SALOMON V. SALOMON & CO LTD [1896] UKHL 1, [1897] AC 22

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INTRODUCTION

The concept discussed in this case is the doctrine of Corporate Personality. The Companies Act of 1862 perceives the Corporate Personality Doctrine in the entirety of its immovability. The doctrine of independent corporate personality implies that when a business is recorded as a company, it provides for this company a legitimate distinct element from its individual members. It means that the company is “fit for enjoying rights and of being dependent upon obligations which are not equivalent to those delighted in or borne by its individual members.” Although a corporation can be identified with a characteristic individual person, the corporation is typically characterized as a legitimate personality and a counterfeit individual. Also a company can’t follow up on its own and needs others for its activities. It also needs others to execute its objectives. Therefore, Salomon vs. Salomon is the landmark case of the U.K. which first approved the doctrine of Corporate Personality.

FACTS OF THE CASE

Aron Salomon had maintained a prosperous business as a leather merchant for a long time. In 1892, he chose to transform it into a public limited company and for this reason Salomon and Co. Ltd. was formed with Salomon, his wife, daughter and their four children as individual members, and Salomon as Managing Director.

When the recently framed company had been officially consolidated, Mr. Salomon sold his business to the company at the cost of £39,000. The installment for the business was made by the company through apportioning Mr. Salomon with 20,000 shares worth £1, and the leftover sum was represented by giving Mr. Salomon £10,000 in debentures. Mr. Salomon was furnished with security for the debentures by the company by giving him a floating charge over the company’s stock-in-exchange.

Seven shares were bought in for real money by the individual members and the outcome was that Salomon had 20,001 portions of the 20,007 shares issued, and each one of the six leftover shares was held by a member of his family. The company ran into challenges very quickly and just a year after the fact[1] , the debenture holder, Salomon, transferred his shares to another person, delegated a Receiver and the company went into liquidation. At the hour of liquidation, the circumstance of the company was, extensively, as Resources feasible worth: £6,000; Liabilities: Debentures – £10,000; Unsecured Debts: £7,000.

Subsequently, in the wake of paying the debenture holders, there would be nothing left for the unstable lenders. The outlet brought an activity against Salomon by Mr. Edmund Broderip, the liquidator, considering him answerable for repaying the company against the company’s trading debts.

ISSUES

  1. Whether Salomon & Co. Ltd. was a company?
  2. Whether the company had been validly created in the present case?
  3. Was Salomon responsible for the company’s debts?

CONTENTIONS OF APPELLANT

  1. The appellants contended that the lenders were allowed to find out their portion of shares and the holder of such extents.
  2. Under Sections 6, 8, 30, 43 and (?) some other sections of the Companies Act of 1862, no complaint has been made for a company framed for such purposes[2] .
  3. Since the company meets each one of the authoritative standards for treatment as a genuine company, it should be treated as a separate legal entity, consisting of certain corporators but a distinct and independent corporation.
  4. The subordinate courts have made a puzzler by regarding Solomon and Co. as considerable or fictitious. The courts need to pick one of the two.
  5. Because there is no imposition of personal liability of a shareholder towards a company’s debt, the courts cannot go against the legislature and impose such liability on them.

CONTENTIONS OF DEFENDANT

  1. The fundamental contentions of the defendants depended on the true situation but not on their legitimacy.
  2. Appellant consolidated the company without a free directorate. He was the head of the company and ran it as indicated by his impulses and dreams.
  3. The Appellant took debentures and covered the reality from the lenders to get an uncalled for advantage over them.
  4. Although the company was set up as per the Law, it never had an autonomous presence,; other directors, or his children and his wife, therefore the company was consistently under the appellant’s control.
  5. Because of his incredible dominance of shares, the appellant turned into the sole proprietor of the company, which permitted him to settle on any choice.

