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M. Waqas and Z. Rehman (2016) Int. J. Soc. Sci. Manage. Vol-3, issue-1: 1-4
DOI: 10.3126/ijssm.v3i1.13436

Mini Review
SEPARATE LEGAL ENTITY OF CORPORATION: THE CORPORATE VEIL
Muhammad Waqas1* and Zahoor Rehman2
1
Department of Law Abdul Wali Khan University Mardan, Pakistan
2
Institute of Peace and Conflict Studies University of Peshawar, Pakistan

*Corresponding author email: [email protected]

Abstract
The concept of separate legal entity is 500 years old and it means that the corporation is separate in all spheres of its activities. It is separate
from its owner, from its employees and due to this separation between the corporation and an individual the shareholders’ liability is also
limited. A corporation is established through four different ways i.e. continuity, self-governance, identification persona, and specification of
assets. The personhood of a corporation is evolved with the passage of time through different court judgments in which Salomon case plays
the role of corner stone. The corporation can own, sell and buy property in its name. The corporation can sue and be sued in the court of law
as a legal person.
Keywords: Corporation; shareholders; separate legal entity; Limited liability; corporate veil.
In 17th century for the first time in England, charters were
Historical Evolution of Corporate Personhood issued to trading companies for commercial purpose (Blair,
The history of corporation is very old and its study shows 2012). Trading companies were actually contractual
that in earlier stages corporation were not meant for the partnerships recognized at common law and did not
purpose of business and trading but they were established, required charter. By the end of 17th century several
in the middle age of Europe, for religious and church companies were established.
institutions. These institutions got their authority through There are four means through which the personhood of a
charters granted by local lords and kings. Charters were corporation can be established:
granted for the purpose to hold property. This ability of
institution to hold property in their own name assured that Providing Continuity
the property held by such institution is the sole property of This means that a corporations continuous its business,
that very institution and not of those individual or their legal holds its property and carry out its contracts without any
heirs who control such institution. These properties were gap, the legal entity continuous to exist over the time even
also not subjected to heavy taxes. After granting of the royal if the owner dies or withdraw its assets from the
charter, the property owned by such institutions could not corporation. The life of corporation is immortal which
th
be reverted back to the estate of the lord. Later on in 16 means that the corporation runs its business smoothly
century the range of granting charter to the institutions was without any gap until winded up through a procedure.
extended and other institutions such as hospitals, (Trustees of Dartmouth College v. Woodward, 1819)
universities, colleges etc were also granted charters. The
purpose of those incorporations was perpetual succession
Providing an “Identifiable Persona”
and that succession of different individuals to be recognized From identifiable persona, here it means the name through
as a single legal person. But till that time the corporations which the corporation is known. The name of the
were not used for commercial purposes. (Ron, 2000) corporation serves as a legally liable person who carries out
Single individuals like kings, bishops etc were involved in the business activities. The persons involved in the
certain type of corporations. They were known as sole corporation are known by the name of that corporation. The
corporations. The purpose of the incorporation of these name is the intangible asset of the corporation such as
corporations was to make it clear and known to the public franchise, monopoly rights, reputation, image brand etc.
that the property hold by the person is not their own These intangible assets are the valuable source of
property but they are for the public purpose and the corporations. (Blair, 2012) This persona is used in all
contracts made, if any, were not in personal behalf but were contracts and a corporation can sue and can be sued in this
made in their official capacity (Blair, 2012). All of these persona.
corporation were known as “aggregate corporations”

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M. Waqas and Z. Rehman (2016) Int. J. Soc. Sci. Manage. Vol-3, issue-1: 1-4

