By Ayush Upadhyay [1]
In the House of Lords
| NAME OF THE CASE | Salomon V. Salomon & Co. Ltd. |
| CITATION | [1897] AC 22, [1896] UKHL 1 |
| DATE OF THE CASE | November 16, 1896 |
| APPELLANT | Salomon |
| RESPONDENT | Salomon & Co. Ltd. |
| BENCH/JUDGE | LORD HALSBURY, LORD HERSCHELL, LORD MACNAGHTEN |
| STATUS/CONSTITUTION INVOLVED | The Companies Act of 1862 |
| IMPORTANT SECTIONS/ARTICLES | The Companies Act, 1862 — Section – 6, 8 & 30 |
Abstract
The core principle involved in Company Law is Separate Legal Personality, out of which the legal structure of modern business was instituted. Corporate veil protects the shareholder’s private assets and gives a method for the limitation of liability which is necessary to increase business development & international trade. Separate Legal Personality (SLP) is one of the most contested facet and stringent produce of Company Law, entrenched a century old principle in Salomon v. Salomon & Co. Ltd. Case. Sometimes a rigid principle may cause damage to the rights of concerned parties who deal with this institution because controllers of the corporation may be utilizing the principle as a defense to accomplish wrong.
Thus, the court given some exception to this principle which permits for ‘lifting of the veil’ of the stringent form as furnished in Salomon’s case. However, this principal is distinguished as, the most deep and constant edict of jurisprudential aspect of a corporation. The principle produced in Salomon v. Salomon & Co. Ltd. is still prevailing and forming in modern company law not only in England but also in global governance.
Introduction
Separate Legal Personality (SLP) is the initial precept on which company law is formed. Creating the foundation of basic functions and rules that viewed as earnest legal ethics. The Company law is based on a general rule that it is an artificial person, discrete and independent from its directors and shareholders. The directors & shareholders are not personally responsible for the levant of the company. The basic rule dates prior to a century and was evidently set forth in the recognized English case of Salomon v. Salomon & Co. Ltd.
Separate Legal Personality –
The concept of SLP generally provides that when a corporate company obtains a document of incorporation it has a ‘distinct legal personality’. In legal aspect, the company embellish a juristic person by its own right. It means basically that if one begins a trade as a limited liability company, then corporation is a distinct legal entity separate from its members or shareholders. Legal personality is a well-known concept of company law. It can set foot into a contract in its own name, sue and be sued by others. When a company is incorporated, it is treated as a separate “legal entity distinct” from its shareholders, promoters, directors, members and employees; and the concept of the corporate veil, separating those parties from the corporate body, has arisen. The issue of “lifting the corporate veil” has been considered by courts and commentators for many years and there are instances in which the courts have negated from the strict application of this doctrine[2].
FACTS OF THE CASE
In this case, Mr. Salomon continued a business as a leather dealer of boot making. At first run as a single proprietorship. In the year 1892, he established the corporation “Salomon & Co. Ltd.” He included himself, his wife and five of his children in this corporation. The members of the family took the shares for Mr. Salomon because the statute of England related to company law demanded at that time of transfer must be seven shareholders. Mr. Salomon was having true intent with regards to Companies Act, 1862 as a businessman. He proposed to limit his liability and takes the preference debenture-holder over other unsecured creditors, to vend his trade to a limited corporation comprising of himself & six other members of his family. The freshly embodied company acquired the sole leather business. The business of Mr. Salomon was assessed at €39,000. It showed Mr. Salomon’s success in his business.
The money was financed €10,000 for the debentures, allowing a possibility over all the assets of corporation. €20,000 shares of €1 apiece, the remaining of €9,000 was given to Salomon in cash. Mr. Salomon at this point took €20,001 shares in the corporation & his family member took the remaining 6 shares. Thus, he was a second creditor as he held debenture.
