Case Study 1: Separate Personality : Salomon V. Salomon & Co. The case of Salomon V. Salomon & Co.

, commonly referred to as the Salomon case, is both the foundational case and precedence for the doctrine of corporate personality. The House of Lords in the Salomon case affirmed the legal principle that, upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders. The court did this in relation to what was essentially a one person Company, which is Mr Salomon. Facts and decision of the Salomon Case Mr Aron Salomon was a British leader merchant who for many years operated a sole proprietor business, specialized in manufacturing leather boots. In 1892, his son, also expressed interest in the businesses. Salomon then decided to incorporate his businesses into a limited company, which is Salomon & Co. Ltd. Mr Salomon, his wife and five of his children held one share each in the company. The members of the family held the shares for Mr Salomon because the Companies Acts required at that time that there be 7 shareholders. Mr Salomon was also the managing director of the company. The newly incorporated company purchased the sole trading leather business. The leather business was valued by Mr Salomon at 39,000. This was not an attempt at a fair valuation; rather it represented Mr Salomons confidence in the continued success of the business. The price was paid in 10,000 worth of debentures (a debenture is a written acknowledgement of debt like a mortgage) giving a charge over all the companys assets (this means the debt is secured over the companys assets and Mr Salomon could, if he is not repaid his debt, take the companys assets and sell them to get his money back), plus 20,000 in 1 shares and 9,000 cash. Mr Salomon thus held 20,001 shares in the company, with his family holding the 6 remaining shares. He was also, because of the debenture, a secured creditor. He was thus simultaneously the company's principal shareholder, a MD and its principal creditor. However, things did not go well for the leather business and within a year the company was placed in insolvent liquidation (i.e. it had too little money to pay its debts) and a liquidator was appointed (a court-appointed official who sells off the remaining assets and distributes the proceeds to those who are owed money by the company). The trade creditors argued that the company and Salomon were one and the same. As a consequence, they claimed, his debenture was void since a man cannot be a creditor of himself. The liquidator also alleged that the company was but a sham and a mere alias or agent for Mr Salomon and that Mr Salomon was therefore personally liable for the debts of the company. The unsecured creditors claimed that they carry a preferential right as to repayment of their debts over Salomon. Court Held: IMT Dubai 2012-14 (DCP) Page 1

The Court held that a company formed in compliance with the regulations of the Companies Acts is a separate person and not the agent or trustee of its controller. The court further stated: The company is at law a different person altogether from the shareholders and though, it may be true that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands received the profits, the company is not in law the agent of the shareholders or trustee for them. Nor are the shareholders, as members, liable in any shape or form, except to the extent and in the manner provided by the Act. Court held that Salomon should be treated as Secured and Preferential Creditor. Case Study 2: Separate Personality: Lees Air Farming Ltd. Mr Lee incorporated a company, Lees Air Farming Ltd, in August 1954 in which he owned all the shares. Mr Lee was also the sole Governing Director for life. Thus, as with Mr Salomon, he was in essence a sole trader who now operated through a corporation. Mr Lee was also employed as chief pilot of the company. In March, 1956, while Mr Lee was working, the company plane he was flying stalled and crashed. Mr Lee was killed in the crash leaving a widow and four children. The company, as part of its statutory obligations, had been paying an insurance policy to cover claims brought under the Workers Compensation Act. The widow claimed she was entitled to compensation under the Act as the widow of a worker. The issue went first to the New Zealand Court of Appeal who found that he was not a worker within the meaning of the Act and so no compensation was payable. The case was appealed to the Privy Council in London. They found that: 1. The company and Mr Lee were distinct legal entities and therefore capable of entering into legal relations with one another. 2. As such they had entered into a contractual relationship for him to be employed as the chief pilot of the company 3. He could in his role of Governing Director give himself orders as chief pilot. It was therefore a master and servant relationship and as such he fitted the definition of worker under the Act. The widow was therefore entitled to compensation. Case Study 3: Experience of Shareholder is the experience of the company: Horizons Ltd. v. Union of India New

New Horizons Ltd., when seen through the veil covering the face of New Horizons Ltd. was found to be a joint venture created as a result of reorganization in 1992. 60% of its share capital was owned by an Indian group of companies and 40% share capital was owned by a Singapore based foreign company. The Government had invited tenders for distribution of State largesse. IMT Dubai 2012-14 (DCP) Page 2

The appellant's tender was not considered on the ground that the experience of its constituents was not the same as that of the appellant and because of inadequate experience, another companys tender was accepted as they had long experience and had also offered a much lower amount of royalty. New Horizons Ltd. pleaded the experience of constituents of the joint venture company should be treated as its own experience and corporate veil should be seen through for this purpose. Supreme Court Held: Allowing the appeal, the Supreme Court ruled that the action of the State Government in determining the eligibility of tenders was not in consonance with the standards or norms and was arbitrary and irrational. The Court further observed that in case of a joint venture corporation, the Court can see through the corporate veil to ascertain the true nature of a company. The doctrine of lifting the corporate veil is invoked when the corporate personality is found to be opposed to justice, convenience or interest of revenue.

Case Study 4: Separate Property : In Macaura v Northern Assurance Co. Mr. Macaura owned an estate and some timber. He agreed to sell all the timber on the estate in return for the entire issued share capital of Irish Canadian Saw Mills Ltd. The timber, which amounted to almost the entire assets of the company, was then stored on the estate. On 6 February 1922 Mr Macaura insured the timber in his own name. Two weeks later a fire destroyed all the timber on the estate. Mr Macaura tried to claim under the insurance policy. The insurance company refused to pay out arguing that he had no insurable interest in the timber as the timber belonged to the company. Eventually in 1925 the issue arrived before the House of Lords who found that: 1. The timber belonged to the company and not Mr Macaura. 2. Mr Macaura, even though he owned all the shares in the company, had no insurable interest in the property of the company. Just as corporate personality facilitates limited liability by having the debts belong to the corporation and not the members, it also means that the companys assets belong to it and not to the shareholders.

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