Specification of Assets Cases Establishing the Principle of Separate

There should be a mechanism through which the assets of Legal Entity
the corporation are separated from the assets of the Legal personality of a corporation or legal existence of a
shareholders, and it should be also specified that what assets corporation as separate legal entity has been accepted from
are dedicated to the business. This separation of assets very primitive days and a lot of judgments have been passed
makes it very easy for those peoples who want to invest or from 17th century onward by different law courts
participate in the enterprise and it also makes it certain and recognizing the principle of separate legal entity of a
known that, in case of dissolution of the corporation, a corporation. There are numerous cases on this point. The
person will have to bear a specific amount of loss (Limited prominent legal cases establishing the principle are:
liability principle).
Kandoli Tea Company Case (1886)
Self-Governance
For a legal entity status a corporation should have a Facts of the case
mechanism and capacity through which they govern their There were certain persons in Kandoli Tea Company who
internal affairs. The corporation should have the ability to transferred their properties in the name of the Tea Company
make decisions for their internal governance. (Blair, 2012) with intent to avoid paying tax on that very property as tax
was due on that property,
Corporation is a Legal Entity
Petition
Corporation is a legal entity means that corporation, in the
Petition was moved to the court of law in which they were
eye of law, is considered as a legal person having certain
claiming exemption from payment of tax on the ground that
rights and duties under the law. Every state has its own
they did not have any taxable property on their name
separate corporate law through which the corporations are
because the same has been transferred to the Kandoli Tea
governed but certain principles in corporate law are
Company’s name.
universal and are worldwide like corporation has the right
to buy the property and sell the property owned by the Judgment
corporation. If any tort has been committed or any breach The court of law after full scrutiny of the record available
of contract has been made either by the corporation or by gave verdict that as company is a separate legal entity and
the counter-party, the aggrieved party can bring a suit the property is transferred to the name of the company so
against that party and enforce contract against the other the same property should be treated as transferred and the
party who has violated any term of the contract--if petitioners are not liable to any kind of tax. (The Kondoli
enforceable-- and if the contract cannot be enforced Tea Co. Ld. vs Unknown , 1886)
specifically then the aggrieved party will be compensated in
Salomon v A Salomon Co. Ltd (1897)
accordance with law. Certain restriction has also been
The most prominent case in the history of corporation
imposed on the corporation by law. A corporation is a
through which the corporation raises its authority as a
juridical legal person and it cannot hold any public office ,
separate legal person is Salomon case.
cannot caste there vote in a general elections, cannot
participate in the election, corporation cannot interfere in Facts of the case
the affairs of the government. There are certain similar In 19th century Mr. Salomon was a very successful trader of
points between juridical (legal) person and natural person leather and his business was at the peak because he was the
(Schane, 1986). sole trader of leather at that time. There was no other
The word “person” used in a statute will always mean either businessman who could compete with Mr. Salomon
the juridical person (corporation) or natural person as long business. Mr. Salomon then setup a company with 20007
as the interpretation fits with the general design and intent shares, in these 20007 shares he purchased 20001 shares
of the act. while the remaining 6 shares were purchased by his family
Corporation is a juridical legal person and it should be members’ i.e. by his wife and five children one each. After
treated as separate legal person. No person can claim to be setting up a company Mr. Salomon sold his business to the
the owner of a corporation; corporation is a legal person so company at 38,782 pounds. The company paid 20001 fully
no person can own another person. As a corporation, being paid shares to Mr. Salomon and 8,781 pounds in cash, so
a separate legal person, is separate from its members and the total amount paid by the company to Mr. Salomon was
shareholders so the shareholders of a corporation can 28,782 pounds (both in shape of share and cash) and 10,000
become employees of that corporation and can get wide pounds were remained payable to Salomon by the company,
range benefits from that corporation in the shape of he secured his remaining loan through debenture. Mr.
retirement plans, tax free medical benefits, meal, life Salomon followed all the rules and regulations required for
insurance and many other benefits offered by the the incorporation of a company. In his company there were
corporation to their employees. (Hofstrand, 2007) 7 members but the majority of shares were held by

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M. Waqas and Z. Rehman (2016) Int. J. Soc. Sci. Manage. Vol-3, issue-1: 1-4
Salomon. At the same time he was also the main creditor to shareholders. It does not make any difference that the
the company. company management is run by single person or all the
shareholders and therefore preference was given to Mr.
Issue
Salomon’s debenture. ( Salomon v Salomon & Co Ltd,
At the time of winding up of the company because the
1896)
company was failed, a question was raised in the court of
law to decide that whether precedence will be given to the Macaura v Northern Assurance Co. ltd (1925)
secured loan of Mr. Salomon over the non-secured loan of Macaura was the major shareholder of a timber company.
another creditor of amount 11,000 pounds? Almost all the shares of the company were held by Macaura.
If the court gave precedence to the secured loan over non At the same time he was also substantial creditor of the
secured loan then nothing would be left to the non-secured company. He insured the timber on his own name and not
creditor because the assets of the company turned out very on the name of the company which owned the timber. Later
low. Only 7,000 pounds were the assets of the company at on timber were destroyed by fire and when Macaura applied
the time of liquidation. to the insurance company for the payment, the insurance
Arguments company refused to pay on the ground that Macaura did not
The liquidator appointed for winding up of the company own the timber on his name and he is not the real owner of
argued that Salomon purposely transferred the business to timber thus he could not claim payment. Salomon principle
the company. The liquidator also argued that the company was applied to the case by the court and decided that as the
acted as an agent of Salomon and therefore being the timber were owned by the company and the company failed
principal he is liable to pay the debts of unsecured creditor. to insure the property on its own name so the plaintiff was
not entitled to any payment.
Decision of Court The decision in this case, by the court of law, made it very
After hearing the case and relying on the arguments of the clear that the property of the company is the sole property
liquidator the court decided that as the company was the of that very company and no person has the right to interfere
agent of Mr. Salomon hence he was held responsible to pay in the company’s property and even the shareholders have
all the debts to the creditors. no right to use the property without company’s consent. The
Court of Appeal company has the right over that very property and it is at the
The appeal against the lower court decision was also turned disposal of the company either to sell or insure that very
down and the decision of the lower court was maintained on property. (Macaura v Northern Assurance Co. ltd, 1925)
the ground that Mr. Salomon abused the privileges of
Lee v Lee’s Air Farming Co. Ltd (1960)
incorporation and limited liability. The limited liability is
available only to those peoples who are fair and devoted Facts of the case
shareholders. Mr. Salomon did not incorporate the company Mr. Lee was the managing director of a company
with clear hands. He carried on the business of the company incorporated by him. Being the managing director of the
in the same manner as he was carrying his business when he company he appointed himself as a pilot of the company.
was the sole trader. Lee died in a flying accident when he was going for a
business of the company. The widow of Mr. Lee claimed
House of Lords
compensation from the company on the ground that her
The house of lord totally rejected the decisions of both the
husband has died in the course of company’s employment.
lower court and the court of appeal and established a corner
It was argued by the opposite party that Lee and Lee’s Air
stone principle for the modern company law. In the House
Farming ltd was the same person and therefore no
of Lords it was unanimously held that corporation is
compensation could be granted to the widow of Mr. Lee.
separate legal entity, separate from its members and
shareholders. All the requirements for a valid incorporation Judgment
of a company were fulfilled. There were seven members It was held in the judgment of the court of law that 1) Mr.
who had subscribed to the memorandum of the company. Lee was separate person from the company and he had only
Shares were held by all the subscribers and nothing more incorporated the company and therefore compensation was
was mentioned about the independence. It was held by the payable to the widow of Mr. Lee 2) as a company is a
House of Lords that Salomon Company was validly separate legal entity so a member of a company can enter
incorporated in accordance with law and therefore the debts into a contract with that company in which he is holding
of the company are its own debts and the members are not shares 3) the widow of Mr. Lee was entitled to
liable for the payment of the company’s debts. compensation under the workmen’s compensation act, 4)
the director was not restrained from becoming the employee
Result
of that very company (Catherine Lee v Lee's Air Farming
Company as a legal person was lawfully created through
Limited, 1960).
observance of all the rules of the company law by the