SUMMARY OF COURT DECISION AND JUDGMENT

This case first went to the High Court. The High Court Judge stated that Salomon had created the company to transfer the business to it. Therefore, the company is his agent due to which Mr. Salomon is responsible for the company’s debts. Then the case went to the Court of Appeal. It stated that Mr. Salomon had abused the privileges of incorporation and limited liability, which the Legislature had only intended to confer upon “bona fide independent shareholders who had a mind and a will of their own and were not mere puppets.” Then finally the case was decided by the House of Lords. The House of Lords did not accept the judgment given by the High Court and the Court of Appeal. According to the House of Lords, Salomon followed all the procedures required to set the company and the company was validly formed. The formation of the company was genuine and no fraud had taken place as it was formed keeping in mind all the requirements of the Registrar of Company and created as per the provisions of Companies Act.

It was noted that the company is at law a separate person. It was held in the judgment that “the company is in law a completely different person from the [shareholders] …; and, although it may be that after incorporation the business is exactly the same as before, and the same people are managers, and the same hands received the benefits, the company is not by law the agent of the [shareholders] or trustee for them. The [shareholders], as members, are also not liable in any form or form, except to the extent and in the manner provided by law.” It was held that the business belonged to the company. Salomon and Salomon were just its agents.  Therefore, it was concluded that Mr. Aron Salomon has not played out any illicit or fraud act and that he was lawfully the creditor of the company and has the privilege to be paid in the liquidation of the company before the unstable creditors as his debts. It was secured by a charge against the assets of the company.

CASES REFERRED

In Erlanger vs. New Sombrero Phosphate Co, it was held that individuals, who create a company and afterward trade their property to that company, should stand firm on an imaginary foothold in that company, and in this way should consistently be dedicated and should uncover any transactions that influence the capital.

In the case of Re Baglan Hall Colliery Co, the Malins V decision was turned around expressing that when a country that has enacted said law, and the duty lies with the proprietor, then, at that point that nation is in a truly unfortunate circumstance.

In North-West Transportation Co. v. Beatty, it was concluded that when a company hires the proprietor of the majority of its shares, that agreement stays legitimate and binding.

ANALYSIS

According to me, the case had mixed reactions. It was correct as well as incorrect due to the concept of corporate veil and piercing of corporate veil. The judgment by the House of Lords received a lot of criticism. The judgment was not decided correctly. Sometimes the corporate veil may lead to injustice. This is proved as in the In Article 7 Modern Law Review 54, Kahn-Freund described the decision made in the Salomon case as “dire”.

The Salomon case is also criticized on the premise that the principle of separate identity is given priority over the economic reality of a sole proprietorship. In the article, The Law Quarterly Review, Goulding clarifies that the reactions made against the Salomon case are twofold. Firstly, the consistent decision of the House of Lords for this situation gives incorporators the advantage of limited liability even in circumstances where it very well might be considered superfluous. Second, this decision gives corrupt advertisers the chance to mishandle[3]  the advantages given in the Corporation Act.

The Salomon vs. Salomon decision has not stood the test of time and is presently repudiated by different decisions. Recent cases like Tokyo vs. Karoon have dismissed Salomon’s settled methodology. Also, In the case of VTB Capital Plc v. Nutritek International Corporation, the courts upheld the restricted scope of veil piercing only as a limited equitable remedy. In the case of Prest vs. Petrodel, it restricted the lifting of the veil to just two conditions, (i) the “rule of concealment” and (ii) the “principle of evasion.” Therefore, this case eliminated its concentration from the real corporate veil and restored the Salomon Principle.

CONCLUSION

The idea of lifting the corporate veil was presented only after this case in which no individual could take cover behind the company element to commit fraud and stay away from any sort of responsibilities. There should be a sure vicinity to apply this idea of lifting the veil. There is no uncertainty that the decision in the Salomon case set up a separate legitimate personality of a company. Nonetheless, it remains an overwhelming errand for scholars and experts to discover a premise on which the courts can be defended in lifting the corporate veil. This is to a great extent because this is a region where facts of the case and genuine opinions of judges impact the result.

Regardless, the rule in Salomon case is generally perceived and continued in court. Salomon case has become a milestone in UK company case law and is by and large referred to inside the extent of company law. The Salomon vs. Salomon decision has set up the principle of “independent legitimate personality” of a company that permits its partners to get away from personal liability in case of an emergency. However, there have been instances of disappointments contrary to the principle. Needless to say, it is the work of scholars and lawful staff to legitimize the lifting of the corporate veil by the court, and must be determined on a case-to-case basis.


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