CASE SUMMARY – SALOMON v. A. SALOMON CO. LTD. – [1896] UKHL 1; [1897] AC 22

Edited By – Honey Verma

This Case Summary is written by Vasundhara Dhar, a law student at Birla Global University, Odisha.


CASE NAME:

SALOMON                                           ………………………………. (APPELLANT)

V.

A. SALOMON & CO. LTD.                ……………………………… (DEFENDANT)

CITATION:    [1896] UKHL 1; [1897] AC 22

COURT: JUDICIAL FUNCTIONS OF HOUSE OF LORDS

BENCH :    JUSTICE VAUGHAN WILLIAMS , LINDLEY LJ , LOPES LJ, KAY  LJ, LORD HALSBURY LC, LORD MACNAGHTEN

DECIDED ON: 16 NOVEMBER1897

RELEVANT STATUTES/SECTIONS:   COMPANIES ACT 1862, SECTION 15 OF THE COMPANIES 1993;


Brief facts and Procedural History

  1. Aaron Salomon was a sole trader conducting on business as a prosperous boot maker.  In 1892 Mr Salomon settled to formulate a company and ‘A. Salomon & Co Ltd’ (the company) was registered under the Companies Act 1862 (CA 1862). Mr Salomon, his wife, and their five children became shareholders, each endorsed to one share, with Mr Salomon and his two sons titled as directors[1].
  2. After being befittingly incorporated, he then sold his boot-making business to the company at the amount of £39,000. The company paid for the business through allocating Mr Salomon with 20,000 £1 shares, the residual amount was estimated for  Mr Salomon £10,000 in debentures. The company granted Mr Salomon bond for the debentures by serving him a soaring charge over the company’s stock-in-trade.
  3. Right after incorporation, the company became bankrupt and entered into liquidation. The company owed £7,773 to its unsecured creditors, but upon awareness of the company’s assets there remained only £1,055 available for dissemination. As a creditor to the Company, Mr Salomon alleged that he was designated to the £1,055 as he adhered security in consideration for his debentures. As a security holder, if Mr Salomon was fortunate in implementing his floating charge, he would take preference over the company’s unprotected creditors, leaving them cashless.
  4. The Company’s liquidator, Mr Brodrip, argued on behalf of the company’s creditors and opposed Mr Salomon’s claim. He recommended: (i) the amount the company paid for the business was disproportionate; (ii) the arrangement of the company comprised as a ‘fraud to the creditors’[2]. For these grounds, he alleged that Mr Salomon should be held responsible for rewarding the Company’s debts, just as he would if he had remained a sole trader[3].

Issues

  1. Whether Mr Salomon should be made liable for company’s debts and shouldn’t be paid- forgetting he only had limited liability and that the company was a separate legal person?
  2. Whether regardless of the separate legal identity of a company, a shareholder/controller could be held liable for its debt, over and above the capital contribution, so as to expose such member to unlimited personal liability?[4]

Ratio of the court

The First Instance decision:

  • Vaughan Williams J. repudiated Mr Brodrip’s claims. On the other hand, he discovered that the company had regulated business as an agent for Mr Salomon, making Mr Salomon himself the principle. It was notified that the members of the company were ‘dummies’[5] and the company was just Mr Salomon ‘in another form’. Williams ruled Mr Salomon to be personally liable to reimburse the creditors for ‘all the debts incurred in the course of agency for him’[6]. Mr Salomon appealed.

The Court of Appeal decision:

  • The Court of Appeal upheld the High Court’s decision, not on the basis of potrayed by Williams. Lindley LJ. (Lindley) considered the significance and outcomes emerging from a justifiable incorporation. He proposed that as the formalities of the CA 1862 had been in accordance with, and the company should ‘be regarded as a corporation, but as a corporation created for an illegitimate purpose’[7]. On this ground, Lindley held that Salomon used the CA 1862 as a ‘device to defraud creditors.’[8] He acknowledged that as a result of valid incorporation, the company’s creditors were incapable to accuse Mr Solomon precisely and ‘could only reach him through the company’[9], therefore it was decided that Mr Solomon would be liable for compensating the company. Mr Salomon appeal was rejected[10].
  • Lopes LJ. (Lopes) judgement coincided with Lindley. In unison with Lindley, Lopes observed that there was a valid incorporation, however he declared that it was conflicting with and against the administration and provisions of CA 1862[11]. Contradictory to Lindley’s judgement, Lopes opt for a deliberated move and alleged that the ‘Act contemplated the incorporation of seven independent bona fide members’[12] and not ‘one substantial person and six mere dummies’[13].
  • Kay LJ.’s (Kay), judgement pursued and echoed the same rationale as Lopes, but he graduated the deliberate approach ahead and contradicted from the perspective that there was a valid incorporation. Kay opinionated that the court should turn up the sale of Mr Salomon’s business to the company baseless and should be restricted amounting with Mr Salomon being made to reimburse the company for the cost of sale and the interest of the debentures[14], along with debts suffered by the company. Kay thus complied with order of relief by Lindley, accusing Mr Salomon liable to indemnify the company, but his justification as to the extent of his liability varied. Mr Salomon appealed.