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M. Waqas and Z. Rehman (2016) Int. J. Soc. Sci. Manage. Vol-3, issue-1: 1-4
The basic principle established by the court of law and now This well-established principle set down in Salomon v
embodied in the company law is that company after its Salomon & Co is known as the Veil of Incorporation.
formation become a separate legal entity and it can appoint However certain restrictions have been imposed to this
the owner or any other person to deal with the business of principal in order to prevent the abuse of limited liability
the company but they are considered as the agents of the protection.
company and are dealt separate from the company. The veil of incorporation may only be disregarded to avoid
(Anderson, 2004) this principle was established in the fraudulent and reckless trading or where the sole purpose
Salomon case, ( Salomon v Salomon & Co Ltd, 1896) Thus for which the company was incorporated is fraudulent or
an act by the member of the company in discharge of his illegal.
duties toward the company must be considered as an act of The court of law can disregard the corporate veil in order to
the company because the person acting on behalf of the ensure justice.
company is always considered as an agent of the company
and all his acts are considered as committed by the company
References
Anderson H (2004) The theory of the corporation and its relevance
itself. Company is considered as a separate legal entity and
to directors' tortious liability to creditors. Australian
that is why individual employees are protected. If a person
Journal of Corporate Law 16(2): 73-95.
was held personally liable for an act done on behalf of the
company then, due to fear, no one would accept any type of Blair MM (2012) The Four Functions of Corporate Personhood.
Vanderbilt University - Law School, Research Paper No.
responsibility. The concept of separate legal entity is for the
12-15.
purpose to encourage commercial enterprise and also to
limit the risk associated with the company offices. Catherine Lee v Lee's Air Farming Limited (Judicial Committee
(Fridman, 1992) of the Privy Council October 11, 1960).
Fridman GH (1992) Personal Tort Liability of Company Director.
Conclusion 5 Canterbury Law Review 41-44.
So from the above discussion it is concluded that
corporation is a separate legal person, separate from its Hofstrand D (2007) Ag Decieion Maker. Retrieved from
www.extension.iastate.edu/agdm
members and a firm after its proper incorporation through
corporate law acquires a juridical status. A company can run Macaura v Northern Assurance Co. ltd (House of Lords 1925).
its business through its representative and agents and all the Ron H (2000) Industrializing English Law. Cambridge: University
transaction made by any member of the company will be Press.
considered the transaction of the company, if done by the
Salomon v Salomon & Co Ltd (House of Lords 1896).
person who is authorized to do it. The corporation can sell
a property owned by such corporation and also can buy any Salomon v Salomon & Co Ltd (House of Lords 1996).
kind of property. So the corporation has the contractual Schane SA (1986) Corporation is a Person: The Language of a
capacity and it can enter into the contract with any person Legal Fiction. Tul.lL.rev, 563.
even with its own employees and shareholders. If any of the
The Kondoli Tea Co. Ld. vs Unknown (Calcutta High Court April
terms in the contract is violated by either party both the
3, 1886).
parties has the right to approach the court. So the
corporation can sue and can be sued. Trustees of Dartmouth College v. Woodward (Superior Court of
The principal of separate legal entity was firmly established the State of New Hampshire February 2, 1819).
in Salomon’s case and the same was applied to many cases.

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