CORPORATE GOVERNANCE -THE COMMITTEE ON THE FINANCIAL ASPECTS OF CORPORATE GOVERNANCE – A STUDY
Authors: Chanakya Palepogu 
Published: November 2023

Corporate governance is the system by which companies are directed and controlled. Boards of
directors are responsible for the governance of their companies. The shareholders' role in governance is
to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.
Protection of Creditors or Investors or Share Holders and immunity to the Board of Directors under Corporate Governance has
nally evolved through different interpretations and judgments. Salomon v A Salomon & Co Ltd: Salomon v A Salomon & Co
Ltd [1896] UKHL 1, [1897] AC 22 is a landmark UK company law case. The effect of the House of Lords' unanimous ruling was to
uphold rmly the doctrine of corporate personality, as set out in the Companies Act 1862, so that creditors of an insolvent
company could not sue the company's shareholders for payment of outstanding debts. Facts of the Case: Mr. Aron Salomon
made leather boots or shoes as a sole proprietor. His sons wanted to become business partners, so he turned the business into a
limited liability company. This company purchased Salomon's business at an excessive price for its value. His wife and ve
elder children became subscribers and the two elder sons became directors. Mr. Salomon took 20,001 of the company's 20,007
shares which was payment from A Salomon & Co Limited for his old business (each share was valued at £1). Transfer of the
business took place on 1 June 1892. The company also issued to Mr. Salomon £10,000 in debentures. On the security of his
debentures, Mr. Salomon received an advance of £5,000 from Edmund Broderip. Soon after Mr. Salomon incorporated his
business there was a decline in boot sales. The company failed, defaulting on its interest payments on its debentures (half held
by Broderip). Broderip sued to enforce his security. The company was put into liquidation. Broderip was repaid his £5,000. This
left £1,055 company assets remaining, of which Salomon claimed under the retained debentures he retained. If Salomon's
claim was successful this would leave nothing for the unsecured creditors. When the company failed, the company's liquidator
contended that the oating charge should not be honoured, and Salomon should be made responsible for the company's
debts. Salomon sued. It has become the fashion to call companies of this class "one-man companies". That is a taking
nickname, but it does not help one much in the way of argument. If it is intended to convey the meaning that a company which is
under the absolute control of one person is not a company legally incorporated, although the requirements of the Act of 1862
may have been complied with, it is inaccurate and misleading: if it merely means that there is a predominant partner
possessing an overwhelming inuence and entitled practically to the whole of the prots, there is nothing in that I can see
contrary to the true intention of the Act of 1862, or against public policy, or detrimental to the interests of creditors. If the shares
are fully paid up, it cannot matter whether they are in the hands of one or many. If the shares are not fully paid, it is as easy to
gauge the solvency of an individual as to estimate the nancial ability of a crowd. It was argued that the agreement for the
transfer of the business to the company ought to be set aside, because there was no independent board of directors, and the
property was transferred at an overvalue. There are, it seems to me, two answers to that argument. In the rst place, the
directors did just what they were authorized to do by the memorandum of association. There was no fraud or misrepresentation,
and there was nobody deceived. In the second place, the company have put it out of their power to restore the property which
was transferred to them. It was said that the assets were sold by an order made in the presence of Mr. Salomon though not with
his consent, which declared that the sale was to be without prejudice to the rights claimed by the company by their counterclaim. Salomon's case still represents the orthodox view of separate legal personality under English law, although a number of
exceptions have since evolved. In Williams & Humbert v W & H Trade Marks [1986] AC 368 at 429B Lord Templeman described
as "heretical" the suggestion that this principle should be ignored. In E.B.M. Co Limited v Dominion Bank [1937] 3 All ER 555 at
564 Lord Russell of Killowen stated the principle was one of "supreme importance". In Adams v Cape Industries plc [1990] Ch
433 Slade LJ said "the court is not free to disregard the principle of Salomon v A Salomon & Co Ltd [1897] AC 22 merely because
it considers that justice so requires. Our law, for better or worse, recognizes the creation of subsidiary companies, which though
in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal
entities with all the rights and liabilities which would normally attach to separate legal entities." In Prest v Petrodel Resources
Ltd [2013] UKSC 34, [2013] 2 AC 415 at paragraph 66 Lord Neuberger called Salomon: "a clear and principled decision, which
has stood unimpeached for over a century". In the decades since Salomon's case, various exceptional circumstances have
been delineated, both by legislatures and the judiciary, in England and elsewhere (including Ireland) when courts can
legitimately disregard a company's separate legal personality, such as where crime or fraud has been committed. There is
therefore much debate as to whether the same decision would be reached if the same facts were considered in the modern legal
environment, given the House of Lords' decisions in Pepper v Hart and Re Spectrum Plus Ltd and the Privy Council in Attorney
General of Belize v Belize Telecom Ltd that require a purposive approach to interpreting legislation. In 2013 there was a
systemic review of these authorities in Prest v Petrodel Resources Ltd and Lord Sumption distinguished between cases of truly
"piercing the corporate veil" and situations where it was held that the company was essentially an agent for a wrongdoer or held
property on trust.