Salomon v Salomon & Co. is a foundational foundational Aron Salomon was a successful leather merchant who specialized in manufacturing leather boots. For many years he ran his business as a sole proprietor. proprietor. By 1892 his sons had become interested in ta!ing part in the business. Salomon decided de cided to incorporate his business as a "imited company Salomon # $o. "td. At the time the legal re%uirement for incorporation was that at least se&en persons subscribe as members of a company co mpany i.e. as shareholders. 'r. Salomon himself was managing director. 'r. Salomon owned 2(((1 of the company)s 2(((* shares + the remaining si, were shared indi&idually between the other si, shareholders -wife daughter and four sons. 'r. Salomon Salomon sold his business to the new corporation for almost /09((( of which /1(((( was a debt to him. e was thus simultaneously the company)s principal shareholder and its principal creditor. e as!ed the company to issue a debenture of /1(((( to him. owe&er a sudden slow down in business occurred and the company could no longer pay interests to Salomon. &en the wife puts money but the company still cannot pay. Finally Finally Salomon transfers the debenture to one B but still the company could not pay. pa y. B is here a secured creditor cred itor in relation to the company as he holds in respect of his a security o&er property of the company in term of the debenture. B called for a recei&er and therefore sold the easiest part of the company i.e. the factory to co&er his debts. 3hat led to the end of the business. 3his left the debts of the general creditors for instance the general suppliers to be co&ered. 3he company had to be hence li%uidated and the assets were to be sold to pay them.
This law essay is an example of a student's work Disclaimer
3his essay has been submitted to us by b y a student in order to help you with your studies. 3his is not an e,ample of the wor! written by our professional law writers. "aw ssay 4riting Ser&ice "aw Assignment 4riting Ser&ice "aw $oursewor! 4riting Ser&ice 4ho wrote this essay5 Freelance 4riting 6obs 7lace an rder 4hen the winding up order was made ma de the official recei&er became li%uidator unless and until an insol&ency practitioner was appointed in his place. As a li%uidator of a company the official recei&er)s general functions were to in&estigate any wrong doing in the company to secure the assets realise them and distribute the proceeds to the company)s co mpany)s creditors and if there is a surplus to the persons entitled to it -normally the contributories. 4hen the company went into li%uidation the li%uidator argued that the debentures used b y 'r. Salomon as security for the debt were in&alid on the grounds of fraud Salomon was not a genuine incorporator.
High Court
3he :udge ;aughan 4illiams 6. accepted this argument ruling that since 'r. Salomon had created the company solely to transfer his business to it prima facea the company and Salomon were one unit the company was in reality his agent and he as principal was liable for debts to unsecured creditors.
The appeal 3he $ourt of Appeal also ruled against 'r. Salomon on the grounds that 'r. Salomon had abused the pri&ileges of incorporation and limited liability which the "egislature had intended only to confer on
The !ords 3he ouse of "ords unanimously o&erturned this decision re:ecting the arguments from agency and fraud. Salomon followed the re%uired procedures to the set the company shares and debentures were issued. 3he ouse of "ords held that the company has been &alidly formed since the Act merely re%uired * members holding at least one share each. =t was irrele&ant that the bul! of shares were issued to one shareholder. Statute did not mention that each share holder should ha&e > amount of shares. =t said nothing about their being independent or that they should ta!e a substantial interest in the underta!ing or that they should ha&e a mind and will of their own or that there should be anything li!e a balance of power in the constitution of the company. -=n the $ompanies Act 2((1 it is possible for one shareholder to set up a company this is a one man show where he is himself the shareholder and the shareholder ? closed company. 3here was no fraud as the company was a genuine creature of the $ompanies Act as there was compliance and it was in line with the re%uirements of the @egistrar of $ompanies. 3he $ompany is at law a separate person. 3he 182 Act created limited liability companies as legal persons separate and distinct from the shareholders. 3hey held that there was nothing in the Act about whether the subscribers -i.e. the shareholders should be independent of the ma:ority shareholder. =t was held that <ither the limited company was a legal entity or it was not. =f it were the business belonged to it and not to 'r Salomon. =f it was not there was no person and no thing to be an agent CofD at all and it is impossible to say at the same time that there is a company and there is not.< ence the business belonged to the company and not to Salomon and Salomon was its agent. 3he ouse further noted
<3he company is at law a different person altogether from the CshareholdersD ... and though it may be that after incorporation the business is precisely the same as it was before and the same persons are managers and the same hands recei&ed the profits the company is not in law the agent of the CshareholdersD or trustee for them. Eor are the CshareholdersD as members liable in any shape or form e,cept to the e,tent and in the manner pro&ided for by the Act.< b "ee &. "ee)s Air Farming "td. -19( C191D A.$. 12 -Eew ealand 7.$. 3he appellant)s husband formed the respondent company for the purpose of carrying on the business of aerial top dressing. 3he nominal capital of the company was G 0((( di&ided into 0((( shares of G 1 each. 'r "ee held 2999 shares the final share being held by a solicitor. 'r "ee was the sole Hgo&erning directorI for life. e was the &ast ma:ority shareholder he was the sole go&erning director for life and he was an employee of the company pursuant at a salary arranged by him. Article 00 also pro&ided that in respect of such employment the relationship of master and ser&ant should e,ist between him and the company.
