SALOMON V A SALOMON & CO LTD(1896) UKHL 1, (1897) AC 22

INTRODUCTION

The Salomon v Salomon case is a land mark case that has significantly impacted the legal understanding of company structures and dealings. It has successfully laid the concepts in business law, particularly on the issue of separating a company from its owners and managers. This case is between Mr. Salomon and Salomon co. Ltd., a company made by Mr. Salomon himself. Mr. Aron Salomon is a business man who owned  a leather boot business and sort to incorporate his business into a limited liability company. Salomon & co. Is a limited liability company incorporated by Mr. Salomon. The Salomon v Salomon & co case is a landmark civil case on company law. The case is significant because it established the principle of separate legal personality,as set out in the Companies Act[1], so that the creditors of an insolvent company could not sue the company’s shareholders for payment of outstanding debts. The concept of  corporate legal personality simply refers to the legal personality of a company as one that is distinct, separate and independent from that of its members from the date of incorporation, meaning the legal status of one regarded by the law as a person.[2]

The matter started at the trial court as Broderip v Salomon[3] and went on till the house of Lords. The different courts had very different reasoning for their decisions and viewed the case from different lenses and perspectives, giving different interpretation to the rule and the actions of the parties.

FACTS

Mr. Aron Salomon made leather boots as a sole proprietor. He incorporated the business into a limited liability company. This new company purchased the leather boot business at an excessive price for its value. Mr. Salomon’s wife and five elder children became subscribers and the two sons became subscribers and the two sons became directors. Mr  Salomon took 20,001 of the company’s 20,007 shares which were payments from A Salomon & co Ltd for his old business, in which each share was valued at 1 pound. The transfer of the business took place on 1^st of June 1892. the new company also issued to Mr. Salomon 10,000 pounds in debentures and on the security of his debentures, Mr.  Salomon received  an advance of 5000 pounds from Edmund Broderip. Soon after the incorporation of the company, sales of the boots declined leading to the failure of the company defaulting on its interest payments on its debentures(half held by Broderip). Broderip sued to enforce his own security. The company was put into liquidation at that point. Mr. Broderip was repaid his 5000 pounds. This then left £1,055 in company assets remaining, of which Mr. Salomon claimed under the retained debentures he retained. If Mr. Salomon was to be successful, it would leave nothing for the unsecured creditors. When the company failed, the company’s liquidator contended that the floating charge should not be honoured, and Mr. Salomon should be made responsible for the company’s debts. This led to Mr. Salomon’s suit.

LEGAL ISSUES

The main issue in  the Salomon v Salomon case is the determination of the concept of corporate legal personality and determine the relationship between Mr. Aron  Salomon and Salomon & co Ltd and also the concept of limited liability of shareholders. The key issues that were raised for determination are:

1. Whether a company, duly incorporated, has a separate and independent legal identity from its shareholder, and whether the separation can be disregarded in certain circumstances
2. Whether an individual shareholder particularly a majority share holder as Mr. Aron Solomon can be held liable for a company’s debt and liabilities beyond their capital contributions.
3. Whether Mr. Salomon’s interest in the company and control over its assets constituted an abuse of the limited liability rule, justifying the lifting of the corporate veil.
4. Whether A Salomon & co was acting as an agent for Mr. Salomon thereby making him personally liable for the company.
5. Whether the company, A Salomon & co was acting as a trustee for the benefit of Mr. Salomon.
6. Whether Mr. Salomon had formed the company with the intention of incurring debts and benefiting from the secured debentures at the expense of other shareholder, constituting fraudulent intent.

These issues were tossed and turned through out the process of the case from the court of first instance to the House of Lords and they influenced the thinking and decisions of the different courts.

ARGUMENTS

The different parties in the case, formulated different defences to effect the case to benefit them. Below are the arguments of the parties:

Mr. Broderip, one of the creditors of the company who initiated the first suit argued that the company, A Salomon & co Ltd, was not a genuine separate entity but rather a mere agent or nominee for Mr. Salomon himself. He also argued that Mr. Salomon had only incorporated the company to avoid personal liability, to benefit from the limited liability status, while still maintaining control over the business. Mr. Broderip challenged the validity of the floating charge stating that Mr. Salomon had taken over the company’s assets, arguing that it was not a genuine transaction.