Therefore, his personal liability of the debt of trade had turned absolutely from limitless to limited liability. Mr. Salomon no longer responsible personally, as he had also managed director of the corporation. Thus, if the company failed, not only would Mr. Salomon have no personal liability for the debts of the company, but whatsoever assets were left, would be claimed by him to pay off the company’s debt to him[3]. Therefore, things did not good for leather boot making business, and under one-year, Appellant Mr. Salomon had to vend his debenture to secure the trade. On liquidation, the price of assets was distinguished as €6,000 for liability, €10,000 for debentures, & €7,000 for unsecured creditors. Therefore, after remitting to the debenture holders no money would be remain for the unsecured debts. This company did not have the required outcome, and the corporation was located in insolvent liquidation. The liquidator on account of unsecured creditors claimed that the corporation was not more than “alias” or agent of Mr. Salomon, therefore he was personally responsible for the debt of the corporation.
ISSUE RAISED BEFORE THE COURT
1. Whether Salomon & Co. Ltd. was legally incorporated company?
2. Whether Mr. Salomon was personally responsible for the debts of the Corporation?
ARGUMENTS FROM THE APPELLANT SIDE
1. Learned Solicitor on behalf of Mr. Salomon argued that he was not personally responsible for the debts of the corporation because the company was a distinct legal entity from its members, as perceived by the Companies Act, 1862.
2. Learned Solicitor again argued that the rule of limited liability enshrined and applied to the shareholders, and therefore, he was only responsible for the sum of his share capital.
3. Learned Solicitor contended that my client Mr. Salomon was not liable merely on the ground of having majority of shares in the company. Therefore, I request honourable My Lords to remove the wrong allegation made by respondents earlier in lower courts.
ARGUMENTS FROM THE RESPONDENTS SIDE
1. Learned Solicitor for the appellant side argued that Mr. Salomon had utilized the company for evading personal responsibility for the debts of the corporation. Therefore, he should be liable to pay the estimate amounts of debts occurred upon the corporation.
2.Learned Solicitor claimed that the appellant had a majority of shares in the company, and that he was formed this so-called company for avoiding his risk. Solicitor continued that appellant had intentionally construct the company to deceive his unsecured creditors.
3. Solicitor of respondent side made the contention that Mr. Salomon had never wanted to create this company for enhancement of profit of members. Therefore, his intention was centred on avoiding to pay debts.
4. Learned Solicitor on behalf of respondent side contended that the Company was a fake and deceptive institution which had deviously taken money from the creditors to put risk on them.
Related Provision
- The Companies Act, 1862[4]
Section 6 – Mode of forming company – Any seven or more persons associated for any lawful purpose may, by subscribing their names to a memorandum of association, and otherwise complying with the requisitions of this Act in respect of registration, form an incorporated company, with or without limited liability[5].
Section 8 – Memorandum of association of a company limited shares – Where a company is formed on the principle of having the liability of its members limited to the amount unpaid on their shares, hereinafter referred to as a company limited by shares, the Memorandum of Association shall contain the following things’ the third of which was ‘objects for which the proposed company is to be established[6].
Section 30 – No entry of trusts on register – No notice of any trust, expressed, implied, or constructive, shall be entered on register, or be receivable by registrar, in the case of companies under this Act and registered in England or Ireland[7].
Judgement
Finally, after the long run, the House of Lords disagreed the allegations of the opposite party, and upheld the appellant’s statement that the Company was separate legal personality from its members and shareholders by slight majority of 3/2. The House of Lords also vindicated strongly the doctrine of legal personality, as mentioned in the Companies Act, 1862, by that creditors of insolvent corporation would not have right to solicit the company’s shareholders to pay their debts. My Lordships also accentuated that the company incorporated in adherence with the rule of the Companies Act is a distinct person and not an agent of its owner or controller. In their decision my Lordships also averred that the exert of debentures in lieu of shares can facilitate investors risk.
The House of Lords, on appeal, overturned the Court of Appeal’s judgement, and concertedly opined that, as the corporation was aptly enunciated, it is a distinct & independent person.
My Lordships observed that Mr. Salomon accompanied the essential approach to form the company. Mr. Salomon has legally incorporated since the company Act solely required 7 members taking minimum one share apiece. The Court accompanied that the members and shareholders of the company were contingent to the doctrine of limited liability & could not be responsible personally for the debts of the firm mor than the value of their shares. Thus, in the case of Jennings v. Crown Prosecution Service[8] held that the legal fiction of “corporate veil” between the company and its owners/controllers was firmly created by the Salomon case.
