Lifting the Veil Essay

3274 Words Nov 7th, 2015 14 Pages
According to Salomon v Salomon& Co Ltd , the fundamental attribute of separate legal entity is that the company is regarded as a legal person distinct from any and all of the individuals involved in the company by incorporation of a projected or existing enterprise. Under s15(1) of the Companies Act 2006, companies which are registered become incorporated and separate legal persons on registration. As a consequence of the existence of a distinct legal entity, a company has the capacity to be a party to a contract, sue or being sued, commit a crime, be the victim of a crime, hold property, and rationally, thus, make profits and losses that are its own rather than those of the shareholders of the company.

The Principle of
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Salomon then valued his business at £39,000. In return for the business being converted to the new corporation, the purchase consideration was paid by allotment of £9,000 cash, 20,000 shares of £1 each and £10,000 worth of debenture. Salomon was therefore simultaneously the vast majority shareholder with 20,001 shares and principal debtor of the company. After a short duration, the company was in trading difficulties and Salomon sold his debenture to Broderip so as to raise capital for the company. This merely delayed the ineluctable and the company was placed into insolvent liquidation within only a year, without enough assets left to pay off the debenture holder.

The Decision at First Instance, the Court of Appeal and the House of Lords in the Salomon case
In these unhappy situations, the liquidator argued that the debentures issued by the company as security for the debt were invalid as well as fraudulent and that the company was simply the agent for Salomon. The issue for the courts was whether Salomon was liable for the debts incurred by the company. The first instance judge, Vaughan Williams J decided that the theory of fraud was not established on the facts of the case. Instead, he used the agency principles to decide that the company was in reality the agent of Salomon and so he as the principal shareholder and the managing director of the company was liable to indemnify the company against the unpaid debts.
The Court of

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