The House of Lords decision:

  • The House of Lords put down the arguments of agency or fraud and granted Mr Salomon’s appeal. Lord Halsbury threw the question for consideration by the House, as to ‘whether the respondent company was a company at all – whether in truth that the artificial creation of the Legislature had been validly constituted’[15]. Lord Halsbury held that he had ‘no right to add to the requirements of the statute’ and stated to the house that ‘the sole guide must be the statute itself’[16], although the advantages of the precedents were deliberated, the viewpoint recommended in Lord Halsbury’s opening judgement became the foundation of all the Law Lords Judgements. 
  • The CA 1862 prerequisite seven members inheriting at least one share each, it was restrained as to the shareholders being autonomous, or for there to strike balance of authority within the company’s internal relations. The Lords collectively agreed that the company had been rationally brought into reality and found the business be relevant to the company, and not to Mr Salomon; dismissing any precedent disagreement of agency, trusteeship or fraud[17].
  • The House asserted the limit of the consequences obtained from a valid incorporation under CA 1862. Approving that the company was a separate legal entity to Mr Salomon[18], therefore Mr Salomon was not accountable for the debts and liabilities suffered by the company.

Conclusion

The resolution in Salomon is at times considered to have entrenched the ideology of separate legal personality. This is apocryphal, the concept of considering a legal person into actuality through registration was established prior to 1897 with the Joint Stock Companies Act 1844. Salomon depicted that the courts had not, until then, fully agreed the outcomes of incorporation and ‘separate legal personality’. Itentrenched that the court would not enquire the efficacy of incorporation through registration where all the procedures have been acquiesce with, even if the result of incorporation would be to protect the owner(s) from the liabilities suffered through continuing on business, called as the ‘veil of incorporation[19]’. In addition to it, there were two other contemporary principles established by the House of Lords in Salomon[20].

Firstly, Salomon clandestinely identified the ‘one-man company’ much before the legislator apparently permitted their formulation in 1992[21]. Secondly, a relationship of agency or trust will not be implied on the basis of a person acquiring shares in a company. Considering all, the Salomon ruling remains dominant and continues to derive English company law. While sham, façade and fraud primarily shook the conjuration of the veil blaring exclusion in confined situations, these grounds are not exhaustive, and much is left to the vigilance and analysis of the courts on case-to-case basis.


[1] https://www.lawteacher.net/cases/salomon-v-salomon.php

[2] Brodrip v Salomon [1893] B 4793

[3] https://discovery.nationalarchives.gov.uk/details/r/C3836768

[4] https://en.wikipedia.org/wiki/Salomon_v_A_Salomon_%26_Co_Ltd

[5] ibid, Williams J.

[6] Broderip v Salomon [1895] 2 ch 323

[7] ibid

[8] ibid

[9] https://app.justis.com/case/broderip-v-salomon/overview/c4ytn0uZmXWca

[10] Jennings v Crown Prosecution Service, 2008 UKHL 29.

[11] https://lawbore.net/company/hotdocs/1473

[12] https://www.brainscape.com/packs/company-law-5588245

[13] http://corporations.ca/assets/Salomon%20v%20Salomon.pdf

[14] https://digitalcommons.law.seattleu.edu/cgi/viewcontent.cgi?article=2094&context

[15] https://mmu.rl.talis.com/items/5D3CDC41-F0D2-9243-4351-51DC007FABB8.html

[16] https://www.academia.edu/10204586/A_Case_Note_Analysis_Salomon_v_Salomon_and_Co_Ltd

[17]https://pdfs.semanticscholar.org/1804/deff33873c3d38925bfbbd90fb530a6ef938.pdf

[18]https://writepass.com/journal/2016/11/the-doctrine-of-separate-legal-entity-a-case-of-salomon-vs-salomon-co-ltd/

[19]English courts have, however, differentiated between the terms “lifting” and “piercing”, for instance, in Atlas Maritime Co SA v Avalon Maritime Ltd (No 1), court stated that “To pierce the corporate veil is an expression that I would reserve for treating the rights and liabilities or activities of a company as the rights or liabilities or activities of its shareholders. To lift the corporate veil or look behind it, on the other hand, should mean to have regard to the shareholding in a company for some legal purpose”, 1991 4 All ER 769, 779, (Staughton LJ).

[20]Peter B.Oh, ‘Veil-Piercing Unbound’ (2013) 93 B.U. L. Rev. 89.

[21]Companies (Single Member Private Limited Companies) Regulations 1992


Written By:

Author Name: Vasundhara Dhar

Published on – 13th July 2020