The liquidator[4] argued somewhat in line with that of Mr. Broderip. He argued that Mr. Salomon had used the company as a mere agent or nominee for himself and just like Mr. Broderip, he claimed that Mr. Salomon had formed the company to avoid personal liability and to benefit from the liability and to benefit from the limited liability rule. He argued that Mr. Salomon had incorporated the company to benefit from the secured debentures while leaving the creditors exposed, implying that Mr. Salomon had formed the company with the intention of incurring debts and benefiting from the company’s  assets at the expense of other creditors. He sought to pierce the veil of incorporation and hold Mr. Salomon personally liable for the debts of the company , arguing that the company’s legal personality should be disregarded due to Mr. Salomon’s alleged abuse of the corporate rule.

Mr. Salomon argued that the company, A Salomon & co Ltd was a distinct and independent entity from himself. He argued that, as a shareholder of the company, he was not personally liable for the debts of the company beyond his capital contribution. He also asserted that the company was lawfully incorporated and that he had complied with all the necessary legal requirements for incorporation. Mr. Salomon also argued that all transactions between him and the company were legitimate. Ultimately, Mr. Salomon argued that due to the principle of corporate legal personality, specifically separate legal identity, he should be entitled to payment before other creditors since he was owed money by the company and he was a secured creditor.[5]

THE COURTS

Court of First Instance

At the court of first instance, the court[6] reasoned based on the notion that the company’s incorporation was contrary to the true intent of the Companies Act[7].  He believed that Mr. Salomon had incorporated the company solely to avoid personal liability and limit his risk and not to create a genuine separate entity. With the above reasoning, the court ruled  that the company, Salomon & Co. Ltd, was essentially an alias or sham  for Mr. Salomon.

 It was held that the company was not a separate legal entity from Mr Salomon and that he was personally liable for the company’s debts.

Court of Appeal

The court of Appeal believed that Mr. Salomon had incorporated the company contrary to the true intent of the Companies Act, and that the company was essentially an alias or a trustee to Mr. Salomon. The court reasoned that Mr. Salomon had conducted the business as an a trustee of himself and therefore he should be held responsible for the debt  accrued to the company. The court rejected the Agency contention of the first court.

The court[8] held that Mr. Aron Salomon was personally responsible for the debt accrued to the company and that the company is not a separate legal entity.

House of Lords

The decision of the house of lords was centered on the principle of separate legal personality. The house of lords held that, once a company has been properly incorporated, it becomes a legal entity separate from its shareholders, with its own rights and liabilities. The court emphasized that the separation is a fundamental principle of company law. The house of lords confirmed that shareholders’ liability is limited to the amount they have invested in the company and they are not personally liable for the company’s liabilities. The court also rejected the argument that the company was an agent of Mr. Salomon, holding that the company’s transactions were genuine and not a sham as has been contended.

SIGNIFICANCE OF THE CASE

Basically, the case has established the concept of corporate personality, emphasizing that a company is different from its shareholders and managers. The properties of the company is different from that of the shareholders as has been subsequently held in the case of Macaura v. Northern Assurance.[9] The liabilities of the shareholders are similarly, limited to the amount unpaid on the nominal value of the shares they own and they are not personally liable for the debts of the company.[10] Ultimately the significance of the case of Salomon v. Salomon & Co. Ltd is to set out the protection of shareholders from being wrongfully held liable for the debts of companies. The case of Salomon v. Salomon Co. Ltd holds immense significance in general corporate law and has set the precedent that has reshaped how companies are being viewed under the law.

CONCLUSION

The case of Salomon v. A Salomon & Co Ltd is a case that has helped in the  interpretation of the company law concept of corporate legal personality. It is a landmark case that significantly impacted the legal understanding of companies and their structures. It laid down the groundwork for certain crucial concepts in business law, particularly regarding the separation of companies from their owners. It has marked a pivotal shift in perceiving companies as distinct legal entities, separate from their shareholders. Till this day, this case is still cited enthusiastically in courts across the world and taught in classrooms as the major landmark case on the concept of corporate legal personality.

REFERENCE(S):

[1] 1862.

[2] Chris C. Wigwe, Company Law and Practice, second edition, 2022, p. 139.

[3] (1895) 2 Ch. 323.

[4] Represented by Broughton.

[5] mylawtutor.net.

[6] Per Vaughan William J.

[7] 1862.

[8] Per Lord Esher MR.

[9] (1925) AC 619.

[10] Williams v. Natural Life Health Foods Ltd (1998) BCC 428 HL.