In the words of Lord Halsbury,
Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr. Salomon, who is often referred to as Salomon. If it was not, there was no person and nothing to be an agent at all; and it is impossible to say at the same time that there is a company and there is not[9].
In the words of Lord Herschell,
He noted and reasoned his approach on Court of Appeal’s logic and that earlier many companies had been formed in which more that one share holders were not interested person who did not hold any impact over the corporation. So that, any person merchandising with such type of company was definitely acquainted of its character, and could by conferring the record of shareholders become sensible of the division of share proprietorship out of shareholders.
In the words of Lord McNaughten,
My Lordship asked what was wrong with appellant picking benefit of the particular provisions enshrined in the Act, as he was absolutely legitimate to do. It was not a concern of the Judges to convey limitation in the Act so that, if the laws of particular land permitted, they were deserving severe criticism. In the case of Macaura v. Northen Assurance Co.[10] held that property of the company affiliates to it & not with sole members, by that even if its majority shareholder has no absolute interest in the assets of the corporation.
For these aforesaid reasons, My Lordships are of opinion that the appellant’s claim should be allowed and order of the Court of Appeal altered & cross appeal dismissed with costs.
Conclusion
The landmark case on company law Salomon v. Salomon & Co. Ltd. entrenched the key principle of separate legal entity and limited liability of the corporations. These important doctrines have had extensive connotations for administration of company, protection of minority shareholders, and use of defrauding. As has been enunciated, once a corporation has applied with the provisions of the Companies Act, it will definitely be formed. The concept of lifting of the corporate veil was established after the epoch-making verdict in Salomon’s case where no person could escape behindhand the company’s distinct entity to do fraud and evade any responsibility. In this case it was observed that no wrong or illegal act has been caused by appellant and he was legitimately the sole creditor of the firm and has an absolute right to be financed while ending of the company ahead of the unsecured creditors as Mr. Salomon’s debt was annexed by levy in regard to the company’s assets.
Soon after the judgement in Salomon’s case was pronounced, the Parliament responded by passing § 2 and 3 of the Preferential Payments in Bankruptcy Amendment Act, 1897[11].
This case has evolved a groundbreaking effort in administration of modern company law, and that verdict has been antecedent in several issues in the world. Conclusively, I can say that this famous case has established key immunity for the stockholders and creditors, and has also encourage the various sources for lucrative growth in investments. In the extending prospective of jurisprudential aspects of the company, it is permissible to raise the corporate veil. However, it will depend upon several aspects in relation with the management and administration in company.
[1] LL.B.(Hons.) 4th Semester Student at University of Allahabad, Prayagraj, Uttar Pradesh.
[2] Dahal, Rajib, Salomon v Salomon: Its Impact on Modern Laws on Corporations, SSRN, (April 26, 2018), <https://ssrn.com/abstract=3169431> accessed 25 June 2023.
[3] Oladotun Gbolagunte, Salomon v Salomon: Relevance to modern Company Law, LinkedIn, (December 8, 2016), <https://www.linkedin.com/pulse/salomon-v-relevance-modern-company-law-oladotun-gbolagunte/> accessed 25 June, 2023.
[4] The Companies Act, 1862 (25 & 26 Vict. c. 89), Acts of Parliament, 1862(United Kingdom).
[5] See The Companies Act, 1862, § 6.
[6] See The Companies Act, 1862, § 8.
[7] See The Companies Act, 1862, § 30.
[8] Jennings v. Crown Prosecution Service, 2008 UKHL 29.
[9] Wikipedia contributors, Salomon v A Salomon & Co Ltd. Wikipedia, the free Encyclopedia, (March 10, 2023), <https://en.wikipedia.org/w/index.php?title=Salomon_v_A_Salomon_%26_Co_Ltd&oldid=1143862578> accessed 26 June, 2023.
[10] Macaura v. Northen Assurance Co. (1925) AC 626.
[11] The Preferential Payments in Bankruptcy Amendment Act, 1897, (60 & 61 Vict. c. 19), Acts of Parliament, 1897(United Kingdom).