Separate Legal Personality and the Corporate Veil

The Principle of Separate Legal Personality

The principle of separate legal personality derives from Salomon v Salomon (1896). It provides that the director and the company are two different entities. The director cannot be held responsible or liable for the actions of the company in a personal capacity. As seen in the case of Macaura v Northern Assurance Co Ltd (1925), a company can own property, and it can sue or be sued in its own name. It is no different from a human being; it is an entity in itself.

Lifting the Corporate Veil

However, this is a mere general rule, and we can lift the corporate veil. We can lift the corporate veil in instances of fraud and negligence. This principle has been extended to parent subsidiaries, also known as multinational companies. For example, consider Toyota and Lexus. The parent company is Toyota, which was very well established in the 1980s. It wanted to rival German cars and created a subsidiary called Lexus to cater to the elite market. Lexus is a subsidiary; however, it is separate compared to Toyota. Applying the same principle of Salomon v Salomon, we can lift the corporate veil and hold the parent to be responsible if we can establish fraud or negligence.

Case Study: Salomon v Salomon (1896)

Facts of the Case

Aaron Salomon was a successful leather merchant. First, he ran the business as a sole proprietorship. He then decided to incorporate his business as a limited liability company. He gave one share each to his wife and his four children, and he himself took 20,001 shares out of 20,007 shares. In consideration therefore, debentures were issued to Salomon, the business founder. Salomon was unable to salvage the company, and the company was put into liquidation. The assets were enough to pay off secured creditors, including himself, who was a debenture holder. Unsecured creditors were left stranded. The liquidator sued Salomon.

The House of Lords Decision

The Court of Appeal held that he was liable to indemnify the company against the losses. However, the House of Lords, reversing the Court of Appeal's decision, held that the incorporation of a company created a separate person. The members were not liable in respect of the company's obligations. Even though the business of the company was the same as before, and the same person managed the business and received the profits, the company was not an agent or trustee for the members.