Shravan Niranjan | 20151248

SEPARATE LEGAL ENTITY: ANALYSIS OF SALOMON v. SALOMON

The doctrine of separate legal entity is a doctrine which has gained increasing importance in the
analysis of company law. The importance of this doctrine and its relevance in the analysis of laws
relating to companies is evident in the case of Salomon v A Salomon and Co Ltd, the leading case
which gave effect to the separate entity principle.
The consequences of Salomon v A Salomon & Co Ltd are that a company must be treated as a
separate legal entity, separate and distinct from its shareholders, the company must be treated like
any other independent persons with rights and liabilities appropriate to itself. In legitimizing the
one-man company, Salomon also legitimizes the group concept with each subsidiary company
being a separate and distinct entity and not the agent of its parent company. The parent company
and the subsidiary are separate legal entities and each company is entitled to expect that the court
will apply the principles of Salomon in the ordinary way and respect the identity of each company
in the group.

The principle set out in this case is that a limited company's creditors must look at the capital, the
limited fund, and that only. Limited liability discourages shareholders from monitoring and
controlling their company's commercial ventures. The company's creditors bear the burden of the
risks inherent in dealing with limited liability companies. At issue is whether it is right that limited
liability should operate to restrict the size of the company's capital. Different types of creditors
have different capacities to protect themselves against these risks. While banks and similar
financial creditors easily overcome such risks, the same cannot be said of trade creditors and.
Because trade creditors rarely insist on security before they supply goods on credit, they bear a
considerable part of the risk of corporate insolvency. Employees are in an even more precarious
position. In stark contrast to finance and trade creditors, employees have no opportunity to obtain
security or diversify the risk of their corporate employer's insolvency.

It may, therefore, be concluded in the light of above discussion that though it is firmly established
ever since Solomons case that a company is an independent and legal personality distinct from
the individuals who are its members, it has since been held that the corporate veil may be lifted,
the corporate personality may be ignored and the individual members recognized for who they are
in certain exceptional circumstances.