief analysis of the growing concern over the long-standing principle and its relevancy today, along with the author’s analysis and conclusion.
Keywords: Corporate Legal Personality, Lifting the Veil, Piercing the Veil, Corporate Liability
INTRODUCTION
A Disquisition on Salomon v. Salomon ventures beyond the well-trodden path of legal history to inquire into the enduring pertinence of this case in today’s dynamic legal and business landscapes. Although it is accepted as a fundamental tenet of company law, this study explores the depths of its modern ramifications. The paper clarifies the nuances underlying the Salomon case’s ongoing significance by focusing on critique, judgement impact, and the evolving concept of corporate veil.
METHODOLOGY
The methodology used for the paper herein presented was an extensive literature review of the available data on Corporate Personality and a Critical Analysis of Soloman’s case. This paper aims to scrutinize its enduring relevance of it and It also dramatically focuses on the Principle of the corporate veil. By the methods of collection of secondary data, the paper highlights and contributes to the nuanced debate of the relevancy of Soloman’s principle today.
LITERATURE REVIEW
Critique of the case
The analysis of the Salomon[1] case is founded on two points[2], which are elaborated upon in thereafter paragraphs. First off, because the House of Lords’s reasoning was so literal their conclusions ran somewhat counter to what the legislature had intended. Second, Salomon’s ruling was established fifty years earlier to that of R v. Arnaud[3], and the case’s conclusion was more or less founded on considerations of bad policy. Since the circumstances of the case satisfied the requirements, the House of Lords used a literal interpretation of the Act[4], which stipulated that seven people must own shares in the firm. The problem occurs because the House of Lords failed to carry out the legislative intent, which must be determined by interpreting the statute’s language broadly and looking at the problems it was meant to address rather than taking the Black letter of the law. The shareholders’ participation and even if bona fide evidence suggests that Mr. Salomon’s entire family was involved in or aware of the default, the repercussions fell on the creditors. The legality of one-man businesses was affirmed by the House of Lords. The Court’s decision ultimately interfered with the development of such reforms, which were intended to address the potential abuses. and that as a result, Soloman had priority over other secured creditors in receiving the assets.
However, regarded as the most fundamental company law case in all of commonwealth, factually it was not the first one to state the fact that a company is a separate legal entity. The decision given by Calcutta High Court in the case of Kondoli Tea Co. Ltd, Re[5], in which the court observed that “the company was a separate person a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property, as if the shareholders had been totally different persons”.
Judgment’s impact
Due to the House of Lords’ decision in the Salomon v. Salomon case, the doctrines of corporate identity and limited liability had emerged.[6] Despite an enormous number of challenges to these two ideas, which are recognised as the two pillars around which contemporary company law is based, the courts have typically been ready to uphold and endorse it .The fact that the company is a legal entity apart from its members is the fundamental characteristic of corporate personality from which all repercussions follow.[7] In essence, this means that the Companies Act, makes a business a body corporate after it has been established. The corporate identity, perpetual succession, and, in some situations, limited liability is some of the essential characteristics of incorporation that are mentioned in this section.[8]
Evolving principle of corporate veil
Courts have come to understand that the Solomon’s case idea cannot be applied uniformly because unscrupulous employees within corporations may use it for unethical and fraudulent ends[9]. The legal system must identify and hold responsible those who abuse the idea of corporate personality in order to safeguard the interests of both stakeholders and the general public. For a better understanding, the following two categories can be used to classify the situations in which courts may decide to lift the corporate veil:
1. Lifting the corporate veil by Statue
2. Lifting the corporate veil by Courts
A company is a legal entity, everything inside and every component of the corporation functions as a single unit. There are instances where a corporation’s external entity is insufficient to help determine its culpability, making it necessary to look past the corporate veil. Judges try to “pierce the veil” in order to identify the actual people who are accountable for doing a violation.
The lifting of corporate veil principle in India and the principle of veil-piercing in UK are synonymous[10]. Although it’s a picturesque term borrowed from the American corporation law, it’s infamous because of the case of Prest v. Petrodel Resources Ltd[11]., th supreme court of UK recast the doctrine of veil piercing as a remedy of last resort.
Petrodel’s facts are widely known, however a short summary is as follows: the case included a disagreement on the distribution of marital assets, in which the wife requested a transfer of numerous properties owned by offshore firms, of which the husband was the sole owner. The Supreme Court supported the Court of Appeal’s judgement not to remove the corporate veil and consider the assets of the business as belonging to the spouse for the purposes of the statutes governing asset distribution upon divorce.
The judgement formulated by Lord Sumption, helps understand the new position of Soloman in light of Petrodel[12]. It was very clearly stated that “if it is not necessary to pierce the corporate veil, it is not appropriate to do so”.
CRITICAL ANALYSIS
Empirical Analysis disregarding Soloman’s principle
The empirical analysis in a study done by Oxford[13] concluded that there is contempt for the separate legal entity principle. This is consistent with the idea associated with the principle established in the Salomon case, namely, the concept’s ephemeral and fluctuating dependability. The Supreme Court’s decision in Prest v. Petrodel in 2013[14] resulted in a revised interpretation of the principle from the court, which decreased the principle’s disregard rate. The information also reveals that the disregard rate was greater when an individual rather than a company was the stakeholder.
