Salomon v A Salomon & Co Ltd

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Salomon v A Salomon & Co Ltd
Whitechapel High Street 1905.JPG
Court House of Lords
Decided 16 November 1896
Citation(s) [1897] AC 22
Case history
Prior action(s) Broderip v Salomon [1895] 2 Ch. 323
Case opinions
Lord Macnaghten, Lord Halsbury and Lord Herschell
Keywords
Corporation, separate legal personality, agency

Salomon v A Salomon & Co Ltd [1897] AC 22 is a landmark UK company law case. The effect of the Lords' unanimous ruling was to uphold firmly the doctrine of corporate personality, as set out in the Companies Act 1862, so that creditors of an insolvent company could not sue the company's shareholders to pay up outstanding debts.

Facts[edit]

Mr Aron Salomon made leather boots and shoes in a large Whitechapel High Street establishment. His sons wanted to become business partners, so he turned the business into a limited company. The company purchased Salomon's business for £39,000, which was an excessive price for its value. His wife and five eldest children became subscribers and two eldest sons also directors (but as nominee for Salomon, making it a one-man business). Mr Salomon took 20,001 of the company's 20,007 shares. Transfer of the business took place on June 1, 1892. The company also gave Mr Salomon £10,000 in debentures (i.e., Salomon gave the company a £10,000 loan, secured by a floating charge over the assets of the company). On the security of his debentures, Mr Salomon received an advance of £5,000 from Edmund Broderip.

Soon after Mr Salomon incorporated his business a decline in boot sales, exacerbated by a series of strikes which led the Government, Salomon's main customer, to split its contracts among more firms to avoid the risk of its few suppliers being crippled by strikes. Salomon's business failed, defaulting on its interest payments on the debentures (half held by Broderip). Broderip sued to enforce his security in October 1893. The company was put into liquidation. Broderip was repaid his £5,000. This left £1,055 company assets remaining, of which Salomon claimed under his retained debentures. This would leave nothing for the unsecured creditors, of which £7,773 was owing. When the company failed, the company's liquidator contended that the floating charge should not be honoured, and Salomon should be made responsible for the company's debts. Salomon sued.

Issues[edit]

The liquidator, on behalf of the company, counter-claimed wanting the amounts paid to Salomon paid back, and his debentures cancelled. He argued that Salomon had breached his fiduciary duty for selling his business for an excessive price. He also argued the formation of the company in this was fraud against its unsecured creditors.

Judgment[edit]

High Court[edit]

At first instance, the case entitled Broderip v Salomon[1] Vaughan Williams J said Mr Broderip's claim was valid. It was undisputed that the 200 shares were fully paid up. He said the company had a right of indemnity against Mr Salomon. He said the signatories of the memorandum were mere dummies, the company was just Mr Salomon in another form, an alias, his agent. Therefore it was entitled to indemnity from the principal. The liquidator amended the counter claim, and an award was made for indemnity.

Court of Appeal[edit]

The Court of Appeal[2] confirmed Vaughan Williams J's decision against Mr Salomon, though on the grounds that Mr. Salomon had abused the privileges of incorporation and limited liability, which Parliament had intended only to confer on "independent bona fide shareholders, who had a mind and will of their own and were not mere puppets". Lindley LJ (an expert on partnership law) held that the company was a trustee for Mr Salomon, and as such was bound to indemnify the company's debts.[3]

Lopes LJ and Kay LJ variously described 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.

House of Lords[edit]

The House of Lords unanimously overturned this decision, rejecting the arguments from agency and fraud. They held that there was nothing in the Act about whether the subscribers (i.e., the shareholders) should be independent of the majority shareholder. The company was duly constituted in law and it was not the function of judges to read into the statute limitations they themselves considered expedient. Lord Halsbury LC stated that the statute "enacts nothing as to the extent or degree of interest which may be held by each of the seven [shareholders] or as to the proportion of interest or influence possessed by one or the majority over the others." His judgement continued.[5]

Lord Herschell noted the potentially "far reaching" implications of the Court of Appeal's logic and that in recent years many companies had been set up in which one or more of the seven shareholders were "disinterested persons" who did not wield any influence over the management of the company. Anyone dealing with such a company was aware of its nature as such, and could by consulting the register of shareholders become aware of the breakdown of share ownership among the shareholders.

Lord Macnaghten asked what was wrong with Mr. Salomon taking advantage of the provisions set out in the statute, as he was perfectly legitimately entitled to do. It was not the function of judges to read limitations into a statute on the basis of their own personal view that, if the laws of the land allowed such a thing, they were "in a most lamentable state", as Malins V-C had stated in an earlier case in point, In Re Baglan Hall Colliery Co., which had likewise been overturned by the House of Lords. The key parts of his judgement were as follows.[6]

Significance[edit]

In the decades since Salomon's case, various exceptional circumstances have been delineated, both by legislatures and the judiciary, in England and elsewhere (including Ireland) when courts can legitimately disregard a company's separate legal personality, such as where crime or fraud has been committed. Although Salomon's case is cited in court to this day, it has met with considerable criticism. For example, Otto Kahn-Freund called the decision "calamitous" in his article published at [1944] 7 MLR 54. In that article, the author also called for the abolition of private companies. There is therefore much debate as to whether the same decision would be reached if the same facts were considered in the modern legal environment, given the House of Lords' decisions in Pepper v Hart and Re Spectrum Plus Ltd and the Privy Council in Attorney General of Belize v Belize Telecom Ltd that require a purposive approach to interpreting legislation.

See also[edit]

Notes[edit]

  1. ^ [1893] B 4793
  2. ^ [1895] 2 Ch. 323
  3. ^ [1895] 2 Ch. 323, 337–340
  4. ^ [1895] 1 Ch. 674.
  5. ^ [1897] AC 22, 29–32
  6. ^ [1897] AC 22, 51–54
  7. ^ N.B. subsequently Parliament enacted the Preferential Payments in Bankruptcy Amendment Act 1897, s 2 which made the floating charge subject to preferential creditors' claims. This is now found in the Insolvency Act 1986 s 175, and see also s 176A

References[edit]

  • [1897] 13 LQR 6
  • O Kahn Freund, [1944] 7 MLR 54