This principle was established from the case of Salmon v. A Salmon & Co Limited, according to this principle the company is a separate legal entity from its shareholders. The facts of the case are as follows: A company formed its legal corporation by Mr. Salmon, in this company the shareholders were him and his family. Later, when the company failed the issue arose as there were insufficient funds to pay the creditors and Mr. Salmon too. The statement of affairs was Assets: $6000, Liabilities: Salmon as debenture holder: $10,000 and Unsecured Creditors: $7000. The Unsecured creditors asked a priority over the debenture holders as the debenture creditor and Mr. Salmon was one. The House of the Lords said that the existence of a company is quite independent and distinct from its members and further added that the assets must be utilized for the payment of the debenture which must be the priority over the payment of Unsecured Creditors. This case established the principle that the company is a separate legal entity, the Salmon Principle.
SALMON PPRINCIPLE: COMPANY AS A LEGAL PERSONALITY
According to this principle, a company is regarded as a legal person and is separate from its shareholder, the directors, agents, and employees. Meaning that the company by its name can be sued and can own assets. This principle also separates the rights and duties of the shareholders, directors, and agents from the company. This principle draws a metaphorical veil also known as Corporate Veil between the company on a side and its directors, the shareholders on the other side. As the company has limited liability, the shareholders are not responsible for the obligations or the commitments of the company, hence the shareholders are only liable for their share which are unpaid. The company has a never-ending existence even though its members and constitution changes. It has its own property and can buy and sell any property under its name. It has limited liability and has the ability to sue and be sued in its own name, the shareholders, directors are not to be affected. As the company is a legal personality it can also be a party to a contract. In the eyes of law, the company is equal to a normal person. This is considered as one of the cornerstones of Indian Company Law. Ever since the House of Lords gave the decision in the case of Salmon v Salmon & Co. in 1897 the principle, that company is a separate legal entity and has its own legal personality, is followed. The company as a separate legal entity means that the jurist acts can be done by the company by its own name, it can sue and be sued. The shareholders, the directors enjoy protection against personal liability. Although this principle is influential in the corporate law, in India as well as in the whole globe, still there are exceptions were the court disregards this personal liability and lifts the corporate veil. Normally, the corporate personality of the company is respected, but the veil of incorporation does not mean that the internal affairs of the company are hidden from the view of the outside world. There are many instances when the Indian courts have tried to respect this principle and resisted to lift the veil. This principle and the benefit cannot be misused, and when misused the court lifts the corporate veil, to arrest the person who misuses the benefit given to them by the law. However, this principle does not provide protection to its shareholders or its directors for their own conduct or allow the directors and shareholders to use the company to be used for sham transactions and the courts can lift or pierce the veil accordingly to the necessity. The Court can remove this metaphoric corporate veil and if the veil can create a substantial injustice and pierce the veil to prohibit any fraud.
LIFTING THE CORPORATE VEIL
Lifting the corporate veil means disregarding the Salmon principle. Disregarding the principle that the company has a separate legal entity and then seeing who is actually controlling the company. Meaning when a company does a dishonest or a fraudulent act and the individual who controls the company tries to take shelter under the corporate personality, the individual will not be allowed to misuse the benefit provided by law. In this regard, the court disregards the corporate principle of the company and lifts or tears the corporate veil. A company is an artificial (fake) person but it is a legal entity and a jurist person. Whereas, in reality, the company is a group of people, those who are the owners and the beneficiaries of the corporate body. Since the company is an artificial person it can only be operated by natural persons. The Black Law Dictionary tells about the doctrine of lifting the veil is as an act of judiciary to impose liability on an individual who would otherwise be immune corporate officers, for the companies fraudulent or dishonest act or a wrongful act. When this principle is involved, it is allowed to show that the individual taking shelter under the corporate personality or hiding behind the corporation is legally responsible to discharge the responsibilities and duties ignoring the principle of company as a separate legal personality. The corporate veil and be lifted when the when it is found to be opposed to justice or against the public interest. The main reasons why the veil should be lifted
(i) To carry out the laws of the company.
(ii) To avoid fraudulent and wrongful acts.
(iii) To effect fully deal with group of companies.
Ways to lift the Corporate Veil.
(i) By Legislation
(ii) By the Discretion of the Courts.
Many of the Indian legal provisions are borrowed from English law. The Salmon v Salmon & Co. case acts as a precedent for many Indian corporate cases. In the case of Tata Engineering Locomotive Co. Ltd v. State of Bihar and others [1986 AIR 1370, 1985 SCR Supl. (3) 909] in 1964, the Supreme Court held that in law a company is equal to a normal person. The individual of the company is absolutely separate from its members, shareholders, or directors. The company has its own name and seal and even the assets and liability is distinct from its members. Similarly, the member’s creditors do not have any right to the assets of the company.
In the case of LIC of India v Escorts Ltd [1986 AIR 1370, 1985 SCR Supl. (3) 909 ] in 1985 the court stressed that the corporate veil should be lifted where the companies associated are in a way that is impossible to separate are connected as to be in reality part of one concern. Furthermore in Bhopal Gas Leak Tragedy lifting of the veil escalated.