This law essay is an example of a student's work Disclaimer
3his essay has been submitted to us by a student in order to help you with your studies. 3his is not an e,ample of the wor! written by our professional law writers. "aw ssay 4riting Ser&ice "aw Assignment 4riting Ser&ice "aw $oursewor! 4riting Ser&ice 4ho wrote this essay5 Freelance 4riting 6obs 7lace an rder 3he husband was !illed while piloting the company)s aircraft in the course of aerial top dressing. is widow the appellant claimed compensation under the Eew ealand 4or!men)s $ompensation Act 1922. n a case stated for its opinion on a %uestion of law the Eew ealand $ourt of Appeal held that since the deceased was the go&erning director in whom was &ested the full go&ernment and control of the company he could not also be a ser&ant of the company. 3he widow appealed. =t was held 3he substantial %uestion which arises is as their "ordships thin! whether the d eceased was a
legal entities so as to permit of contractual relations being established between them so also were they separate legal entities so as to enable the company to gi&e an order to the decease. =n their "ordships) &iew it is a logical conse%uence of the decision in Salomon)s case that one person may function in dual capacities. 3he appeal was allowed and the widow was therefore entitled to compensation.
c" #acaura v. $orthern %ssurance Co !td ()*+ %C ,( 3he property of a company belongs to it and not to its members. Eeither a shareholder nor a creditor of a company -unless a secured creditor has an insurable interest in the assets of the company. 'r 'acaura was the owner of the Killymoon estate in county 3yrone. =n Lecember 1919 he agreed to sell to the =rish $anadian Saw 'ills "td all the timber both felled and standing on the estate in return for the entire issued share capital of the company to be held by himself and his nominees. e also granted the company a license to enter the estate fell the remaining trees and use the sawmill. By August 1921 the company had cut down the remaining trees and passed the timber through the mill. 3he timber which represented almost the entire assets of the company was then stored on the estate. n Februar y 1922 a policy insuring the timber was ta!en out in the name of 'r 'acaura. n 22 February a fire destroyed the timber on the estate. 'r 'acaura then sought to claim under the policy he had ta!en out. 3he =nsurance company contended that he had no insurable interest in the timber as the timber belonged to the company and not to 'r 'acaura. 3he ouse of "ords agreeing with the =nsurance company found that the timber belonged to the company and that 'r 'acaura e&en though he owned all the shares in the company had no insurable interest in the property of the company. "ord 4renbury stated that a member ? Me&en if he holds all the shares is not the corporation and neither he nor any creditor of the company has any property legal or e%uitable in the assets of the corporationI. N. ,ceptions to the separate legal entity principle M"ifting the corporate &eilI =n a number of instances the courts want to lift the &eil to find out who causes the company to act. 3his is usually done for reasons of fraud. 3here are 2 types of lifting of the &eil 6udicial lifting -most important Statutory lifting
-i" udicial !ifting -a" /ilford motor company !td v. Horne (00+ Ch.(0* 'r. orne was an e,+employee of 3he Oilford motor company and his employment con tract pro&ided that he could not solicit the customers of the company after the termination of his employment -negati&e clause. =n order to defeat this he incorporated a limited company in his wife)s name and solicited the customers of the company. 3he company brought an action against him. orne argued that it was the company -as a separate legal personality that was attracting
the clients + not him. 3he $ourt of appeal was of the &iew that
