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Case Analysis - SALOMON V. SALOMON & CO LTD


Authored by Aprajita Priyadarshni


Keywords: Corporation, Personality, Liquidation, Separate Legal Personality, Corporate Veil


CASE ANALYSIS- SALOMON V A SALOMON & CO LTD [1896] UKHL 1, [1897] AC 22


Abstract

The Companies Act, 1862 acknowledges the Doctrine of Corporate Personality in its complete firmness. The doctrine gives a separate legal and artificial personality to a corporation which is different from that of its members. A corporation or Company is an artificial or fictitious Person created by the personification of a group or a series of individuals. According to Savigny- a personality is attached to corporations, institutions and funds by a pure legal fiction. The Personality of Corporation is different from the personality of its members that means there is a double fiction in the case of Corporation. The corporation can sue and also be sued in this personality and can work through its agents. It has the capacity to enter into contracts and can have its property along with rights and duties. The Doctrine of Corporate Personality was approved first in the landmark case of U.K. called the Saloman vs A Saloman & Co. Ltd.


Facts of the Case:

Aaron Salomon was a sole trader carrying on business as a successful boot maker. His sons also wanted to become partners to his business and so he converted the business into a limited company in 1892. He named the company ‘A. Salomon & Co Ltd’ which was registered under the Companies Act 1862. Mr Salomon, his wife, and their five children became shareholders, each subscribing to one share, with Mr. Salomon and his two sons named as directors.


Once the newly formed company had been formally incorporated, Mr. Salomon sold his boot-making business to the company at the price of £39,000. The payment for the business was made by the company through allotting Mr. Salomon with 20,000 shares worth £1, and the remaining amount was accounted for by issuing Mr. Salomon £10,000 in debentures. Mr. Salomon was provided with security for the debentures by the company by granting him a floating charge over the company’s stock-in-trade.


Very soon after the incorporation of the company, there was decline in the boot sales. Mr. Salomon’s business failed and this resulted into defaulting on its interest payments on the debentures. The company became insolvent and entered into liquidation. The company owed £7,773 to its unsecured creditors, however upon realization of the company’s assets there remained only £1,055 available for distribution. Mr. Salomon claimed that he was entitled to the £1,055 being a creditor while he held securities in consideration for his debentures. If Mr. Salomon had been successful in enforcing his floating charge, he would have taken a priority over the company’s unsecured creditors leaving them with nothing. So, the liquidator, Mr. Edmund Broderip, sued for his security as well as stood with the company’s creditors denying the claim of Mr. Salomon and held Salomon responsible for the company’s debts.


Issue:

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.


The Trial:

Court of First Instance- In the case brought up before the Court of First Instance, Vaughan Williams, J. accepted the claims of Broderip. The company had a right of indemnity against Mr. Salomon. The company was Mr. Salomon in another form, or at most his agent and the signatories to the memorandum were mere ‘dummies’. An award was thus made for indemnity and Mr. Salomon was held to be personally liable to indemnify the creditors for ‘all the debts incurred in the course of agency for him’[1]. Salomon appealed against the award.

Court of Appeal- The Court of Appeal rejected the appeal of Mr. Salomon on the grounds that Mr. Salomon had abused the privileges of incorporation a limited liability.


He had used the CA, 1862 as a device to fraud his creditors. But as the incorporation of the company was made legally, Salomon could not be sued directly but could be reached only through the company. The Court held the company as a myth and a fiction and said that the incorporation of the business by Mr. Salomon had been a mere scheme to enable him to carry on as before but with limited liability. He was thus made liable for indemnifying the company. Mr. Salomon appealed further.


House of Lords- The final judgment was by the House of Lords which upon appeal reversed the above ruling, and held unanimously that the company being duly incorporated was an independent person with all its rights and liabilities appropriate to itself. The motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what the rights and liabilities of the company are. With this landmark judgment the legal fiction of “corporate veil” between the company and its owners/controllers was firmly created by the House of Lords.


Conclusion:

From the landmark case of Salomon vs. Salomon, the rule of separate legal personality (SLP) has been followed as a mandate precedent not to be compromised with in several many cases that followed. The legal fiction of corporate veil thus established vocalizes that a corporation or a company is a separate legal personality. It has an identity which is separate from its shareholders. The shareholders are only liable to the extent of the capital contributions, thus being in ‘Limited Liability’. As companies can then sue and be sued on its own name, it facilitates legal course too. And most importantly, the company survives the death of its members and does not die with them as a striking feature of Separate Legal Personality.


References:

· https://en.wikipedia.org/wiki/Salomon_v_A_Salomon_%26_Co_Ltd

· https://www.srdlawnotes.com/2018/04/corporate-personality-meaning.html

· https://lawlex.org/lex-bulletin/case-summary-salomon-v-salomon-co-ltd/23368

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