Salomon v Salomon

This article has been written by Prithiv Raj Sahu, a student of KIIT School of Law, Bhubaneswar (4th year). The writer has analyzed the case of Solomon v Solomon

Separate Legal Personality (SLP) is the basic tenet on which company law is premised. Establishing the foundation of how a company exists and functions, it is perceived as, perhaps, the most profound and steady rule of corporate jurisprudence. Contrastingly, the rule of “SLP” has experienced much turbulence historically and is one of the most litigated aspects within and across jurisdictions.1 Nonetheless, this principle, established in the epic case of Salomon v Salomon, is still much prevalent, and is conventionally celebrated as forming the core of, not only the English company law but of the universal commercial law regime.

Court: House of Lords

Decided: 16 November 1897

Citation(s): [1896] UKHL 1 [1897] AC 22

Case opinions: Lord Macnaghten, Lord Halsbury and Lord Herschell

Keywords: Corporation, separate legal personality, agency

Facts

Aaron Salomon was a leather trade man, has a sole proprietorship business. 1892, he incorporate with his sons as a limited company. Any limited company should have at least seven persons who considers as members of a company “shareholders”. Salomon himself as a managing director, his wife, his daughter, and his four sons the company purchased for £39,000, taking £10,000 of them as a debt to him also at the same time he was thus simultaneously the company’s principal creditor and its principal shareholder. On the security of his debentures, Mr Salomon received an advance of £5,000 from Edmund Broderip. Shares were divided as: 20,001 shares for Mr Salomon and each other subscribe take one share, each one share worth £1. There was a decrease on the sales, “strike”. Salomon business failed. October 1893, Edmund Broderip sued Salomon to enforce his security, which makes Salomon pay back the £5,000 of Edmund Broderip. The liquidator also argued that the debentures used by Mr Salomon as security for the debt were invalid, he just fraud on them. The liquidators sued Mr Salomon, since he was the one who is taking the responsibility over the company.

Issues

Whether the Salomon & Co. Ltd. was a company at all?
Whether in truth the artificial creation of the legislation, i.e., the company, had been validly created in the instant case?
Whether Salomon was liable for the debts of the company?

Argument

The Liquidator contended that though Salomon & Co. Ltd. Was incorporated under the Act, the company never had an independent existence. It was only a one man show since all the shares except six were held by Salomon himself. The vast preponderance of shares made Salomon absolute master. The business was solely conducted for and by him and the company was mere sham and fraud.

Judgment

High Court

The judge, Vaughan Williams J. accepted this argument, ruling that since Mr Salomon had created the company solely to transfer his business to it, then the company and Salomon were one unit; the company was in reality his agent and he as principal was liable for debts to unsecured creditors.

Appeal

They confirmed what was said in the high court

House of Lords

The House of Lords unanimously overturned this decision, rejecting the arguments from agency and fraud. Salomon followed the required procedures to set the company; shares and debentures were issued. The House of Lords held that the company has been validly formed since the Act merely required 7 members holding at least one share each. There was no fraud as the company was a genuine creature of the Companies Act as there was compliance and it was in line with the requirements of the Registrar of Companies. The company is at law a different person altogether from the (shareholders); and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands received the profits, the company is not in law the agent of the (shareholders) or trustee for them. Nor are the (shareholders), as members, liable in any shape or form, except to the extent and in the manner provided for by the Act.

Conclusion

All in all, the Salomon ruling remains predominant and continues to underpin English company law. While sham, façade and fraud primarily trigger the invocation of the veil piercing exception in limited circumstances, these grounds are not exhaustive, and much is left to the discretion and interpretation of the courts on case-to-case basis.

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