Salomon v A Salomon & Co Ltd [1897] By Trapti Pareek

Salomon v A Salomon & Co Ltd [1897]

Facts

• Mr Salomon was a shoemaker in England. His sons wanted to become his business partners so he converted his business into a limited company (A Salomon & Co Ltd).
• A Salomon & Co Ltd purchased Mr Salomon’s business for above market value.
• His wife and his five children became subscribers. The two eldest sons became directors of the company.
• Mr Salomon was allocated 20,001 of the company’s 20,007 shares.
• The company gave Mr Salomon £10,000 in debentures and received an advance of £5,000 from Edmund Broderip, on security of the debentures.
• Salomon’s business eventually failed and it defaulted on its interest payments on the debentures (half held by Broderip). Broderip sued to enforce his security.
• The company went into liquidation. Broderip was repaid his £5,000. This left £1,055 company assets remaining. Salomon claimed this amount under his retained debentures. This would leave nothing for unsecured creditors.
• The company’s liquidator argued that Salomon should be responsible for the company’s debts. Salomon sued
for the £1,055.

ISSUE
The case concerned claims of certain unsecured creditors in the liquidation process of Salomon Ltd., a company in which Salomon was the majority shareholder, and accordingly, was sought to be made personally liable for the company’s debt. Hence, the issue was 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.

JUDGEMENT

HIGH COURT
HC make a decision against Mr. Salomon. He said that since Mr. Salomon was the creditor of the company
from the beginning as sole proprietorship and even if he changed the form of the company to limited company, it still his company because he has the biggest part of shares, and the other subscribes are just names and nothing else.

COURT OF APPEAL
The Court of Appeal, declaring the company to be a myth, reasoned that Salomon had incorporated the company contrary to the true intent of the then Companies Act, 1862, and that the latter had conducted the business as an agent of Salomon, who should, therefore, be responsible for the debt incurred in the course of such agency. They confirmed what was said in the high court

HOUSE OF LORDS
The judge rejects the argument of agency and fraud.
1. The law was clear and consist that to form a limited company you should have at least seven subscribers.
2. The law doesn’t mention any thing about how much each subscriber should has from the shares, so it doesn’t matter if each of them have just one share or more The company was separate legal entity and a distinct independent corporation. A majority shareholder does not own the company. The company will not lose its identity to the majority shareholder. Once company is legally incorporates it is an independent person with rights and liabilities of its own and these aren’t influenced by the motives of the people involved in its promotion. The company
conducts its own business as a separate person.

COMPANY AS A SEPRATE LEGAL ENTITY
The effects of separate legal entity are:
• It has perpetual existence, despite changes of its members and constitution.
• It can own property of any kind, and thus buy and sell property in its own name.
• It can be a party to a contract.
• It can sue and be sued in its own name.
• Transferability and transmissibility of shares.

CONCLUSION
There is no doubt that the decision in Salomon’s case established the separate legal personality of a company, allowing shareholders to carry on trading with minimal exposure to the risk of personal insolvency in the event of a collapse. This is largely due to the fact that this is an area where case facts and personal views of judges have a bearing on the outcome.

BY TRAPTI PAREEK

@LEXCLIQ

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