Comprehending the need[15]
Some legal experts believe that a business has a fictitious personality. This fictious identity results from the requirement of creating a separate organisation that can function independently and manage its business on behalf of its benefactors, or its members. We are aware of the “persona ficta” in Roman law developed by Savigny. Although this “fiction theory”, has received a lot of criticism, one of the main ones being that the from the point of view of ownership, this theory takes us nowhere. How can a non-existent (imagined) person own property if a company is only an imaginary person that only exists in the eyes of the law? But the author believes that it offers a lot more than any other theory be it- the realistic theory leaded by Gierke[16] or the Bracket theory and Organism theory.
The bigger question then and now is that “should people behind the company be held responsible or not?”, although just answering this question yes or no will not give an apt reasoning and justify the need to still follow Soloman’s principle. Nevertheless, the “piercing the veil” approach hasn’t offered a sufficient foundation for the analysis of the challenging issue. It has so given the appearance of a random or unprincipled outcome.[17]. The broader idea that company is a juristic person and a different person altogether in some ways seemed perfect and satisfying as pointed out by Dan-Cohen[18], however time is such factor which cannot be predicted aptly, especially in the legal context wherein the entire world intersects.
Relevancy today
The conception of corporate personality is a simplification of the process of thought. The courts were forced by the realities of contemporary economic life to develop this theory, which has led to more uncertainty than stability.[19] A lengthy history of court rulings dating back to the Salomon case demonstrates that this doctrine’s development, articulation, and uses have not resulted in a cogent theory. A similar stance was taken by Gajendragadkar, C.J., in Tata Engineering & Locomotive Co[20].
The concept of limited liability and corporate governance remains one of the most fundamental principles in company law, however it’s not endured a world with impeding progress and responsible business practices. It all boils down to the fact that due to this strict separation between the corporate personality and their shareholders will cause and ahs been allowing and enabling companies to evade accountability for actions deliberate or not, have had consequences that should be punishable. Along with the rise of the concept of Corporate Social Responsibility and in a world wherein everything is slowly switching to sustainable practices, the need for the Saloman principle is called into question.
CONCLUSION
Although the Salomon v. Salomon decision has unquestionably become a cornerstone of company law, its ramifications in contemporary settings demand careful analysis. The literal interpretation that formerly dictated legal thinking now faces the intricacies of modern economic reality as we traverse a dynamic corporate environment. The Salomon case’s ongoing influence pushes us to construct a corporate jurisprudence that is in line with the varied and constantly changing demands of the 21st century in this complex interaction between tradition and progress. Shedding light also on the fact that it is imperative to adapt, this principle requires a judicious revaluation. All in all, one could not safely rely on the Soloman principle anymore, although landmark however no more relevant.
[1] Salomon v Salomon [1897] AC 22
[2] Lim, Ernest. “Of ‘Landmark’ or ‘Leading’ Cases: Salomon’s Challenge.” Journal of Law and Society, vol. 41, no. 4, 2014, pp. 523–50. JSTOR, http://www.jstor.org/stable/43862403. Accessed 18 Aug. 2023.
[3] R v. Arnaud [1846] 9 Q.B. 806.
[4] The Companies Act, 2013, Acts of Parliament, 2013 (India )
[5] Re Kondoli Tea Co. Ltd (1886) ILR 13 Cal 43
[6] Supra note 1
[7] Seventeenth Ed. Avtar Singh, Company Law, (EBC 2019)
[8] Rahim, Mohsin, Revisiting the Principle of Lifting the Corporate Veil: A Contemporary Analysis of Salomon V. Salomon. SSRN: https://ssrn.com/abstract=4140866. (2022) Accessed on 17 Aug. 2023
[9] Brahmbhatt Devanshi, The Doctrine of Lifting The Corporate Veil And The Judicial Trend In Determining The Criminal Liability Of Corporations, Journal on contemporary issues of law (2017) Volume 3 Issue 5 last accessed on 17 Aug. 2023
[10] Xing, Tan Zhong, The New Era Of Corporate Veil-Piercing, 28 SAcLJ 209 , SCC Online Web Edition, (2016) Last Accessed on 17 Aug. 2023
[11] Prest v. Petrodel Resources Ltd, [2013] 3 WLR 1
[12] Supra note 10
[13] Alan Dignam, Peter B Oh, Disregarding the Salomon Principle: An Empirical Analysis, Oxford Journal of Legal Studies, Volume 39, Issue 1, Spring 2019,(2019) Pages 16–49, Last Accessed on 18 Aug 2023
[14] Supra note 10
[15] Machen, Arthur W. Corporate Personality, Harvard Law Review, Vol. 24, No. 5 pp. 347-365, : The Harvard Law Review Association, : https://www.jstor.org/stable/1324691 Last Accessed on 18 Aug 2023
[16] Maitland F.W, Introduction to Gierke‟s Political Theories of the Middle Age; F. Hallis Corporate Personality, 1st Ed. 1913 page 137; 146, Last Accessed on 18 Aug 2023
[17] James, Nicolas, Separate Legal Personality” Legal Reality And Metaphor, University of Melbourne, Last Accessed on 18 Aug 2023
[18] Dan-Cohen M, Righzs, Persons and Organisations: A Legal Theory for Bureaucratic Society, University of California Press, Berkeley (1987) Last Accessed on 18 Aug 2023
[19] Bahadur Krishna, Personality Of Public Corporation And Lifting The Corporate Veil 14 JILI (1972) 207, SCC online Web edition, Last Accessed on 18 Aug 2023
[20] Tata E. & L. Co. v. State of Bihar, AIR 1965 SC
Author Bio
