Case 3

Case 3

[Slide 7] Salomon v A Salomon & Co Ltd (1897)
The company went bankrupt when the business failed.
The company didn`t have sufficient assets to pay its unsecured creditors.
Liquidators of the company sued the individual shareholder, Salomon.
Issue – Was Salomon obliged to pay the debt?
Decision – No

The House of Lords held that a corporation is an entity separate from its members.
Only the corporation held the debt; the individual shareholders did not hold the debt.
If a company fails to pay its debts, the person to be sued is the company, not its members.

[Slide 12] Gilford Motor Co v Horne (1933)
Mr Horne was an ex-employee of the Gilford motor company and his employment contract provided that he could not solicit the customers of the company.
In order to defeat this, he incorporated a limited company in his wife`s name and solicited the customers of the company.
The company brought an action against him.
Issue – Did court lift the corporate veil against the company set up by Horne?
Decision – Yes

The court was satisfied that the company was formed by Horne for the purpose of avoiding liability under the agreement.
The court noted that while a company usually has its own separate legal identity, the company “was formed as a device, a strategem, in order to mask the effective carrying on of business of Mr Horne”, in which it was clear that the main purpose of incorporating the new company was to perpetrate fraud.

[Slide 12] Adams v Cape Industries plc(1990)
The plaintiffs obtained a judgment against Cape an English registered company in the American courts.
As Cape had no assets left in the US, they then sought to enforce the judgment against the parent company in the group in the English courts.
The plaintiffs sought to ignore the separate legal personality of a parent (Cape) and its subsidiary company and to hold the parent company liable for the obligations of the subsidiary....

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