-1" ones v. !ipman (,)+ 2!3 40) 'r "ipman had entered into a contract with 'r 6ones for the sale of land. Before the con&eyance -the act of transferring the legal title in a property from one person to another 'r. "ipman then changed his mind and did not want to complete the sale. e formed a company and in an attempt to a&oid the transaction sold the land to the company in which he and his sollicitorJs cler! were shareholders and directors. "ipman then claimed that he could not complete the transaction with 'r 6ones since he no longer owned the land i.e. the company was now the lawful owner. 3he :udge specifically referred to the :udgments in Oilford &. orne and held that the company here was
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Salomon v A Salomon & Co Ltd From 4i!ipedia the free encyclopedia Salomon v A Salomon & Co Ltd
Court
4hitechapel igh Street ouse of "ords
1 Eo&ember 189 C189D RK" 1 C189*D A$ 22 Case history 5rior action-s" Broderip v Salomon C189D 2 $h. 020 Case opinions "ord 'acnaghten "ord alsbury and "ord erschell 6eywords $orporation separate legal personality agency Decided Citation-s"
Salomon v A Salomon & Co Ltd C189D
RK" 1 is a landmar! RK company law case. 3he effect of the "ords) unanimous ruling was to uphold firmly the doctrine of corporate personality as set out in the $ompanies Act 182 so that creditors of an insol&ent company could not sue the company)s shareholders to pay up outstanding debts.
Contents •
1 Facts
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2 =ssues
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0 6udgment o
0.1 igh $ourt
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0.2 $ourt of Appeal
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0.0 ouse of "ords
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N Significance
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See also
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Eotes
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* @eferences
7acts 'r Aron Salomon made leather boots and shoes in a large 4hitechapel igh Street establishment. is sons wanted to become business partners so he turned the business into a limited company. 3he company purchased Salomon)s business for /09((( which was an e,cessi&e price for its &alue. is wife and fi&e eldest children became subscribers and two eldest sons also directors -but as nominee for Salomon ma!ing it a one+man business. 'r Salomon
too! 2(((1 of the company)s 2(((* shares. 3ransfer of the business too! place on 6une 1 1892. 3he company also ga&e 'r Salomon /1(((( in debentures -i.e. Salomon ga&e the company a /1(((( loan secured by a floating charge o&er the assets of the company. n the security of his debentures 'r Salomon recei&ed an ad&ance of /((( from dmund Broderip. Soon after 'r Salomon incorporated his business a decline in boot sales e,acerbated by a series of stri!es which led the Oo&ernment Salomon)s main customer to split its contracts among more firms to a&oid the ris! of its few suppliers being crippled by stri!es. Salomon)s business failed defaulting on its interest payments on the debentures -half held by Broderip. Broderip sued to enforce his security in ctober 1890. 3he company was put into li%uidation. Broderip was repaid his /(((. 3his left /1( company assets remaining of which Salomon claimed under his retained debentures. 3his would lea&e nothing for the unsecured creditors of which /***0 was owing. 4hen the company failed the company)s li%uidator contended that the floating charge should not be honoured and Salomon should be made responsible for the company)s debts. Salomon sued.
8ssues 3he li%uidator on behalf of the company counter+claimed wanting the amounts paid to Salomon paid bac! and his debentures cancelled. e argued that Salomon had breached his fiduciary duty for selling his business for an e,cessi&e price. e also argued the formation of the company in this was fraud against its unsecured creditors.
udgment High Court At first instance the case entitled Broderip v SalomonC1D ;aughan 4illiams 6 said 'r Broderip)s claim was &alid. =t was undisputed that the 2(( shares were fully paid up. e said the company had a right of indemnity against 'r Salomon. e said the signatories of the memorandum were mere dummies the company was :ust 'r Salomon in another form an alias his agent. 3herefore it was entitled to indemnity from the principal. 3he li%uidator amended the counter claim and an award was made for indemnity.
