Question

What is the significance of Salomon v A Salomon & Co Ltd [1897] AC 22? What is the ‘corporate veil’ and when is it permitted to be lifted under the Corporations Act?

Answer 1

The significance of Salomon v A Salomon & Co Ltd [1897] AC 22 was that it led to the creation of the important rule and principle with regards to corporate personality. It laid down that with regards to corporate entities a significant limited liability concept exists and that any company which is formed in compliance with the legal provisions and legal regulations of the Companies Act will be regarded as a separate person and will not be regarded as an agent of its controller. Thus the significance of Salomon v A Salomon & Co Ltd [1897] AC 22 is that it established that a corporate entity has a separate legal personality and the rights and obligations of a corporate entity is different from the rights and obligations of the shareholders of a company.

The theory of corporate veil states that identity of a company is completely distinct and separated from its members and shareholders. Corporate veil can be lifted when corporate personality of a company is used for the purpose of committing fraud and for conducting illegal acts and improper acts. It should be noted that a corporate entity is merely an artificial person and since an artificial person cannot do anything fraudulent or cannot do an illegal act the legal system has to lift the corporate veil to determine which shareholder or which agent of the company has committed the fraud. This will help to hold the guilty shareholder liable for the debts of the company that came into the books of the company due to the illegal actions of that shareholder.