Salomon v A Salomon & Co Ltd [1897]

Salomon v A Salomon & Co Ltd [1897]

• Official citation: AC 22, 66 LJ Ch 35, 4 Mans 89, 45 WR 193, 1 LDAB 240, [1895-99] All ER Rep 33, 41, Sol Jo 63, 75, LT 426, 13, TLR 46

Court Name & Bench

• The names of the courts are the Court of Appeal and the House of Lords.
• Name of the judges: Lord HALSBURY, Lord WATSON, Lord HERSCHELL, Lord MORRIS, and Lord DAVEY.
• Bench type is a five-judge panel
• The exact date when the judgement was delivered is the 16th of November 1896.

Parties Involved

• Description of the petitioner(s) / appellant(s) Aron Salomon was a successful sole trader as a leather merchant.
• Description of the respondent(s) / defendant(s) Salomon and Company, Limited. Previously owned by Aron Salomon, and currently its own separate legal entity

Facts of the Case

Salomon was a sole trader as a leather merchant for many years before he decided to incorporate his solvent business into a limited company and sell it. The company issued Salomon 20 thousand in shares as part payment, making him a shareholder worth 20 thousand and 1 shares and his family one share each, in total 20,007 shares, as well as payments in debentures, making him a secured creditor. Salomon was also a managing director for the business. Later the company went through liquidation with £6,000 left in assets and was not able to pay off debts.

Issues Raised

• Whether the company was a company at all?
• Whether Salomon followed company act requirements?
• Are the other shareholders nominees of Salomon? And is it contrary to the true intent of the company act?

Arguments of the Parties

• The petitioner/appellant argument was that after Salomon registered the business and sold it, it became a separate legal personality; therefore, Salomon is not liable for anything after the sale. Salomon has also established himself as a secured creditor and is entitled to the remaining assets of the company to pay off its debt to him under the Companies Act.
• The respondent/defendant argument was that Salomons was of knowledge that the business was solvent before incorporating and selling the business. The defendant also claimed that due to the company being under his name and him being a current shareholder, Salomon should be liable for the debts and that Salomon was liable for the debt to him.

Judgement / Final Decision

• The House of Lords held that under the Company Act 1862, it is not illegal to limit liability by registration of a business. That Salomon was in his rights to do so. Therefore, the decision by the Court of Appeal to maintain the approach that the company was an alias of Salomon and he was liable for company debt was reversed. The House of Lords stated that the 20 thousand debenture was deemed valid and lawful, making Salomon a secured creditor with priority over unsecured creditors. The company was ordered to use the £6,000 in assets to repay Salomon.

 Legal Reasoning

• Lord Herschell stated that since the Court of Appeal has already treated the company as a separate legal entity from Salomon, it will be considered as such. The company will not be seen as an alias nor another name of an agent for Salomon. This is when the separate legal personality was established. Lord Herschell also observed and applied the limited liability principle, that while shareholders had an impact on the difference between the company’s success or liquidation, it does not legally link a relationship for duties to liabilities for the company’s debts. Whether the other six shareholders were nominees of Salomon or not did not impact his legal standing; under the Companies Act, a company was required to have a minimum of 7 shareholders, and this was complied with, making the business legally an incorporated company. But no mention in the act about subscribers’ intentions. The Court of Appeals was dismissed due to its problematic approach. Viewing Salomon’s decision to incorporate his business as a scheme means many genuine businesses that turn into limited companies will be seen as invalid. It is also the Companies Act’s intent to limit liability after the formation of a company. In regard to the company’s payment in debentures to Salomon, it is not considered to be illegal; therefore, he is legally a secured creditor and entitled to remaining assets after liquidation.

Conclusion / Observation

The significance of this case is the clarity and judicial interpretation of the law as well as the assessment of the benefits of incorporation, such as limited liability to shareholders as well as legal rights for the company itself, which encourages and promotes the growth of limited companies; however, the case does not include repercussions for the potential abuse of such power and lack of good faith. Which was later corrected by the doctrine of “lifting the corporate veil”. But the weak protection for unsecured creditors stays weak to this day.