Court of %ppeal 3he $ourt of AppealC2D confirmed ;aughan 4illiams 6)s decision against 'r Salomon though on the grounds that 'r. Salomon had abused the pri&ileges of incorporation and limited liability which 7arliament had intended only to confer on
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"indley "6 was the leading e,pert on partnerships and company law. 3he incorporation of the company cannot be disputed -see s. 18 of the $ompanies Act 182. 4hether by any be reached under s. N8 to which = ha&e already alluded. As the company must be recognised as a corporation = regarded by ;aughan 4illiams 6. as the agent of Aron Salomon. = should rather li!en the company to a trustee any :ury were as!ed Whose business was it? they would say Aron Salomon)s and they would be right if they under no such liability as 'r. Aron Salomon has come under. is liability rests on the purpose for which he for with the company without percei&ing the trap which he has laid for them. =t is idle to say that persons dealing with companies are protected by s. N0 of the $ompanies Act 182 which r and his ad&isers who were e&idently &ery shrewd people were fully ali&e to this circumstance. =f the legislatur 'r. Aron Salomon)s scheme is a de&ice to defraud creditors.
"opes "6 and Kay "6 &ariously described the company as a myth and a fiction and said that the incorporation of the business by 'r Salomon had been a mere scheme to enable him to carry on as before but with limited liability.
House of !ords 3he ouse of "ords unanimously o&erturned this decision re:ecting the arguments from agency and fraud. 3hey held that there was nothing in the Act about whether the subscribers -i.e. the shareholders should be independent of the ma:ority shareholder. 3he company was duly
constituted in law and it was not the function of :udges to read into the statute limitations they themsel&es considered e,pedient. "ord alsbury "$ stated that the statute
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"ord alsbury "$ a conser&ati&e peer and author of Halsbury's Laws too! strict literalist approach to legislati = ha&e no right to add to the re%uirements of the statute nor to ta!e from the re%uirements thus enacted. 3he sol ither the limited company was a legal entity or it was not. =f it was the business belonged to it and not to 'r. "indley "6 on the other hand affirms that there were se&en members of the company but he says it is manifest =t is ob&ious to in%uire where is that intention of the "egislature manifested in the statute. &en if we were at li supposed prohibition5 =t is of course easy to say that it was contrary to the intention of the "egislature + a pro
"ord erschell noted the potentially
by consulting the register of shareholders become aware of the brea!down of share ownership among the shareholders. "ord 'acnaghten as!ed what was wrong with 'r. Salomon ta!ing ad&antage of the pro&isions set out in the statute as he was perfectly legitimately entitled to do. =t was not the function of :udges to read limitations into a statute on the basis of their own personal &iew that if the laws of the land allowed such a thing they were
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"ord 'acnaghten. 4hen the memorandum is duly signed and registered though there be only se&en shares ta!en the subscribers are a body corporate
members liable in any shape or form e,cept to the e,tent and in the manner pro&ided by the Act. 3hat is = thin! the declared intention of the enactment. =f the &iew of the learned :udge were sound it would follow that no common law partnership could register as a company limited by shares without remaining sub:ect to unlimited liabilityT TAmong the principal reasons which induce persons to form pri&ate companies as is stated &ery clearly by 'r. 7almer in his treatise on the sub:ect are the desire to a&oid the ris! of ban!ruptcy and the increased facility afforded for borrowing money. By means of a pri&ate company as 'r. 7almer obser&es a trade can be carried on with limited liability and without e,posing the persons interested in it in the e&ent of failure to the harsh pro&isions of the ban!ruptcy law. A company too can raise money on debentures which an ordinary trader cannot do. Any member of a company acting in good faith is as much entitled to ta!e and hold the company)s debentures as any outside creditor. &ery creditor is entitled to get and to hold the best security the law allows him to ta!e. =f howe&er the declaration of the $ourt of Appeal means that 'r. Salomon acted fraudulently or dishonestly = must say = can find nothing in the e&idence to support such an imputation. 3he purpose for which 'r. Salomon and the other subscribers to the memorandum were associated was
directors and the property was transferred at an o&er&alue. 3here are it seems to me two answers to that argument. =n the first place the directors did :ust what they were authorized to do by the memorandum of association. 3here was no fraud or misrepresentation and there was nobody decei&ed. =n the second place the company ha&e put it out of their power to restore tdshe property which was transferred to them. =t was said that the assets were sold by an order made in the presence of 'r. Salomon though not with his consent which declared that the sale was to be without pre:udice to the rights claimed by the company by their counter+claim. = cannot see what difference that ma!es. 3he reser&ation in the order seems to me to be simply nugatory.